WASHINGTON - The capital's testy political atmosphere is beginning to wear holes in the reserved, highly polished veneer of Jay Powell.

In one of his first interviews since becoming under secretary of the Treasury for domestic finance on May 19, Mr. Powell said he has had it up to here - that's just above the knot in his Hermes tie - with a Congress that refuses to modernize the laws governing financial institutions.

"Stalemate is the preferred outcome almost all the time on these issues," groused Mr. Powell. "It is very frustrating."

What most rankles Mr. Powell is the "overreaction and excessive risk aversion" that the savings-and-loan crisis produced among bankers, regulators, and lawmakers - which is stymieing Treasury's efforts to end the credit crunch.

Last year's banking law, he said, with its detailed operating instructions for banks, is at the root of the country's credit problem. As he views it, Congress sent a strong message to lenders to avoid taking risks.

Of course, many in the industry blame Treasury Secretary Nicholas Brady and his team for accepting too many compromises in last year's fight for banking reform on Capitol Hill.

Robert Glauber, who preceded Mr. Powell in the No. 3 post at Treasury, is held culpable for being impolitic by trying to push too broad a proposal through Congress. Mr. Glauber returned to his life as a Harvard professor in January.

Mr. Powell, 39, who came to work for Mr. Glauber as an assistant secretary in May 1990, doesn't see it that way.

"We invested extraordinary amounts of capital, effort, time in trying to do something positive for the banking industry last year," he said. It is Congress that loaded the bill with provisions costly to the industry, he explains. But the bill included a $70 billion line of credit for the Federal Deposit Insurance Corp., so President Bush had to sign it.

In temperament, Mr. Powell is worlds apart from Mr. Glauber's pushy and cocksure attitude. "He is smart, a straight-shooter, competent, trustworthy," said one congressional aide.

Weighing In with Industry Leaders

But industry leaders complain that Mr. Powell is a lightweight.

"He doesn't have a commanding presence," said a powerful trade group executive. "Can you imagine putting him up against [John] Dingell," chairman of the House Energy and Commerce Committee?

Looking ahead, Mr. Powell said the administration must convince lenders, examiners, and lawmakers that the banking industry is not following the thrift industry off a cliff. But restoring balance, like healing a wound, will take time. His job, he said, is "to push that healing process along."

Many lawmakers, he said, are realizing that the 1991 banking law may have gone too far. Mr. Powell has hammered out a Comprehensive Regulatory Relief and Reform Act, which would free banks from two dozen rules. But it has gotten a lukewarm reception, with only two sponsors in the Senate and 20 in the House.

|The Heart of the Credit Crunch'

Mr. Powell is confident more lawmakers will sign on.

"There is a whole lot of sympathy up there for the issue because members are hearing about it from bankers and borrowers," he said. "It goes to the heart of the credit crunch."

In addition to seeking regulatory reforms, Treasury will be back in 1993 pushing for financial services reform with what Mr. Powell terms terms "a similar and slightly slimmed-down package."

Mr. Powell deftly hedges when discussing the tougher underwriting many banks are doing these days. He never says that banks should ease their credit standards - but he implies it.

"The question is, have banks raised their standards so much that they no longer want to deal with certain classes of borrowers?" Mr. Powell said. "We're very, very concerned about it."

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