From Hubris to Humility

It was April 25, 1991.  Senior regulators from all of the federal bank regulatory agencies met at the Fairmont Hotel in Dallas, Texas to discuss what began as the Savings and Loan Crisis but morphed into a general banking crisis that lasted from the late 1980's through the early 1990's.  A key speaker at this meeting was the fiery and plain-speaking Federal Deposit Insurance Corporation (FDIC) Chairman, L. William "Bill" Seidman.  I was in the audience that day in my capacity as Deputy Comptroller of the Currency for Compliance Management.

With great thanks to the curators of the L. William Seidman papers special collection at the Grand Valley State University, I was able to obtain both his typed talking points that day and his handwritten notes.  His talking points and notes provide a point-in-time, behind-the-scenes view of that banking crisis from a top regulator's perspective.

He leads off his talking points by saying that "supervision has failed."  

"Supervisors in Crisis [all emphasis is his] --- perhaps is identity crisis.  From insurers' viewpoint, supervision has failed.  S&L---the bank insurance fund has become insolvent."

Interestingly, his handwritten notes say "supervision has not cut the failed" 

And I vividly remember his departure from the text of those initial remarks when he bitingly said to the group:

"I'm standing here, as the FDIC Chairman, with a busted insurance fund.  What I really want to know is:  If you guys are so good, why did things get so bad?"

The group of senior federal bank regulators remained respectfully quiet, but one could discern that a very sensitive nerve had been struck.  However, whatever contemplative self-reflection or introspection took place among the senior bank regulators assembled, in the face of Bill Seidman's acerbic challenge, seemed to dissolve by the time the evening cocktail reception rolled around.

His talking points and notes can be accessed here:  seidmanspeech.zip  (Note: some corporate firewalls will block access to Google Drive.  You may need to use your personal computer, tablet, or smartphone.)

Fast-forward to the 2008 financial crisis and the Great Recession.  Many of the points made by Bill Seidman in 1991 and later, similar points made by a highly-respected Senior National Bank Examiner with the Office of the Comptroller of the Currency (OCC), Emory "Wayne" Rushton, in 1996, went, if not unheeded, at least insufficiently considered and executed by the state and federal regulators up until the financial crisis.

The majority Report of the Financial Crisis Inquiry Commission (FCIC) concluded, in part:

"We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets.  The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves."

...and which of the sentries drew the short straw in the Dodd-Frank Act and was thrown into the smoldering crater of the volcano to appease the angry gods?  The Office of Thrift Supervision was abolished by the Act.

Reading Bill Seidman's remarks in 1991, the wise words of  Wayne Rushton in 1996, and the FCIC conclusions in 2011, you can understand the colloquial definition of insanity as it applies to banking supervision: doing the same thing over and over, expecting to get different macroeconomic results.

There was/is something still not right with the model of banking supervision and regulation in its present incarnation and as presently practiced by state and federal banking regulators.  Particularly as that model has been applied to the largest banks in the U.S. banking system.

Looking Forward

Enter Thomas J. Curry, sworn in as the 30th Comptroller of the Currency in April 2012 after having been a member of the Board of Directors of the FDIC since 2004.  He sports a strong resume as a former Commissioner of  Banks for the Commonwealth of Massachusetts for many years.

Not a (socioeconomic) climate change denier, shortly after his arrival he assembled his senior executive team to produce eight strategic initiatives within a program called: One Vision - A Stronger OCC.  The initiatives are: aligning, supervising, leading, funding, connecting, engaging, messaging, and assessing.

The last strategic initiative - assessing - deals with building consistent and disciplined processes for self-assessment and self-improvement.  The comptroller spoke of this eighth strategic initiative recently at the American Banker Regulatory Symposium on September 23, 2013.

He spoke of strengthening internal quality assurance processes and publicly unveiled an effort "for senior supervisory personnel from three countries that exhibited great resilience during the financial crisis—Australia, Singapore and Canada—to participate in an independent peer review of the process we use for the supervision of large banks and thrifts..."

Leading the independent peer review effort is Jonathan Fiechter, a former Senior Deputy Comptroller at the OCC with broad bona fides across the Federal Government and with experience at the International Monetary Fund and at the World Bank.

"Assisting Jonathan in the review will be Ted Price, recently retired Deputy Superintendent for Canada's Office of the Superintendent of Financial Institutions (OSFI), Keith Chapman, Executive General Manager, Diversified Institutions, the Australian Prudential Regulatory Authority (APRA), Teo Swee Lian, Deputy Managing Director, Financial Supervision, the Monetary Authority of Singapore (MAS), and Brigitte Phaneuf, Managing Director, Supervision Sector, OSFI...  The review team is scheduled to begin their onsite work in mid-October 2013 with their analysis completed by the end of November 2013. [OCC System News - 9/20/2013]"

This effort, maybe more than any of the projects associated with the eight strategic initiatives, holds the promise and the potential to make organic, constitutional changes to a bank supervision model that hasn't undergone a self-initiated third-party review since Comptroller Jim Smith, almost four decades ago and in the wake of several national bank failures, engaged the accounting and consulting firm of Haskins & Sells to review OCC supervision processes in 1975.

The findings of this independent peer assessment effort could be evolutionary, possibly revolutionary, but, given the experiences of the 2008 financial crisis, will definitely not be stationary for the supervision of our largest banks.  Let's see how Comptroller Curry rolls out the results of this independent assessment effort over the next couple of months.

Strategic Initiatives: There Will Be Speed Bumps

As for all comptrollers of the currency, time is not on Tom Curry's side.  The biggest risk to effective, lasting, and legacy-defining change at the OCC has always been the inexorable and relentless daily countdown to the end of a comptroller's five-year term of office.  The payoff, though, is that the vast majority of OCC staff will welcome and embrace recognizable change for the better.

But there will be a small minority, some in key executive positions, who will show outward support, but harbor private skepticism and fears.  They will use dilatory arguments, delaying maneuvers, and other passive-aggressive behaviors, to retard anything more than superficial and easily-reversible change.  Their behavior is anchored in the fact that, for many, their present career success has been based largely on their familiarity with and ability to navigate the organizational status quo.

Ginning up complicated, over-engineered IT projects, sending issues into legal research black holes, or getting into interagency concurrence quagmires are the classic derailleurs of this resistance.

In the end, having run out the clock, and breathing sighs of relief; the resistors will then turn to the task of somberly escorting the now-outgoing comptroller to the door, while soaking their handkerchiefs with rivulets of their crocodile tears.  Keep a very, very close eye on the clock, Tom.