Warsh vs. Quarles said to be renewed by Trump Fed search

Register now

The race to be the next Federal Reserve chairman is rekindling an old feud between Kevin Warsh, one of the Trump administration's finalists, and the newest Republican appointee to the Fed board, according to several people familiar with the matter.

Fed Governor Randal Quarles, who was sworn in this month as vice chairman of bank supervision, has told friends that he doesn't think Warsh is qualified to lead the world's most powerful central bank, according to two former associates familiar with his comments. Quarles, they added, is also concerned that Warsh would inject himself into regulatory policies that are meant to be the domain of the vice chairman.

Treasury Secretary Steven Mnuchin, a key participant in the chairman search, is aware of Quarles's concerns, the people added. The pushback could be having an impact: Mnuchin has privately made clear that he doesn't support Warsh's candidacy, two people familiar with his thinking have said.

President Donald Trump said this week that he is "very, very close" to announcing his selection. He has narrowed the list to Warsh, a former Fed governor, and four others: Fed Governor Jerome Powell; John Taylor, a Stanford University economist; National Economic Council chief Gary Cohn and the current Fed Chair, Janet Yellen.

It's not unusual for ambitious, smart people to clash in Washington. But the animosity between Quarles and Warsh shows how long such conflicts can brew and their potential to influence the most critical White House decisions. Going back more than decade, the two men have tangled over high-profile appointments and major policy initiatives, as well as lesser matters like whether the Fed would accept and display a statue honoring a prominent relative of Quarles's wife.

The battle dates to when both worked in the George W. Bush administration, and its intensity, especially on the part of Quarles, has surprised many of their former colleagues. Warsh has long been known as a political player who isn't afraid to throw elbows behind the scenes in pursuit of his goals, but Quarles is seen as a low-key, courtly lawyer who has garnered few adversaries in Washington.

The Warsh-Quarles relationship was detailed by more than a half dozen officials who have worked with them. All spoke on condition of anonymity in order to discuss more freely the disputes between the two.

Warsh, 47, declined to comment through a spokeswoman. Friends of his, while acknowledging that the two men don't like each other, questioned whether Quarles was ginning up controversy to help Powell win the Fed chairman job. Powell and Quarles are longtime friends. They worked together in the Treasury Department in the early 1990s and later both had stints at private-equity firm the Carlyle Group LP.

Easing rules

Quarles, 60, declined to comment via a Fed spokesman. He was sworn in Oct. 13 as the Fed's first supervision chief, a position that holds great power over Wall Street banks and is on the frontlines of Trump's push to ease tough rules put in place after the financial crisis.

One major issue for Quarles is whether Warsh would try to influence the regulatory matters that Quarles is charged with overseeing, said two of the people. Warsh, during his time on the Fed, acted as an emissary to Wall Street and maintains extensive relationships with numerous banking executives.

Though Quarles is some 13 years older than Warsh, there are similarities in their backgrounds.

Both attended Ivy League law schools, are mainstream Republicans and have carved out a niche in the top echelons of financial services policy, in and out of government. After leaving the Bush administration in 2006, Quarles worked at Carlyle and a Salt Lake City private equity firm. Warsh resigned from the Fed in 2011, and has served as a consultant to hedge fund magnate Stanley Druckenmiller's family office. He is also a visiting fellow with the Hoover Institution at Stanford University, his alma mater.

Both men married into great wealth. Warsh's wife, Jane, is a granddaughter of Estee and Joseph Lauder, founders of the cosmetic company. Quarles's wife, Hope, comes from one of the most prominent Mormon families in Utah, the Eccleses, who made their fortune as industrialists and bankers. One of the Fed's headquarters buildings is named after her relative, Marriner Eccles, who was chairman of the central bank from 1934 to 1948.

Unusual fight

That connection was grist for perhaps the most unusual dispute involving Warsh and Quarles, a years-long squabble over a six-foot bronze statue of Marriner Eccles. The family, which commissioned the work from a prominent Utah artist, wanted to donate it to the Fed for display in the the Eccles building.

The Fed, according to two people who were privy to the discussions, was less than enthusiastic. And Warsh, whose role as a governor included dealing with administrative matters, was charged with handling the situation. Quarles was one of the Eccles family's points of contact with the central bank.

Negotiations between the Eccles family and the Fed over the statue began some time around 2008 and flared up sporadically, the people said. The talks included whether the Fed would be able to accept the gift, where the artwork would be placed, how it would be officially handed over and, if there was a ceremony, which lawmakers would be invited.

At one point, Warsh came under political pressure from members of the Utah congressional delegation who wanted the Fed to hurry up and take possession of the statue, the people said. He successfully batted it back, the people said.

The issue was sensitive for the Fed, which didn't want to alienate a family important to its history. Still, there were a number of bureaucratic boxes that needed to be checked, such as complying with fire codes and tax rules for donations, the people said.

Rescuing bankers

In addition, the Fed was facing intense political criticism at the time for bailing out banks while thousands of Americans were losing their homes to foreclosure. Some Fed officials were concerned that it would be bad form to prominently display the statue of a suited banker, the people said.

Ultimately, the Fed did accept the statue and held a ceremony in 2014, several years after Warsh had stepped down. However, it stands in an out-of-the-way nook by the building's unused front door rather than in the center of the arresting two-story atrium, as the Eccles family wished.

Some of the tension between Warsh and Quarles was over weightier matters.

The first dispute between the two dates back to 2005 when Quarles was an assistant Treasury secretary up for a promotion. Warsh at the time was a young staff member on the Bush White House's NEC, and decided he wanted the position that Quarles was being considered for, undersecretary of domestic finance.

Same job

Warsh, according to four people who were involved at the time, campaigned heavily for the nomination, calling in political chits and asking prominent donors to weigh in on his behalf. The campaign was so effective that the decision was brought to the president, the people said.

In the end, the people said, Bush decided not to get involved and left the choice to then-Secretary John Snow. He picked Quarles.

Once Quarles was on the job, he and Warsh had an extended fight over who would lead the Bush administration's push for reforming Fannie Mae and Freddie Mac -- at the time, before the financial crisis, the most pressing financial policy issue. Both mortgage finance companies had been involved in accounting and corporate governance scandals and the administration was seeking to reduce the size of their investment portfolios while tightening their oversight.

Warsh, according to four people familiar with the matter, successfully maneuvered to become the lead Bush administration official on the policy. He often belittled Quarles and the Treasury to staff on the Senate Banking Committee, as it crafted legislation to rein in Fannie and Freddie. Warsh would also angrily bark orders at the Treasury team on conference calls, one participant recalled.

A former Bush administration aide said that while Warsh did argue that Quarles wasn't aggressive enough in dealing with the two mortgage finance giants, the Treasury had little political clout under Snow. The White House, the aide said, took the lead on most markets policy.

Still, the ex-official noted the dispute proved meaningless. No reform measure became law, and by the time Fannie and Freddie helped ignite the financial crisis, Quarles had left the government and Warsh had joined the Fed. His job as governor was arguably a better posting than the undersecretary position he tried to wrestle from Quarles.

Bloomberg News
Federal Reserve