Volcker Sidelined as Obama Reshapes Board Advising on Economic Recovery

Paul Volcker is leaving as chairman of a presidential advisory board that’s being reshaped to have more of a business-outreach mission.

Volcker, 83, was kept out of discussions on how the President’s Economic Recovery Advisory Board, which brought together business executives to come up with solutions to the economic crisis, might function next or who its new members might be, according to a person with knowledge of his views.

President Barack Obama is planning to reconstitute the board when its term expires next month and Volcker, a former Federal Reserve Board chairman, leaves, according to another person familiar with administration deliberations.

The president wants the board to put a greater focus on U.S. economic competitiveness now that the recovery is on firmer footing, said the person, speaking on condition of anonymity because the decisions haven’t been made final.

Volcker, known for taming inflation in the 1980s, was disappointed with the way his advisory group became a public relations tool for the White House as its meetings with the president were televised live, making honest discussion difficult to conduct, the person familiar with his views said.

The group moved most of its work to subcommittees to get around that, presenting Obama with advisory reports on matters from financial reform to economic revival, and cut its full group meetings to about every six months.

The Outsider

“Volcker was always sort of on the outside anyway,” said Joseph Engelhard, a former U.S. Treasury deputy assistant secretary who is now a senior vice president at Capital Alpha Partners in Washington. “They pretty much used him to look tough on regulation, and now they’re done with him, they’re saying goodbye.”

Volcker has been chairman of the advisory board since it was established by executive order two years ago. That charter expires Feb. 6, and the president plans to renew it.

Volcker agreed to serve for two years and plans to remain available to advise the administration, according to another person familiar with the matter. On the panel, Volcker provided advice on economic issues as well as the rewriting of regulations for financial institutions.

The law enacting those regulations included the so-called Volcker rule, which banned proprietary trading at banks and restricted their investments in private-equity and hedge funds.

Volcker had rocky relations with Obama’s top economic staff from the start. Although the former Fed chief was in Obama’s circle of advisers early in the 2008 election campaign, he lost much of his influence when the newly elected president chose Lawrence Summers to head his National Economic Council.

Clash With Summers

Summers was instrumental in pushing deregulatory measures through Congress as Treasury secretary in President Bill Clinton’s administration. Summers also has left, with the White House expected to name Gene Sperling, an adviser to Treasury Secretary Timothy Geithner, as chairman of the NEC tomorrow.

Volcker complained when the startup of the advisory board was delayed. He slowly got his voice heard and achieved one of his biggest goals when Obama in January 2010 backed the main tenet of Volcker’s financial reform ideas, preventing banks from using their own money to take risky trading positions or invest in hedge funds.

That breakthrough was due to the election of Republican Scott Brown that month to fill the late Edward Kennedy’s Senate seat representing Massachusetts, following defeats in gubernatorial races in November, according to Engelhard.

Disappointment
“The best thing that happened to Volcker was a Republican’s election in Massachusetts,” Engelhard said. “Otherwise he wouldn’t even get the Volcker rule out of the administration.”
Volcker was disappointed with the final version of the rule that bears his name as it was watered down with lobbying by banks and members of Congress sympathetic to Wall Street’s views, as well as some administration members in the banks’ defense, people with knowledge of the talks said at the time.

In the final version, U.S. banks, including Goldman Sachs Group Inc. and Citigroup Inc., have as long as a dozen years to reduce stakes in hedge funds and private-equity units.

JPMorgan Chase & Co., the second-largest U.S. bank by assets, operates the world’s biggest hedge fund, according to the 2009 rankings of AR magazine, an industry trade publication. The New York-based firm’s hedge funds had $50 billion of assets under management as of Jan. 1, the magazine reported in March. Goldman Sachs’s hedge funds, which ranked ninth on the list, had $21 billion.

Levin in Line
Yale University President Richard Levin is a leading candidate to be chairman of the reconfigured board that Volcker chairs, according to one of the people familiar with the matter.

Levin was also interviewed by Obama to replace Summers, who returned to Harvard University at the end of the year, according to an administration official. Sperling served as NEC chairman during Clinton’s administration.

The 17-member advisory board known as PERAB was created to provide an outside perspective on the administration’s plans to revive the economy and draft recommendations.

Members of the panel include General Electric Co. Chairman and Chief Executive Officer Jeffrey Immelt; former Securities and Exchange Commission Chairman William Donaldson; former Fed Vice Chairman Roger Ferguson; UBS Americas Chairman and CEO Robert Wolf, and Service Employees International Union Secretary-Treasurer Anna Burger.

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net Hans Nichols in Washington at hnichols2@bloomberg.net;

To contact the editors responsible for this story: Mark Silva at msilva34@bloomberg.net David Scheer at dscheer@bloomberg.net