The new research office to be set up within Treasury has broad powers, so much so that some are calling it the CIA of finance
Don't expect an Elizabeth Warren-style campaign for the first director of the Office of Financial Research, yet another agency set up under the financial system overhaul. Unlike the pending decision over who will lead the Consumer Financial Protection Bureau, which has prompted online petitions and a viral rap video in support of the Harvard law professor, the competition over who will be the head of the research office is a wonks-only affair. Two early contenders, Allan Mendelowitz, a former regulator of the Federal Home Loan Banks, and Lewis Alexander, a counselor to Treasury Secretary Timothy Geithner, are relative unknowns outside a small community of economists, statisticians, and risk assessment officers.
That may not last long. The research office is only now beginning to attract attention for the unusually strong powers Congress granted it to force financial companies to turn over confidential information and help spot potential market blowups. In a nod to its abilities to peer into the uncharted depths of the financial system, lobbyists are calling it the CIA of financial regulators.
The analogy may not be far off. Housed within the Treasury, the office will have both data collection and analysis arms. The law says it can demand "all data necessary" from financial companies, including banks, hedge funds, private equity firms, and brokerages. That would include previously secret details such as who the counterparties are for credit default swaps and information on individual loans such as interest rate and maturity. If companies aren't forthcoming, the director of the office can issue subpoenas. Providing the staff support to the new Financial Stability Oversight Council—and holding a nonvoting seat on the council, which will monitor the banking system for risks—the research office can require companies to submit "periodic reports" to help it determine which firms to keep tabs on.
Pushed by a committee of academics and current and former financial executives, including Nobel laureate Harry Markowitz, one of the founders of modern portfolio theory, the office was championed on Capitol Hill by Senator Jack Reed (D-R.I.). Among its first duties: Telling financial companies how their data must conform, so they can be more easily compared.
The office is insulated from politics, with its director appointed by the President and confirmed by the Senate for a six-year term. Congress also required the director to make annual reports to congressional banking committees, testimony that cannot be reviewed by other government or agency officials. After a two-year startup period during which the Federal Reserve will provide its budget, the research office's funds will come from fees assessed on large financial companies.
Proponents say the office's central mission is to help spot the next financial crisis as it is forming. "This gets to the essence of what really causes problems," says Clifford Rossi, a former chief risk officer at Citigroup (C) now with the University of Maryland's Center for Financial Policy. "No single agency was really looking holistically across the entire system, going 'holy smokes, we've got a bubble of monumental proportions here.' "
Financial companies aren't so sure. They've raised concerns about the costs of complying with additional requests from a regulator. They also say they are worried about the disclosure of proprietary information. (While the law says confidential information needs to be protected, it also calls for the office to make its data available to the public. The office is also subject to the Freedom of Information Act.)
Moreover, bankers say, with the Fed and other regulators constantly requesting information and monitoring the markets, the research office is likely to be duplicative. "This idea that somehow these guys will notice the economic trends that everybody else is missing, I think that requires a certain suspension of disbelief," says Wayne Abernathy, an executive vice-president at the American Bankers Assn.
The bottom line: Wall Street is worried about how a new research office to be set up within Treasury will use its broad powers.