Kara Stein: Wall Street's Worthy Adversary - OZY | A Modern Media Company


Few government roles are more important than those preventing the next financial crisis. Stein is trying to lead the way.

By Emily Cadei

Kara Stein doesn’t look the least bit intimidating. With her Lisa Loeb-esque glasses and puckish grin, this Yale-educated attorney looks far younger than her 50 years. And, as she has observed with a laugh, she is “height-challenged.”

But try crossing swords with her on the future of America’s financial industry and how best to prevent another meltdown like the one that happened in 2007 and ’08, and you just might get skewered.

Stein has emerged as one of Washington’s most powerful voices calling to rein in Wall Street, just over a year after being appointed one of the five commissioners at the Securities and Exchange Commission. She’s pushing for tougher punishments of banking’s bad actors and for aggressive implementation of the 2010 financial reform law known as Dodd-Frank.

That’s put her at odds with others on the commission, even a fellow Democrat, Chairwoman Mary Jo White. Meanwhile, she’s won raves from liberals dismayed by the Obama administration’s — and White’s — tepid response to Wall Street’s excesses.

Those were scary days, with millions of American jobs and billions of dollars on the line.

— Kara Stein

It’s a role befitting the Lynchburg, Virginia, native. As a senior congressional staffer, she helped write the text of Dodd-Frank, the comprehensive legislative response to the financial crisis.

“I, too, am crisis-scarred,” Stein told an audience at the Peterson Institute for International Economics, a Washington think tank, in June, perched on a stool so she could see over the podium. “The events of 2008 are indelibly etched into my memory.”

Back then, Stein was Democratic Sen. Jack Reed’s lead staffer on the Banking Committee, and she recalled many panicked closed-door briefings with the country’s economic leaders. “Those were scary days, with millions of American jobs and billions of dollars on the line. Huge policy choices had to be made with imperfect information, with consequences that would shape the world’s economy for years to come.”

Six years later, the consequences of some of those policy choices are coming into focus.

Stein’s SEC has been busy figuring out how to execute new rules governing securities markets. That includes stocks and bonds as well as their more complex cousins — mortgage-backed securities and other dodgy derivatives, financial contracts whose value is based on an underlying asset, like home mortgage loans, but doesn’t include ownership of that asset. It’s a multitrillion-dollar hedging and gambling market that helped unravel financial giants like Lehman Brothers, Merrill Lynch and Bear Stearns, when the underlying assets collapsed in value.

Dodd-Frank gave the SEC power to determine how these rules would work, broadening its precrisis authority. The Obama administration billed White as its new Wall Street enforcer when she was appointed in January 2013, a label she hasn’t lived up to. Instead, it’s Stein who’s stepped into that role.

Kara Stein shaking hands with man on left hand side of frame

U.S. Rep. Mel Watt with Kara Stein before her SEC confirmation hearing in 2013

Banking lobbyists credit Stein with putting teeth into one of the most controversial parts of the 2010 law: the so-called Volker Rule. It seeks to prevent commercial banks, which lend to consumers, from engaging in risky speculative investments. Lobbying was fierce, with big banks spending millions of dollars to loosen any restrictions. But after years of back-and-forth, the final Volker Rule was a rare victory for Main Street in its battle against high-powered Wall Street. 

Stein grabbed D.C.’s attention this year with a series of clarion calls for concerted government action.

She warned the securities industry that internal oversight mechanisms weren’t working.

In April, she lambasted her fellow commissioners for allowing the Royal Bank of Scotland to keep special privileges as an SEC-designated “well-known seasoned issuer,” despite a criminal conviction earlier in the year for illegally manipulating interest rates.

In May, she warned the securities industry that internal oversight mechanisms weren’t working, the punishments for wrongdoing little more than a slap on the wrist.

And in her speech at the Peterson Institute in June, she called for more disclosure rules and higher capital requirements for financial firms to give investors better information and prevent investment banks from taking dangerous risks.

“A NEW FIGHTER AT THE SEC,” one liberal blog declared. “Kara Stein Declares War on SEC Commissioner Mary Jo White,” hailed another.

Others are not enamored. The financial industry has been wary of criticizing her openly but opposes many of her most stringent proposals. Daniel Gallagher, Stein’s Republican colleague on the SEC, says Stein’s call to punish the Royal Bank of Scotland was woefully misguided, hurting investors, not the bank’s brass. Stripping the bank of its special status “could make shareholders less informed, compounding the harm to investors and impeding price discovery and capital formation to the detriment of the broader market,” he said in a statement.

Some insiders caution not to read too much into Stein’s challenge to White or other SEC colleagues, noting there’s always some tension among commissioners, and that the level of debate and engagement on the commission is a good thing. 

Stein, they say, is very willing to do both — forcefully.

Stein was a senior policy aide for Sen. Reed, a member of the Senate Banking Committee, for more than a decade. From 2009 to ’13, she was the staff director of the Banking subcommittee he chaired, overseeing of the securities markets and the SEC, among other things. But she got her start in the policy world on housing and housing finance — including a fellowship right out of law school helping defend the housing rights of the low-income and homeless in Dallas.

“She’s such a capable person — Yale law grad and undergrad — that she moved quickly into the issue of banking securities,” Reed tells OZY.

After years on Capitol Hill, she appears quite at ease questioning witnesses from behind the dais, her conversational tone belying the wonky subject matter.

Shades of that other financial policy brain-turned-liberal political hero, Massachusetts Sen. Elizabeth Warren? Stein’s five-year term on the SEC is up in 2018, so she still has time to plan her next move. 

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