Karen Petrou, founder of Federal Financial Analytics, dies

WASHINGTON — Karen Petrou, co-founder and managing partner of Federal Financial Analytics and a luminary of financial policy, died Saturday afternoon of liver cancer after a brief illness. She was 73.

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Petrou wielded an outsized presence in Washington economic and regulatory circles, cultivated over the course of decades in the industry and through countless speeches, reports, op-ed pieces and media appearances. Dubbed “the sharpest mind analyzing banking policy today — maybe ever” by this publication in 2012, Petrou offered policymakers and casual observers uncommonly comprehensive insight into the inner workings of the financial system. 

In a policy sphere riven with smart people, Petrou stood apart. Her distinctive guiding light was to improve the lives of people far removed from finance or power, even if her policy prescriptions might not align with the political valence of her audience. Petrou could be an intimidating presence; she did not suffer fools, though she encountered many. But to Washington insiders, she was something of an oracle — what she offered, to anyone who could keep up with her, was either incontrovertible fact or a sage opinion. Whether anyone listened was up to them.

Petrou was born in 1953 and grew up in Briarcliff Manor, a suburb of New York City, and excelled academically. But as she told Washington Monthly in 2018, she received a diagnosis as an adolescent that would change her life: retinitis pigmentosa, a condition that doctors believed would leave her completely blind by the time she was 25. She beat those odds, not losing her ability to read until her thirties and not requiring a guide dog until she was in her 50s. But she said her visual impairment — as well as the sexist attitudes prevalent in the business world as she was charting her career — led her to believe in herself even when others doubted her.

“I was already used to people thinking I wasn’t supposed to be where I was,” she told Washington Monthly. “That was good combat training.”  

Petrou earned an undergraduate degree in Political Science from Wellesley College and studied briefly at the Massachusetts Institute of Technology before earning her Master’s Degree in Political Science from the University of California, Berkeley. She began her career at Bank of America in 1977 working as a “corporate political scientist,” by her description, analyzing foreign regimes to determine whether the local political environment was stable enough to warrant investment. 

“Most of it was, you had the post-colonial powers, with a tremendous amount of corruption, but [making] efforts at growing their economies and therefore trying to entice global banks,” Petrou said in a 2020 interview. “And you really have to say … ‘How long is this despot going to make it versus the one who’s trying to kill him?’ Those kinds of analyses.”

She parlayed her experience into the private practice she co-founded, Federal Financial Analytics, in 1985. While her experience in banking proved valuable, a project involving housing resulted in a chance introduction to Basil Petrou, a housing expert who would later become her husband. The two were married in 1995; Basil, the other managing partner of Federal Financial Analytics, died of cancer in 2021. 

“Housing finance brought us together,” Karen said of her relationship with her husband. “I did not know anything about it in our more banking-oriented practice, and Basil did not know much about banking in his housing finance-oriented practice, and a client we each had said, ‘You know, there is a project with housing finance and banking issues we need worked on,’ and that’s how we met.”

While not a lobbyist or advocate, in her later career she took aim at the Federal Reserve’s post-crisis financial policy positions — both in its monetary and regulatory capacities — as unfairly benefiting the wealthy at the expense of the poor. 

Her 2021 book, “Engine of Inequality: The Fed and the Future of Wealth in America,” argued that several of the Federal Reserve’s assumptions and actions leading up to and following the Global Financial Crisis held too wide an aperture. The Fed rationalized its bailouts of markets and firms as benefiting the broader economy via the “wealth effect,” which Petrou said ignored the fact that that wealth was accruing at a faster rate into fewer and fewer hands. The central bank thus ignored or harmed low- and middle-income Americans while primarily benefiting markets — which, in turn, tend to benefit the wealthy. 

By setting interest rates so low for so long and buying assets — not just Treasurys, but mortgage-backed securities and an array of commercial paper and other non-traditional assets during the COVID pandemic, for the express purpose of aiding markets and firms that assumed outsized risk — the Fed, Petrou argued, had not only failed to broaden prosperity after 2008, but also was the primary driver of the widening inequality we have experienced since that time. 

“I’m among the Americans who got angrier and angrier from 2010 to 2020 as America became increasingly unequal while well-intentioned policy-makers assured us that, as the Fed likes to say, the U.S. economy was in a ‘good place,'” Petrou wrote. “The central bank touted its ultra-low interest rates as a boost to the wealth effect, but all they meant to the vast majority of American households was no hope of saving for the future. Most of the debt they used to get by also remained very, very expensive.”

Petrou was also a driving force behind efforts to establish financial instruments that could fund “translational research” to find cures for blindness and other ailments. Translational research is the costly and financially risky stage of medical research that develops promising laboratory experiments into safe and effective treatments for people, but the cost and risk involved in those treatments prevents investors from pledging the funds to develop them.

Petrou advocated for the passage of a law that would fund those research projects with “Bio Bonds” backed by a limited government guarantee, reducing the risk to the bondholder and advancing research at the same time. 

Petrou said in a 2019 white paper that the advent of “green bonds” by the World Bank in the mid-2000s jump-started investments into renewable energy research that primed the pump for those technologies to become cost-competitive with fossil fuels, obviating the need for continued subsidy over time.

“Despite the widely-shared goal of reducing fossil-fuel dependence and global warming, funds for sustainable energy-and-environmental programs were scarce until the World Bank guaranteed the first of what we now call green bonds in 2007,” Petrou said. “Depending on how the market is measured, it has grown since then to at least $580 billion in total issuance through 2018. The reason for these hundreds of billions is not that sustainable finance suddenly got safer, but that the World Bank guarantee encouraged other governmental backstops that reduced risk to the point that institutional investors believed that their fiduciary duties were satisfied along with their own personal hopes of a greener, cooler planet.”

Barb Rehm, Senior Managing Director at IntraFi and former Editor-in-Chief of American Banker, said Petrou’s intellectual power and credibility cut a unique figure in financial services policy.

“One of the things I think I appreciate most about Karen was her independence,” Rehm said. “She didn’t tell banks what they wanted to hear. She told them what they needed to hear.”

Petrou was an active member of the Cosmos Club in Washington, D.C., a board member of the Fidelco Guide Dog Foundation, and chairperson of the Foundation Fighting Blindness — the organization driving the Bio Bond initiative. She is survived by her brother, Stephen Dolmatch.