Power Player Profile: Daniel Tarullo

Exclusive reporting for FinReg21 by Darrell Delamaide

When President-elect Barack Obama needed someone trustworthy to represent him at the Group of 20 summit in Washington during the awkward period after the election and before the inauguration, he sent Georgetown law professor Daniel Tarullo to meet on the sidelines with the heads of state, who were curious about the new administration.

When the travails of the auto industry that eventually ended in bankruptcy for General Motors and Chrysler seemed to require a “car czar,” Tarullo’s name surfaced as a possibility.

And when it was time to nominate a U.S. trade representative, Tarullo, who had advised candidate Obama on trade and other issues, was on the list.

In the end, however, Tarullo was dispatched to fill one of the vacancies on the Federal Reserve Board of Governors, the seven-member panel at the heart of the system that constitutes our central bank. The 56-year-old Massachusetts native began a term in January that expires in 2022.

All of the board members, along with the president of the New York Federal Reserve Bank and four rotating heads of the 11 other Federal Reserve banks, sit on the Federal Open Market Committee that sets monetary policy.

With his background in law and regulatory procedure, Tarullo has already become the Fed’s point person on banking supervision and regulation and is sure to play a central role as the Fed takes on added regulatory responsibilities.

Tarullo is a man for all seasons and a consummate Washington insider. After collecting degrees from Georgetown, Duke and University of Michigan Law School, and teaching for several years at Harvard Law School, he cut his political teeth working for Sen. Edward Kennedy as chief counsel on employment policy.

In the Clinton administration, Tarullo served successively as assistant secretary of State for Economic and Business Affairs, deputy assistant to the president for Economic Policy, and assistant to the president for International Economic Policy. He was also a member of both the National Economic Council and the National Security Council. And from 1995 to 1998, Tarullo was President Clinton’s sherpa (personal representative) for the G7/G8 meetings.

During the Democrats’ exile from power, Tarullo taught courses in international financial regulation, international law, and banking law at Georgetown University Law Center.

Tarullo published a book last year under the auspices of the Peterson Institute for International Economics that was sharply critical of the so-called Basel II regime for bank capital, which gave banks much more flexibility in determining risk levels for their assets and apportioning capital.

The Basel II rules, which were only beginning to be implemented when the financial crisis struck, have been largely discredited in the wake of last fall’s meltdown because they would probably have worsened the crisis.

The Basel Committee for Banking Supervision is now supposed to go back to the drawing board and create a new system that will be more cautious in how risk is assessed and how much capital cushion banks will need to have.

In his book, Tarullo recommended a simple leverage ratio for international banks and a requirement to issue subordinated debt.

In his maiden speech as Fed governor in June, Tarullo blamed the failure of regulation to stop the current crisis because regulatory agencies focused on bank lending and capital requirements did not appreciate the impact of capital market and trading activities on bank soundness.

As bank holding companies interacted more with other market participants, boundary issues began to threaten the core banking system. “The boundary problem is simply stated,” Tarullo said in a speech at the Peterson Institute. “Systemic risk concerns, including too-big-to-fail issues, extended beyond bank holding companies to firms that were unregulated.”

The danger became apparent when the crisis produced a series of runs on non-depository financial institutions. “A combination of leverage, extensive counterparty relationships, and dependence upon asset sales for liquidity made such institutions both vulnerable to a wholesale funding run and a threat to the entire system,” Tarullo said.

The solution, Tarullo suggested, lies in improving micro-prudential regulation, addressing the boundary issue of this interconnectedness, and developing a macro-prudential regulatory outlook that monitors systemic risk and not just the safety and soundness of individual institutions. 

If the Obama administration is able to enact its reform program giving the Fed responsibility for supervising systemically important institutions and monitoring systemic risk, Fed governor Tarullo will have ample opportunity to implement his recommendations.