The White House's removal of Joseph Smith as a nominee to be the director of the Federal Housing Finance Agency does not bode well for an administration facing so many regulatory jobs to fill, observers said Friday.
Smith's difficulty getting confirmed surprised many. After Senate Banking Committee Republicans, including ranking member Richard Shelby, opposed the North Carolina bank commissioner last month, Democrats failed to schedule a vote. Late Thursday, a White House official said Smith would not be renominated.
With Republicans having since gained seats in both chambers, analysts said Smith's outcome could spell trouble for future administration choices at the FHFA and other agencies, and further sharpens battle lines over reforming the government-sponsored enterprises.
"If the nominee is someone who is perceived to be more supportive of the administration's view, it will be hard to get approved right now," said Laurence Platt, a financial services practice area leader with K&L Gates. "That's true for GSEs and the Consumer Financial Protection Bureau. That is true for anything financial reform-related right now."
As with the newly established consumer bureau, the administration has not found a permanent comptroller of the currency. (John Walsh is the acting comptroller.) And another significant opening will emerge later this year when Federal Deposit Insurance Corp. Chairman Sheila Bair is expected to step down.
In the political environment, some speculated the administration will need to be careful finding nominees that do not rock the boat.
"The Republicans have much more influence than they did a year ago or even a month ago. So the administration is going to have to find moderates acceptable to Sen. Shelby if they want to see them confirmed. There is no ability to ram anyone through," said Jaret Seiberg, an analyst with MF Global Inc's Washington Research Group.
The Senate Banking Committee had approved Smith last month, but Shelby joined five other Republicans in objecting to the nomination, calling Smith a "lapdog" and a "tool" of the administration.
In a statement, the White House official said Smith was "highly qualified to lead the FHFA. Unfortunately, there is not a clear path to confirmation for his nomination at this point in time, and Mr. Smith has asked not to be renominated in the 112th Congress." Perhaps in a sign the holdup was affecting the future of his current job, Smith announced in a statement Friday that North Carolina Gov. Bev Perdue had nominated him for another term as commissioner.
A Shelby spokesman, Jonathan Graffeo, said the senator's objection was not political. "Sen. Shelby considers each" nomination "on its own merits."
Indeed, some congressional sources said Smith did not prove he would be sufficiently objective on the sensitive issue of GSEs. Republicans have criticized both the Bush and Obama administrations for the taxpayer costs associated with the takeovers of Fannie Mae and Freddie Mac, and, they said, Smith hadn't indicated he would be any different.
"It certainly shows that the administration has had to rethink who's confirmable and what confirmable means," said a Republican Senate aide. The aide, who spoke on the condition of anonymity, suggested that the FHFA's acting director, Edward DeMarco, has more Republican support. "The biggest concern had to do with taxpayer protection," and "Smith wouldn't adequately safeguard the taxpayer when they are so exposed to losses at Fannie and Freddie."
Joseph Engelhard, a senior vice president with Capital Alpha Partners, agreed that some Senate Republicans "had some real strong concerns" about Smith and "it's my understanding that during the confirmation process those concerns were not resolved."
He rejected the notion that Republicans would just reject anyone the current administration chose. "There's no question that another candidate might fair better," he said. "I don't think there is any reason to believe that there would be a problem getting someone else through."
Still, his supporters expressed surprise that Smith, a former chief counsel at a regional bank in North Carolina, had faced so much resistance.
"Joe is well regarded both by consumers and by the banking industry. … He comes from a banking establishment background," said Rep. Brad Miller, D-N.C.
Others said the failed nomination was just another sign of the intensifying debate over GSEs. The administration is preparing a report on how policymakers should reform the structure of Fannie and Freddie amid a consensus that the current structure has failed. The process promises to be a contentious one with conservatives pushing for privatization of the mortgage giants, and Democrats not ready to go that far.
Platt said Smith may just have been a victim of that battle.
"It's foreshadowing the difficulties on coming to a resolution on the GSEs," he said. This guy was a lifelong banker before he became a regulator. If a banker is considered too liberal who won't be? I just look at that as [the GOP] flexing their muscles on the battles to come."
V. Gerard Comizio, a partner at Paul, Hastings, Janofsky & Walker, agreed that any opposition party, Republican or Democrat, needs to be realistic before targeting qualified candidates for regulatory openings.
"The cautionary tale is for both political parties," he said. "If every presidential appointment is going to be delayed and potentially turned into a three-ring circus you're not going to get qualified people for these jobs. Congress needs to believe that the administration has the prerogative to choose their appointments. Unless there is resume showstopper that has not been vetted, there has to be some bipartisan agreement that the appointments in the vast majority of federal agencies are of competent candidates. If you're going to have constant delays, the people who are making the personal and financial sacrifices that are needed to fill these roles are not going to want to play ball" to be nominated.
He added, "The Republicans when they're in power are going to have the same concerns. Traditionally, the government went along for many years where the political parties had a high degree of bipartisan consensus and gave the administration discretion to fill these positions. It seems that to some degree that system has broken down."
But some said a tougher road for nominations now is inevitable with the divided Congress.
"I would personally expect that you will see with respect to some nominees more difficulty with greater Republican presence — I think that's sort of a given with the political nature of nominations," said Wright Andrews, a partner with Butera & Andrews.
"This one may have drawn a little more fire, but you will see others raising concerns on various nominations. I don't think the Republicans can be perceived as blocking everything, so I think they have some incentive there and I don't think the Republicans will necessarily want to block everything.
"But there will be some nominations that they will put a hold on as we have seen. And I think the Democrats would do the same thing if the tables were reversed. Despite all the talk of bipartisanship, I'm afraid the closer we move to the 2012 elections the less of it we will see."