Transition and the Power of the Federal Government

Those of us working at the FDIC during the banking crisis of the late 1980s and early 1990s became addicted to the adrenaline that came from having an overwhelming amount of work to do without enough time to do it. It was easy to put off thinking about what would happen when the banking crisis ended, which it abruptly did near the end of 1992. Once again, businesses and consumers resumed their borrowing, and banks started lending to them. The economic growth that followed continued, almost without interruption, for 15 years.

The benefits of the economic turnaround were felt throughout the world, but at the FDIC and the Resolution Trust Corporation (RTC), it marked the beginning of a long and difficult transition period. Our workload quickly shrank, but our staff had grown to 23,000—up from just 4,000 in the precrisis period. We now faced the need to begin an unprecedented and massive downsizing.

This marked the beginning of a very difficult period for the FDIC and its staff. The sweeping layoffs sapped morale, and among those who survived the layoffs, there was a wave of unwarranted investigations into the behavior of many FDIC and RTC staff members that also took its toll. As a result, the FDIC staff turned increasingly inward, with a focus on preserving their jobs and responsibilities. The cumulative effect significantly contributed to a weakening of the institution's voice and diminished influence in important public policy debates.

To begin to understand the personnel challenge facing the FDIC, it's useful to look at the layoffs and the issue of who would be retained and who would be let go. Most of the employees hired by the FDIC before the crisis began were career staff protected by federal civil service rules. These were “permanent employees,” a term that reflected the fact that for many the expectation was that it was a job for life.

Even though the RTC was a temporary agency, it had a significant number of permanent employees involuntarily transferred from the FDIC. These permanent employees had the right under law to return to similar jobs at the FDIC with equal status and pay.

Upon their return, many RTC employees had job skills that logically fit within the FDIC's Division of Liquidation. That division already had many more employees than were needed for the projected workload. There were 22 offices around the country, many with 500 to 600 employees. Most of those offices would have to be closed, and my job as director was to figure out the best way to do that.

The FDIC had never been through a downsizing of this magnitude. The labor union that represented most of FDIC's employees, the National Treasury Employees Union (NTEU), would play a role. I was concerned that the NTEU would be a highly disruptive force as we went through the downsizing process. I believed the union had helped Scripps-Howard's reporters develop their series of negative articles about the FDIC's loan collection practices. The NTEU also had sent FDIC employees to testify at the subsequent congressional hearings alleging wasteful practices.

Bob Tobias ran the NTEU, and I asked him for the union's support during the downsizing process. He asked that the NTEU be allowed to have a more active involvement in the FDIC's strategy discussions. We agreed to work together on both issues.

The FDIC staff conducted a very careful workload analysis, projecting the FDIC's future staffing needs over the next several years. The results, while not unexpected, were nevertheless sobering. Not only would the FDIC have to shrink its workforce substantially, it would have to do so over a multiyear horizon. A large part of the staffing reductions would hit the liquidation division.

I wanted to be as transparent as possible and give employees as much information as soon as possible so everyone could plan for their future. Most of the liquidation offices around the country would have to be closed. Temporary employees would lose their jobs, while permanent employees at those offices would be transferred to surviving offices. I joined the heads of other divisions in visiting each FDIC office and talked with the staff about why it was necessary and what steps were being taken to help with their transition. Generally, the office closings went smoothly. With the economy recovering, many people found new jobs. The FDIC is countercyclical in that respect. It hires more people in a weak economy, when banks are more likely to be experiencing problems. Conversely, the FDIC needs fewer people when the economy is doing well.

But some employees attacked me personally, with the view expressed by one that if they were going down, so was I. The decision to close the South Brunswick, New Jersey, office rather than one in Hartford, Connecticut, raised particular anger. Certain employees alleged that political considerations had entered into my decision on which offices should remain open. Various congressmen had attempted to make a pitch for their home state office remaining open, and some employees suggested that certain of them were successful in that regard. Some employees claimed that I had been influenced by personal considerations in favoring the Hartford office, as it was closer to some of my family members in Massachusetts.

In July 1994, Senator Frank Lautenberg (D-NJ) asked the General Accounting Office (GAO) to review the factors surrounding the FDIC's decision to choose the Hartford office as the surviving office in the Northeast instead of the one in South Brunswick. The FDIC's inspector general also began an investigation into whether I had let personal considerations enter into the decision and whether I had attempted to use my government position to help my cousin's business interests.

I anticipated that making unpopular decisions had a price, but I had never been the subject of an investigation before. This is one of the downsides of being a government employee—anyone can allege almost anything, and no matter how absurd the accusation may be, it will be investigated and it could become public. In March 1995, the Wall Street Journal published an article questioning my integrity. For me, the worst part was that my cousin, Peter Bovenzi, was brought into the investigation as well. I knew that I would pay a price for doing what had to be done. Peter was an innocent bystander.

It would be two years before the inspector general closed out its investigation, which concluded that the allegations were without merit. I had no contact with my cousin during that time, since conversations with him likely would only lead to new rounds of questions, prolonging what already was an unnecessarily slow review. Once Peter and I were cleared of all of the allegations, there were no news reports noting that fact. Any damage to our reputations that might have resulted from the initial article would not be rectified by what the press would view as an unnecessary follow-up story. For the first time, I wondered if having a job at the FDIC was worth it.

Many other FDIC and RTC employees had their personal behavior investigated. Political appointees have always known that personal attacks are an unpleasant part of public life, but Congress did not routinely make personal attacks on career employees. For us, as career government employees, this was a new and unwelcome development.

No investigation was known for either its speed or its bedside manner. Several employees complained to me that they were being subjected to unwarranted investigations despite their years of dedicated public service. There was nothing that I or anyone else could do for them, since sometimes such investigations do uncover actual wrongdoing.

There are standard procedures within government agencies for investigating allegations of improper behavior. Usually, such investigations are conducted in a careful, measured way. A person wrongfully accused needs to trust that process and allow it to run its course. But sometimes the normal careful and measured process is not followed. That often happens when a story is so juicy that Congress and the press want to get involved.

Whitewater was such a story. An independent special counsel, Robert Fiske, was appointed by Attorney General Janet Reno in January 1994 to investigate the allegations of an improper land investment by President Bill Clinton and Hillary Clinton, during the period when they were living in Arkansas. Special counsel have unlimited time and money with which to pursue their investigations. In other words, they have few checks and balances on their behavior and very limited accountability. When allegations of improper behavior by the Clintons became public, many RTC and FDIC employees found themselves unwittingly pulled in as subjects of what became years of an ever-expanding investigation.

April Breslaw was one of the RTC employees who found herself in the center of that storm. Breslaw was a senior counsel in the legal department and had worked for the federal government for eight years. In 1992 and 1993, RTC investigators had submitted criminal referrals to the Justice Department regarding the failed Madison Guaranty Savings & Loan and its former CEO, James McDougal. This attracted congressional and media attention because Madison Guaranty had lent money to the Clintons. Subsequently, the RTC began looking into any civil claims it might have against the officers and directors of Madison Guaranty, as well as others that had advised the thrift. As a result of those investigations, the RTC recovered over a million dollars from Madison's accountants to settle negligence claims. The RTC also was reviewing its own relationship with the Rose Law Firm, were Hillary Clinton had previously worked, over possible conflicts of interest and inappropriate billings on other work it had done for the RTC.

In February 1994, Breslaw visited the RTC's Kansas City office. While there, her conversation with an RTC employee was secretly taped by the employee. During the conversation, Breslaw made some comments about her superiors in Washington, suggesting that while they wanted an honest review of Whitewater-related matters, they probably hoped the matter would just go away.

The employee in the Kansas City office first provided her “notes” to congressional staff, who omitted the parts of the conversation in which Breslaw repeatedly stated that everyone was looking for an honest investigation. These were publicized to support the allegation that a conspiracy was under way to let the Clinton administration off the hook. However, when Breslaw denied that implication, the RTC employee was required to turn the tape recording over to Congress and the special counsel. Taken in context, Breslaw's casual guess about the views of her supervisors provided little support for a conspiracy theory.

Later, the RTC employee in Kansas City was discredited once it became clear that she had planned to write a book criticizing the RTC and had lied about key facts. For example, she claimed that the tape recorder was old; records showed that she had just purchased it, which undermined her claim that she was unaware it was even on during her conversation with Breslaw. Nevertheless, it took years before Breslaw and many other RTC employees were let out of the grasp of the special counsel's office.

My future wife, Erica Cooper, was a deputy general counsel in the RTC's legal department, and was among those RTC employees who had to hire an attorney to defend themselves. Erica was under investigation for 14 months, spent tens of thousands of dollars defending herself, and made two grand jury appearances. She was not alone. Most of the senior legal employees at the RTC and the FDIC were under scrutiny. So many RTC and FDIC officials had to retain counsel that there weren't enough qualified white-collar defense lawyers to go around. Erica and the RTC's general counsel, Ellen Kulka, had to find counsel in the Baltimore, Maryland, bar, traveling an hour each way to meet with their lawyers.

The investigators eventually recognized that the RTC and the FDIC employees had done nothing wrong (with the exception of the lone Kansas City employee) and stopped looking for malfeasance.

Years later, when I talked with April Breslaw about her experiences at that time, she was philosophical about the ordeal. She understood that federal employees must have a great deal of patience and that they generally need to trust the processes that exist within those agencies to investigate concerns that are raised occasionally. She understood that government agencies have to take extra steps to ensure the integrity of their employees and that the strength of these agencies is derived, in part, from taking a careful and measured approach to dealing with such issues.

But sometimes the normal internal investigative procedures are upstaged by the hysteria surrounding a public inquiry. The “Clinton effect” associated with Whitewater led Congress and the special counsel's office to create their own processes, with few checks or balances. Careful deliberation and fair treatment were cast aside in favor of political considerations and catchy sound bites.

It was against this backdrop that President Clinton nominated Ricki Helfer to be the FDIC's new chairman. The nomination was announced in May 1994, but five months passed before she was confirmed. She was considered to be a friend of Hillary Clinton, having attended an annual gathering frequented by the Clintons called “Renaissance Weekend.” These connections put her nomination on hold while Whitewater was being investigated.

Helfer's tenure started amid the FDIC's downsizing. She also was well aware of the criticism associated with the Division of Liquidation's management of assets from failed banks. Upon her arrival, she began asking a lot of questions on these two subjects. She wanted to know why we had chosen Hartford as one of the five remaining offices rather than South Brunswick, since the New Jersey office was closer to New York City. She asked her new chief financial officer, Bill Longbrake, to conduct a review of that decision-making process. She also asked an outside law firm to look into some of the division's internal operating procedures in situations that had been raised as problems in newspaper articles and in congressional hearings.

I explained why we had chosen Hartford over South Brunswick, but Helfer wasn't satisfied. Finally, in an unwise effort to be practical, I told her that she didn't need to review the decision, since it couldn't be reversed. We already had transferred the permanent employees to Hartford from the offices in the Northeast that were scheduled to be closed. To change the decision after the fact would mean uprooting everyone again in order to transfer them a second time.

Helfer responded that even if she couldn't change the decision, if her review found that I had acted inappropriately, she still could fire me. I had a long way to go if I was going to develop a good working relationship with my new boss. Upon reflection, I realized she had to investigate allegations of improper behavior, but that didn't make the environment any easier for me.

By May 1995, the FDIC's 22 liquidation offices had been reduced to 8. The number of employees in the Division of Depositor and Asset Services (our new name for the Division of Liquidation) had dropped by over half, to about 3,000. Before long, we were down to five offices, but our workload kept declining faster than projected. Soon it was no longer feasible to maintain five offices. After a few years of further consolidation, Dallas would be the single remaining liquidation office.

This planned consolidation created a new uproar, particularly in Connecticut. The state's congressional representatives asked to meet with Chairman Helfer to discuss the matter. Several staff members, including Erica, accompanied Helfer to the meeting. The RTC had been merged into the FDIC in 1995, and Erica now was deputy general counsel of the FDIC, the same position she had held at the RTC. Connecticut's congressional delegation, which included Senators Chris Dodd and Joe Lieberman, was in full force at the meeting. While Dodd and Lieberman were insistent but professional, one member of the delegation was much more contentious. While pointing her finger directly at Erica, Congresswoman Barbara Kennelly said that it was admirable that Helfer wanted to protect her staff, but clearly “she,” meaning Erica, was incompetent. The moment had a bit of inside humor since it was the FDIC staff person next to her, Tom Peddicord, whose staffing analysis was the focal point of the discussion.

Helfer could be tough to work for, but she also was a fierce supporter of her staff in situations where she easily could have sacrificed them to appease powerful critics. While Kennelly was trying to give Helfer an easy way out—to blame staff—Helfer declined. She told the delegation that the analysis under discussion wasn't the staff's, it was hers. She supported the decision to close the Hartford office and was not going to change her mind. The meeting concluded with the delegation referring the analysis underlying the decision to close the Hartford office to the FDIC's inspector general's office for review. Their review concluded the analysis was done properly.

Further complicating the FDIC's downsizing, and undermining morale, was the 1995 merger of the RTC into the FDIC. Two executives from each agency had been named as part of an “FDIC/RTC Transition Task Force” to oversee the merger process, and I was one of the FDIC's representatives. The goals of the task force were to ensure that everyone was treated fairly, that the integration proceeded smoothly, and that we incorporated the best practices from both agencies into the merged agency.

This was meant under law to be a merger among equals, not a takeover by the FDIC, but not everyone saw it that way. Many at the FDIC saw the merger as a threat to their status within the organization. While RTC employees' pay and benefits would be protected, not everyone would be assigned to, or remain in, the type of position they had become accustomed to. At the senior levels in particular, there simply weren't enough positions to go around.

Often, I found myself as referee between competing interests. In one such meeting, I listened carefully to the arguments being presented by the RTC's and then the FDIC's personnel offices on what constituted “fair” treatment for returning RTC employees. I was stunned to realize that the position being advocated by the FDIC staff was designed to ensure that RTC employees were placed in lesser positions and at a disadvantage compared to their FDIC counterparts. I have often been described as having an easy-going disposition. I rarely lose my temper in public, even if my frustration over what I am hearing is growing. In this particular situation, after all arguments concluded, I told the senior FDIC personnel officials in the room that I could see no logic supporting their view other than a desire to screw the RTC employees. The FDIC officials accepted a more even-handed position.

As the year-end 1995 date for the merger grew closer, the competition and the tension between the two organizations escalated. Some groups of employees tried to lighten the mood with humor. Shortly before the RTC's sunset date, the two legal divisions held a joint holiday party. Erica recalls the gathering starting out much like a seventh-grade dance, with groups on opposite sides of the room. In advance and in anticipation of the awkwardness, several staff members from each agency made up “top 10” lists of what the other agency's initials really stood for. The FDIC's legal division suggested that the initials RTC stood for “Restoring the Crisis,” given their seemingly constant state of chaos. That was good, but the FDIC legal staff was no match for their RTC counterparts on this particular day. The RTC's employees suggested that the initials of what they perceived to be the much slower paced and staid FDIC stood for “Formerly Dwelling in Caves” or “Found Dead in Chair.” When the FDIC did accelerate its pace, this was characterized as “Furiously Dancing in Circles.” The tension lightened, at least that day. By the time the RTC officially closed, over 2,000 of its employees had joined the FDIC.

Several years passed before the FDIC completed its downsizing, and while the downsizing was carried out smoothly, it took a heavy toll on the agency. Employees turned on each other. Morale, which had been high, plummeted. The relationship between management and the union steadily deteriorated.

Perhaps the most damaging legacy of this period was the way in which the FDIC ceded its important and influential role in shaping U.S. financial policy. With so much of the FDIC's focus on its internal affairs, our independent voice was lost. The agency's diminished influence was evident during the debate throughout 1999 over the Financial Services Modernization Act (popularly known as Gramm-Leach-Bliley). This landmark legislation proposed to overhaul the structure of the U.S. banking system, and so it would be natural to assume that the FDIC played a central role in shaping the positions of the executive and legislative branches. But the agency was largely relegated to the sidelines of discussions over the legislation. A similar dynamic played out as U.S. regulators developed their positions on subprime lending and on “Basel II,” a set of international bank capital standards.

While the FDIC was in its weakened state, the other bank regulatory agencies pounced. There has always been a rivalry (sometimes healthy, sometimes not) among these agencies. And there was some resentment of the FDIC's newfound power during the banking crisis (power that the FDIC sometimes exercised in less-than-subtle ways). So when these agencies sensed weakness at the FDIC, they were more than willing to mostly ignore what the agency had to say.

The FDIC's reduced role allowed a number of measures to be approved, even though they contained shortcomings that would contribute to the onset of the financial crisis.

If there were a silver lining for the FDIC during this difficult period, it would be that many of us learned important lessons about the care that should be taken in utilizing the power of the federal government. Federal bank regulators are often accused of not understanding, or inappropriately using, their power. This can be particularly true in conducting investigations. Whenever a bank fails, there is an investigation into whether there are criminal or civil claims that should be filed against the directors and officers of that bank. This is a powerful authority held by government employees. The utmost caution and care needs to be taken in utilizing that power.

During the 1990s, the FDIC's employees learned these lessons firsthand, as many of us were subject to investigations ourselves. These experiences brought home the importance of careful and deliberate processes to ensure fair treatment. Checks and balances are required to prevent an abuse of that power. We saw that those checks and balances don't exist to the same degree when Congress, or a special counsel with unlimited power, takes control of an investigation. And when politics intervenes, hyperbole and hyperventilation often replace a calm consideration of the facts.