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The 8th Governor

Arguably one of the most important people at the Federal Reserve is someone that is rarely seen. Who is the General Counsel and what does he do? On today’s episode! As always, I can be reached for comments, feedback, or questions on twitter or via my website www.thebanksterpodcast.com.


I am Alexander Bagehot and you’re listening to The Bankster Podcast, the only podcast dedicated to the fascinating and ever more consequential world of central banking.

Today was going to be another round of Centralverse Q&A, but I got so caught up on the first question that the episode no longer fit the model of the “short answer, background info, and long answer” format that I’ve designed the Centralverse Q&A episodes to have. The question involves one of the most important people at the Federal Reserve. Now, unlike my title suggests, the person actually is not a governor, and he is definitely not the 8th governor. Remember - there are only 7 governor positions at the Board of Governors in Washington DC. However, the position wields such power at the US Central Bank that the position is often deemed the 8th governor. Who is this powerful person and what is his position? The subject of today’s episode is Mark E Van Der Weide, General Counsel of the Federal Reserve. Van Der Weide was appointed as General Counsel just two months ago (link), so before I introduce you to what we know about him I’m going to describe the position of General Counsel of the Federal Reserve and use a few examples from the tenure of Van Der Weide’s predecessor, Scott Alvarez, to illustrate the job.


For those of you unfamiliar with the term, General Counsel, (as I was not long ago before joining the corporate world), it is an internal position that normally means three things: (1) the highest ranking lawyer (2) head of the legal department, (3) gives advice to the management of the company concerning legal matters that affect the company. Or as google nicely summarizes, “the main lawyer who gives legal advice to a company.” All major companies have general counsel. The General Counsel is involved in almost every aspect of what a company does. Making sure that the products or services will pass regulations. Advising management on city, county, state, national, and even international laws that govern the company’s industry. They are involved in everything from the contracts and benefits of employees to the nitty gritty details of company expansions and mergers and acquisitions. It’s an important job in any company, and the Federal Reserve is no exception.

But as you know the Federal Reserve isn’t just any company. It’s the biggest player in what I describe at the beginning of every episode as, “the fascinating and ever more consequential world of central banking”. Here are two examples of what Scott Alvarez, the General Counsel of the Federal Reserve from 2004 to just a few months ago, did during his 13 year tenure.

Example number one - Bailouts. Do these names sound familiar: Fannie Mae, Freddie Mac, Bear Stearns, BNP Paribas, Morgan Stanley, Lehman Brothers, AIG? These are all financial institutions that were very troubled at one point or another during the Financial Crisis of 07-09. The Federal Reserve has an implicit job to protect the economy from panics like this one and prevent the panics that do occur from morphing into economy and life destroying depressions. One way the Federal Reserve does this is through the discount window and through other emergency lending facilities. But who can the Federal Reserve lend to? For how long can the loans be offered?

The Federal Reserve was created by an act of congress. That 1913 Act and the handful of amendments that have passed since then dictate the answers to some of these questions. However, the law is often vague and gives incredible discretion to the Federal Reserve. During the Financial Crisis, some of the institutions I named just a second ago received significant help from the Federal Reserve, others did not. Ultimately, the most important voice in the debate about who could receive Federal Reserve money, who could not, how long and at what terms they could receive the money, was the voice of Scott Alvarez, the General Counsel. It was his job to interpret the Federal Reserve Act. He suggested that the Fed had the authority to facilitate the rescue of Bear Stearns by JPMorgan Chase. But when a last minute deal for the British Bank Barclays to purchase the collapsing Lehman Brothers Investment Bank fell through, Alvarez said that that was the end of the rope for the Fed. They could go no further and had to let Lehman Brothers fail. Not long after the bankruptcy of Lehman Brothers Alvarez signed off on an emergency loan to AIG (a large insurance company).

It’s important to remember the two things I mentioned about the laws governing what the Federal Reserve can and cannot do: (1) the law is often and vague and (2) it gives incredible discretion to the Fed in interpreting the law. So when Ben Bernanke, Chairman of the Federal Reserve at the time of the crisis, was trying to keep the economy from completely collapsing, he had to rely on Alvarez’s interpretations and judgements about what was within his power and what was without.

That’s the first and an extreme example of the roll that the General Counsel plays at the Federal Reserve. Onto the second example - Legislation.

One of President Obama’s key legislative victories during his time as president was the Dodd-Frank Financial Reform Act. The Federal Reserve is a critical player in the financial system, so it had a lot of input to add to the debate about how the system should be changed and adapted to fit the post-crisis world. Alvarez and the legal team at the Federal Reserve were involved in two major ways with this law. The first was during the drafting of the law itself. Congress and the Treasury Department brought in Federal Reserve attorneys and Federal Reserve bank examiners to provide their input and perspective into what happened and what could be changed to prevent a similar collapse in the economy in the future. So the Fed lawyers were helping with the writing of the legislation. The second came after the act was passed.

As with many laws that congress passes, the Dodd-Frank Act did not spell out every new rule and regulation. Often it just said something to the effect of, “there will be a rule about how much capital a bank must hold”. These types of statements normally have some kind of footnote that says, “the specific rule will be written by the Federal Reserve”. That’s when the Federal Reserve lawyers and the respective internal knowledge experts get together and write out the specifics of each rule that congress assigned to the Fed to not only enforce but also to write.

So the power to (1) interpret when and how the Federal Reserve can use their money creating powers and (2) write the rules that govern the financial industry are in the hands of the General Counsel. That kind of power is why the position is so important.

Now before I share with you a few facts about the new General Counsel of the Fed, I need to point out one more important characteristic of the position - it is not a political appointment. The man or woman that holds the two powers we’ve talked about today is chosen by senior leadership of the Fed. The framers of the Federal Reserve System designed it like that as an additional buffer to keep the country’s central bank as apolitical as possible. A great debate can be had over whether this is right or wrong. Peter Conti-Brown, a Professor at Wharton wrote an excellent article in the WSJ about the position of Fed General Counsel and why it should be a politically appointed position (link). I highly recommend it and his book, The Power and Independence of the Federal Reserve, which goes into much greater detail about the General Counsel and other important yet little understood facets of the Federal Reserve.

Let’s now turn our attention to the newly appointed General Counsel.

Mark E Van Der Weide

Mark E Van Der Weide began his career at the Fed in 1998. He graduated from the University of Iowa with a degree in History and Philosophy and received his JD from Yale, graduating in 1995. He spent a few years with a law firm in DC before taking a position in the Federal Reserve’s legal department where he worked for the next ten years. From 2009-2010 he was assigned to work at the US Treasury in crafting the Dodd-Frank Act which we mentioned earlier in the episode. Then from 2010 up until a few months ago, Van Der Weide served as the Deputy Director in the division of Supervision and Regulation.

Whenever the Fed is in the news you’ll hear the press clamoring for an interview with Janet Yellen, the current Chairwoman; Bill Dudley, President of the NY Fed; or any of the other Governors or Presidents. However, you can guarantee that in the background the General Counsel has been working hard and had a large influence on the decision that is garnering the news or at least the wording and framing of it.


Today’s episode was written, edited, and produced by me, Alexander Bagehot. Reach out with your feedback, comments, and questions on twitter or via my website www.thebanksterpodcast.com. Leave a rating and share the podcast with your coworkers and classmates. Thanks to all of you for listening, and I’ll see you next time on The Bankster Podcast!


Centralverse Q&A, Round II

Centralverse Q&A, Round II

Centralverse Q&A, Round I

Centralverse Q&A, Round I