Janet Yellen Is A Small-Statured But Powerful Woman Who Has Wall Street Worried

AP

Janet Yellen

$('.icon-tooltip').tooltip();Janet Yellen is in the running to become the next chair of the Federal Reserve, and that has many bankers and Wall Street titans worried. The diminutive vice chair of the U.S. central bank — an academic economist who is married to a Nobel Prize-winning economist — is known to be a formidable intellect and a force on the interest rate-setting Federal Open Market Committee.

Her views on financial market regulation — an area where she’d have tremendous power as leader of the central bank — are less well-known.

“Her strengths are as an economist and thinking about macroeconomic policy and monetary policy,” said Tony Fratto, a former Treasury assistant secretary under President George W. Bush. “There’s no question that’s where the bulk of her experience is.”

The Center interviewed Yellen and reviewed her career through two stints on the Federal Reserve Board and as president of the San Francisco Fed Bank  — including speeches, meeting transcripts, government testimony and reviews of bank failures.

The picture that emerges is of an overseer who tried to point out dangers in the banking system before the situation came to a crisis in 2008, but who didn’t act forcefully against banks that she saw taking excessive risk because she didn’t believe she had adequate authority.

After working through the depths of the crisis and having a hand in closing more than a dozen failed banks  — including Washington Mutual, the largest bank failure in U.S. history  — Yellen now appears determined to ensure that banks fortify themselves against financial shocks and that regulators have the power to police the system.

Yellen is unlikely to push for revolutionary change, such as breaking up the biggest banks.

The Fed so far “has taken the view that we need the rules not to change too much,” said Simon Johnson, a professor at the Massachusetts Institute of Technology, who supports making banks smaller.

However, many expect her to be a tougher regulator than the current Fed chairman, Ben Bernanke, and she appears more willing to take strong action to stop banking giants from putting taxpayers at risk. But even so, the power of the Fed has its limits.

“They can’t stop all future crises, but it’s up to the Fed to make these crises more or less severe,” said Johnson, author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.

Bernanke’s term ends at the end of this year and President Barack Obama has suggested that he may replace him.

She wants to require big banks to hold more capital than is currently proposed, to boost the margin requirements on derivatives trades and to require foreign banks that do business in the U.S. to hold capital in the U.S.  

“We would expect her to toughen rules for the biggest banks,” said Jaret Seiberg, analyst at Guggenheim Strategies in New York, in a client report. “We believe her elevation to chairman would be negative for the mega banks.”

Yellen was first appointed to the Federal Reserve Board in 1994 when Alan Greenspan was chair. She was at the Fed less than a year when she dealt Greenspan his first and only defeat in a vote over his 18 years at the helm.

The Fed’s Board of Governors was set to vote at a rare open meeting in 1995 to require banks to use a uniform formula to inform consumers of the true rate of return on bank CDs. Yellen and then-Vice Chair Alan Blinder were opposed.  

“The formula was wrong. It was just wrong,” Yellen said in an interview in her office. “I couldn’t stand it.”

On her way to the meeting, she complained to another governor about the faulty formula, invoking the image of her mother whose savings was in CDs. When it was time to vote, Greenspan had three yeas to Yellen’s four nays.

That Yellen dealt the notoriously laissez-faire chairman his one defeat in a vote on bank regulation is both amusing and telling.

“On the pro-regulation, anti -regulation spectrum, if we imagine such a thing, she is miles away from Alan Greenspan,” said Blinder.

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