US: Wall Streeter Converts to a Fan of Regulation

Robert K. Steel leans forward, speaking in a rapid, excitable burst
about the powers that a superregulator might wield over Wall Street one
day.

"It will have the license to go everywhere: private equity funds,
investment banks, hedge funds," Mr. Steel, the under secretary of the
Treasury for domestic finance, said in an interview last week.

By his words and demeanor, Mr. Steel could be mistaken for a
midlevel policy wonk - someone hoping to let a little sunlight
disinfect the dark corners of the financial world.

In fact, he is a former vice chairman at Goldman Sachs,
the big investment bank. And in the last two years, Mr. Steel has been
co-chairman of one commission that claimed heavy-handed regulation was
stanching financial innovation and another that argued that hedge funds
could police themselves.

His apparent conversion to the merits of regulation illustrates how
the laissez-faire bones of the Bush administration have been rattled by
the government-brokered rescue of Bear Stearns and the trauma of the credit crisis.

The new industry watchdog that Mr. Steel is trumpeting is the cornerstone of Treasury Secretary Henry M. Paulson Jr.'s controversial effort to revamp the regulatory apparatus of the nation's financial system.

In truth, the plan may well fail to become law because some of its
prescriptions, like diluting the power of the Securities and Exchange
Commission, have drawn fire from those who have long believed that the
Treasury has an antiregulatory bias.

In Washington bureaucratese, the entity is called a market stability
regulator, but there is nothing dull about its mandate. The regulator
would pass judgment on the capital levels, trading exposure and
leverage of Wall Street's most sophisticated institutions.

"When you are driving fast down a slippery road, sometimes a
regulator needs to tap lightly on the brakes to get you to slow down,"
Mr. Steel said.

But to many on Wall Street and on Main Street, the car has already
crashed. Mr. Steel's enthusiasm may represent less a philosophical
conversion than an acceptance of raw political facts.

"Everybody likes to say I told you so, but we told them they were
excessively deregulatory," Representative Barney Frank, the Democratic
chairman of the House Financial Services Committee, said of the Bush
administration. "I very much welcome this affirmation by Paulson and
Steel that we need to regulate risk in ways that we haven't."

Such a suspicion is in many ways rooted in Mr. Steel's own promarket
sympathies, which were on display when he was co-chairman of the United
States Chamber of Commerce's inquiry into the country's regulatory
structure. He gave up that position when he joined the Treasury in 2006.

"The blueprint is an attempt to weld together two contradictory ways
of thinking," said Damon Silvers, an associate general counsel for the A.F.L.-C.I.O.
"One is what Treasury has learned over the past year, and the other is
the pre-existing deregulatory agenda coming out of the business
community."

Mr. Paulson disputes the notion that the plan or Mr. Steel is
antiregulatory in the slightest. "Bob has never been antiregulation,"
Mr. Paulson said in his hoarse voice. At Goldman, he said, Mr. Steel
was an effective liaison with regulators and was often "on the point of
the spear," when it came to dealing with them. As for the plan's broad,
if not self-defeating ambition, he is blunt. "I think it will stand the
test of time," he said.

On Tuesday, Mr. Steel's office will bless the release of two reports
that examine the issues of hedge funds, risk and investor protection.
In one, Eric Mindich, a former Goldman executive who now runs the hedge
fund Eton Park, will - with a group of supporting funds - propose
nonbinding steps that hedge funds should take. They include publishing
audited financial statements like public companies do, the
establishment of conflict committees and disclosing on a quarterly
basis the extent of their hard-to-value assets.

The other report, directed by Russell Read, the chief investment
officer of Calpers, the California state pension fund, will address the
question of applicability of such funds to different classes of
investors.

As someone who reaped significant gains from his days at Goldman,
and who further augmented his wealth from investments in some of Wall
Street's most exclusive and successful hedge funds like Tontine
Partners, Eton Park, TPG-Axon and Lone Pine Capital, Mr. Steel brings
the practiced, experienced eye of the genuine participant to the task.

At times, he still sounds like a deal maker. "I can give leverage to
the secretary," he said at one point, using Wall Street jargon to
describe his mission to provide support to Mr. Paulson on financial
matters.

Mr. Steel was forced to sell all his Goldman stock as well as his
positions in a number of prominent hedge funds before coming to
Treasury, but he is still in all likelihood, the wealthiest under
secretary of domestic finance to hold the post.

Like most Goldman executives, he has been schooled to not flaunt his
riches or success - to grow, not swell, in the words of a former senior
partner. But there is no getting around the fact that Mr. Steel leads a
different life from most people on government salaries.

He recently bought a house in the Georgetown section of Washington,
and he has an investment in NetJets, which allows him use of a private
plane to fly to and from his main home in Greenwich, Conn. His
investments, according to his financial disclosure form, are varied and
include partnerships that invest in Georgia timber, real estate in
Greenwich and Bordeaux wine futures.

Nevertheless, dating back to his days on Wall Street he has shown an
ability to reach consensus with parties on the opposite sides of the
ideological and wealth spectrum.

Mr. Silvers, the labor lawyer who is a critic of the blueprint,
calls Mr. Steel a friend. He and other friends of Mr. Steel say his
shift is an example of essential pragmatism as opposed to being a
philosophical retreat.

"Bob and Hank are pretty balanced thinkers," said Thomas Healey, a
former Goldman partner who held a similar position to Mr. Steel's at
Treasury during the Reagan administration. "They are trying to analyze
data and come up with solutions as opposed to doctrinaire conditions."

It has been a heady year and a half for Mr. Steel, capped by a
limousine ride with President Bush last month on the day that the Bear
Stearns deal was announced, during which he briefed the president on
the latest developments and then returned with him to Washington on Air
Force One.

Born and bred in Durham, N.C., Mr. Steel went to Duke University,
where he retains deep ties, as chairman of the board of trustees. He
joined the Chicago office of Goldman in 1976 and quickly bonded with
Mr. Paulson, another small-town boy eager to make his mark inside Wall
Street's most prestigious firm.

By the start of this decade he had become the firm's most senior
executive in its blue-chip equities division, and in 2002 he was named
co-head of the firm's equities and trading business with Lloyd C. Blankfein, who ran the firm's booming bond and commodities trading business.

As Mr. Blankfein consolidated control, Mr. Steel's role diminished.
In 2004, Mr. Steel quietly retired, taking up a teaching job at the
Kennedy School of Government at Harvard. And there he might have
labored in obscurity, until he received a call from Mr. Paulson just
days after his nomination in 2006.

Now, as Wall Street executives come under pressure from shareholders
for their mounting subprime-related losses, Mr. Steel's mix of a
Goldman pedigree and years in the thick of the government's effort to
grapple with the housing crisis has made him a short-list regular on
investment bank board committees looking for new leadership.

Like many of the top Goldman executives who rose high at the firm,
yet missed out on running the place, Mr. Steel seems driven by an urge
to prove himself. Predictably, Mr. Steel bats aside questions about any
grander ambitions either in Washington or Wall Street.

But he concedes that he has no plans to sit idle. "I'm a young guy," Mr. Steel, who is 56, said. "I like being fully engaged."

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