Lawmaker ire at Fed may imperil Kroszner renewal

WASHINGTON Thu Dec 20, 2007 11:21pm EST

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WASHINGTON (Reuters) - A key lawmaker's frustration with the Federal Reserve's response to the mortgage crisis looms as a major obstacle to at least one of President George W. Bush's nominees to the U.S. central bank's board.

Congress wrapped up its work for 2007 this week leaving three Fed candidates in limbo, as concerns about the central bank's supervision of lenders and the approaching 2008 presidential election have stalled the process.

In May Bush renominated Fed Governor Randall Kroszner to serve a full 14-year term when his current partial term expires on January 31, 2008.

Bush also nominated financial services executives Larry Klane and Elizabeth Duke to seats on the Fed board left open by the departures of Mark Olson in June 2006 and Susan Bies in March 2007.

Senate Banking Committee Chairman Christopher Dodd held a confirmation hearing for the three nominees in August but has yet to schedule a vote on the nominations. All three must ultimately be approved by the full Senate.

Dodd, a Connecticut Democrat, was highly critical of rules proposed by the central bank on Monday to protect consumers from mortgages with excessive fees and hidden costs and penalties.

His frustration with those rules -- which he felt had not gone far enough to protect consumers -- would likely color his views on Fed nominees, he said on Thursday.

"It underscores the importance of appointing Fed governors who understand their duty to enforce consumer protection laws as well as their duty to set monetary policy," he told Reuters on Thursday.

Kroszner, through a Fed spokesman, declined comment.

The White House criticized Dodd for attacking the Fed at a time when the central bank was seeking to bring relief to many homeowners facing foreclosure.

"As the Federal Reserve continues to address the mortgage crisis, the last thing Sen. Dodd needs to do is weaken leadership on the Fed's Board of Governors," said White House spokeswoman Emily Lawrimore.

LEAD ROLE

Kroszner has played a lead role at the Fed in consumer and regulatory issues, and has testified before Congress on the Fed's response to the subprime mortgage crisis.

Millions of Americans who bought homes in recent years face the risk of foreclosure as mortgages with low "teaser" rates are reset at sharply higher levels in coming months.

Dodd, who is pursuing a long-shot campaign for his party's nomination for the presidency, has proposed legislation that would prohibit mortgage brokers and lenders from steering borrowers to high-cost loans.

He has chastised banking regulators for not enforcing consumer protection laws as many unsafe subprime loans were being offered.

The Connecticut lawmaker had been cool on the proposed 14-year term for Kroszner even before the Fed unveiled its proposal, telling reporters in November: "We're frankly getting down to less than a year away from the election. On nominations of that length, I'm fairly reluctant."

A former University of Chicago economics professor, Kroszner served on Bush's Council of Economic Advisers from 2001 to 2003. He took office at the Fed in March 2006 and would serve until a successor is named or he is renominated to the board.

Some of his statements about the economy may also have undermined his candidacy, Senate aides said.

Kroszner testified before Congress on August 2 that the fallout from the gathering subprime storm had yet to damage the broader economy.

However, although the Fed held interest rates steady on August 7, the central bank acknowledged a rapidly deteriorating financial climate within days and took a series of steps, including cutting the discount rate, to calm credit markets.

The Fed has since cut benchmark federal funds rates by a full percentage point over three meetings to 4.25 percent and launched a series of unprecedented measures to soothe markets.

Kroszner may have taken another misstep, the aides said, with a November 16 speech saying the Fed's policy stance was adequate to weather a pending rough patch in the U.S. economy.

Less than two weeks later, Fed Vice Chairman Donald Kohn said financial conditions had deteriorated and signaled a readiness to cut interest rates. The Fed cut its benchmark fed funds rate a quarter of a point on December 11 to 4.25 percent.

(Reporting by Mark Felsenthal; Editing by Diane Craft and Alan Raybould)

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