Questions abound over the Biden administration’s nominee for Comptroller of the Currency, Saule Omarova. Is she a progressive intent on remaking the American banking system? Or is she a misunderstood academic whose legal writings have been grossly taken out of context and who actually favors much about the current financial system? Or is she a “green” whose zeal to end reliance on fossil fuels has led her to tip her hand on how to use the credit system to do that?
The Senate Banking Committee confirmation hearing of Omarova gave vent to all of these alternatives, and more.
Battle in the Banking Committee:
Financial regulatory nomination hearings are often straightforward, where the approval of the nominee is never really in doubt. Not so this time.
Omarova went into the hearing after weeks of having her academic writings, statements during podcast interviews, and even her social media comments probed, dissected and weighed by the media as well as committee opponents to her nomination.
Omarova is currently Director of the Program on the Law and Regulation of Financial Institutions and Markets at Cornell University’s law school. In private practice she worked for about five years in the Financial Institutions Group of Washington, D.C., law firm Davis, Polk & Wardwell.
She subsequently spent a year as Special Advisor for Regulatory Policy to the Under Secretary for Domestic Finance at the Treasury Department during the second term of President George W. Bush. This took place in 2006-2007, the beginning of the emergence of the financial crisis. In her testimony she said multiple times that a key role for the Comptroller of the Currency would be to prevent the next financial crisis.
The hearing grew hot at several points.
For example, Sen. John Kennedy (R.-La.), in reference to Omarova’s early college education in the Soviet Union, questioned her economic beliefs. He said in America she was free to believe what she liked, and that “I don’t mean any disrespect, but I don’t know whether to call you ‘Professor’ or ‘Comrade’.” This and comments in the same vein by other committee members led some Democrats to accuse Republicans of “McCarthyism.” Committee Chairman Sherrod Brown (D.-Ohio) opined that “Now we see what happens when Trumpism meets McCarthyism.”
Nominee Gets Lauded and Damned by Party Leaders
Formal opposition to Omarova’s approval came from many banking trade groups and via multiple editorials from the Wall Street Journal and other sources, before the hearing. This was atypical, historically, for banking regulatory nominations.
“She has both the private industry and the public policy experience to present a repeat of the financial crisis — a crisis that cost millions of Americans their homes and jobs and which shuttered hundreds of community banks,” said Brown. For his part, Ranking Member Patrick Toomey (R.-Pa.) opened by saying that his “concern with Professor Omarova is her long history of promoting ideas that she herself describes as ‘radical.’ I agree that they’re radical and that they can fairly be described also as socialist. In fact, I’ve never seen a more radical nominee to be a federal regulator.”
Even with leading questions posed about her views, Omarova often began her answers by thanking the questioner for asking about her views or giving her an opportunity to elaborate on views from her writings that she often said were taken out of context.
What’s the Backup Plan?
Various sources say Omarova’s confirmation by a divided Senate is doubtful. If the nomination fails, the administration’s options include leaving Acting Comptroller Michael Hsu in place, who has been moving rapidly on key Biden financial services goals.
Omarova portrayed herself as an academic who often devised various concepts as the basis of discussion, not necessarily deeply held personal beliefs and often with the idea of presenting Congress with ideas. She insisted at various points that she favors the American banking system overall and the American dollar as the strongest currency.
The nominee also expressed great concern for the future of community banks and said that a key worry of hers is that very large institutions should not be able to profit from taking undue risks and leave taxpayers to clean things up when they go bad. Omarova believes this happened in the wake of the financial crisis and the Great Recession that followed.
Read More: Biden’s New Regulatory Pick Would Rip Entire U.S. Banking System Apart
Does She Really Want to ‘End Banking as We Know It’?
In a paper Omarova published in 2021, “The People’s Ledger: How to Democratize Money and Finance the Economy,” she lays out the outline of a plan to redraw “the currently dysfunctional U.S. financial system by reimagining its fundamental structure and redesigning its operation.” Among the measures set out are transferring most retail deposit accounts to the Federal Reserve and shifting community banks to the equivalent of Fed franchisees for deposit-taking purposes. She took much criticism and questioning over this paper, and related statements.
Republicans especially probed her on aspects of this paper. Chairman Brown, anticipating the attacks, asked if Omarova truly wanted to “end banking as we know it,” a phrase used in her paper. She denied it.
“No, Senator,” she answered, “I do not want to end banking as we know it. I believe our banking system is the best banking system in the world, although we could do better. This phrase was taken out of a paper that was written in the context of an ongoing academic debate on the future of digital money.” She noted that China is already piloting a digital yuan and that the Federal Reserve is weighing its on central bank digital currency.
“My worry is that if we take this step without fully understanding the implications of it, we may hurt community banks and mid-sized banks, that would experience the flight of business banking to bigger players like big tech companies and Wall Street platform-based financial institutions,” Omarova said.
When Toomey asked about the same point, Omarova added that the “end of banking as we know it” phrase came from the title of a book she had quoted in her paper. Toomey responded that he’d read a good deal of the long paper, and “it is clear to me that you were not referring exclusively to a central bank digital currency.”
“Being a legal academic, there is a particular way we write our ideas,” responded Omarova. “… My job as an academic is to expand the boundaries of academic debate and outline potential options for Congress to consider.”
Sen. Bob Menendez (D.-N.J.) accepted that, adding, “it’s a question of exploring out of the box. It does not necessarily mean that such thoughts are at the end of the day the pragmatic thoughts that you would put in place if you had the power to do so.”
Omarova agreed. She frequently deferred to Congress as the arbiter of what OCC can do, though critics retorted that the agency has very broad powers that could be wielded as an aggressive Comptroller chose.
Read More: Will Regulators Stuff the Fintech Genie Back into the Bottle?
Omarova’s Stance on Lending to Fossil Fuel Companies
The nominee took considerable criticism over remarks she had made in an interview about the energy business and getting away from fossil fuels. She had said: “A lot of the smaller players in that industry are going to, probably, go bankrupt in short order—at least, we want them to go bankrupt if we want to tackle climate change.” She admitted to poor phrasing, but was nevertheless accused of advocating having banks refuse to lend to certain industries.
Multiple senators brought up the Obama-era’s Operation Choke Point, which targeted banks that made loans to certain industries considered susceptible to money laundering. Omarova insisted that she had not meant to imply that banks should cut off credit for fossil fuel companies and that she believed that “it should be banks making decisions [regarding] which company to lend [to].”
“As a regulator … I fully intend to follow the rules and the law as it’s written. The OCC’s job is simply to ensure that when banks make those decisions that they fully identify, understand and account for the risks they’re taking,” said Omarova. “And that’s my position.” (In October the interagency Financial Stability Oversight Council issued a report that acknowledged climate change as an emerging threat to the financial stability of the U.S. Regulators have been expected to consider climate issues as part of safety and soundness evaluations.)
Omarova was also frequently asked about her proposal for a “National Investment Authority,” which has been taken as a proposal for replacing private capital investment with a government investment arm. She insisted that it was not meant “to supplant or replace private allocation of capital, but to supplement it and provide an additional set of investment opportunities for private capital in the kinds of projects that naturally and rationally do not get funded in private markets because of their high risk for long-term profit.”
Elizabeth Warren Praises Omarova as an Enforcer
Omarova was all but accused at multiple points of having communist leanings and pointed out that her great-grandparents had been persecuted for not joining the party and that much of her life in Kazakhstan under Soviet rule was compulsory. Committee Chairman Brown was not the only Democrat to praise Omarova and to deflect criticism from the nominee. Sen. Elizabeth Warren also weighed in forcefully as in this interchange (excerpts):
Warren: I know that the giant banks object to your willingness to enforce the law, to keep our system safe, and that you may cut into big bank profit. So they and their Republican buddies have declared war on you. The attacks on your nomination have been vicious and personal. We’ve just seen them. Sexism, racism pages straight out of Joe McCarthy’s 1950s red scare tactics. It is all there on full display. Welcome to Washington in 2021.
Now, one claim is that you intend to nationalize the banking system, so let’s just get this nonsense out of the way. Does the OCC have the power to end private banking and to move all consumer deposits to a public ledger?
Omarova: Absolutely not.
Warren: If the OCC did have that power, is that something you would support?
Omarova: Absolutely not.
Warren also opined that the giant banks are flourishing and growing larger by the day. And big tech companies like Facebook are trying to move in while many of the smaller banks are getting wiped out. She asked Omarova how, as comptroller, she would support community banks.
Omarova replied that she would make it one of her priorities to take a much closer look at the ongoing trend of consolidation in the banking industry.
Sen. Warren also asked the nominee how a regulator should respond to the types of abuses and violations committed by Wells Fargo over several years.
Omarova responded: “I believe that banking regulators should use the tools in their toolkit to make sure that no bank, small or especially large, gets away with repeated violations of the law, especially when that hurts real families and real businesses on the ground. The fines should have a real bite. I think the executive compensation should be on the line for the big banks that continuously and repeatedly violate laws.”
The hearing ended with Toomey urging that the nomination be rejected and Brown urging approval. Voting will be held on a separate occasion.
One line of thinking is that perhaps Omarova’s nomination has not been an appointment intended to make it through the confirmation process. Acting Comptroller Michael Hsu has been going about the job like someone who is quite comfortable in the role, with definite thoughts on how to change national bank regulation. And Omarova has made a good lightning rod.