Going Forward

Why has it been so hard to achieve a safe, stable, and fair financial system? Part of the answer is in the complexity of the issues. The almost universal focus on sound bites can't do the issues justice, and even capable, well-intended people can promote misguided policies.

The political and financial system is also focused on short-term, rather than long-term, objectives. This makes it more difficult to implement rules strong enough to prevent crises. Even when such rules are implemented, for example, in the aftermath of a crisis, they are difficult to retain over time as memories fade, the pendulum swings, and short-term considerations once again take precedence.

Greater attention should be focused on three areas: (1) ensuring that financial market regulators are independent from the political process, (2) maintaining effective checks and balances in our regulatory system, and (3) recognizing the historical knowledge and perspective of the career staff.

Independence

Why is independence so important? The political process results in pressure by groups that seek preference for their special interests over the broader public interest. Independent agencies—those not part of the executive branch, not subject to congressional appropriations, and not controlled by the industry they regulate—can better insulate themselves from that pressure. I've shown examples throughout this book of how political pressures have impacted financial regulatory policy and how independent agencies like the FDIC are capable of resisting those pressures.

Independent agencies are better positioned to help end bailouts. I have argued that some bailouts were warranted under the circumstances (Continental Illinois, Wachovia, Citigroup), others were avoidable (the S&L crisis), and still others were avoided (Washington Mutual, Penn Square).

The first group of bailouts occurred in part because there were operational constraints on resolution authorities (the FDIC's inability to segregate insured from uninsured deposits in a timely manner for hundreds of small-bank failures during the late 1980s, the lack of any advance resolution planning for large financial institutions outside the FDIC's purview), and structural or other problems within the financial sector (large-bank interdependencies, lack of transparency, cross-border issues). Addressing these issues will take time, perseverance, and hard work. Independent regulatory agencies are more likely to stay the course over time.

The second group of bailouts resulted largely because of industry and political pressure. An independent resolution authority, which did not exist for the S&L industry during the 1980s, can help prevent such outcomes. Another group of potential bailouts was avoided because there was an independent resolution authority advocating that result.

When you start bailing out large-bank creditors, one can easily argue that fairness dictates the need for additional bailouts (e.g., uninsured creditors at insolvent small banks, underwater homeowners). These bailouts are financed with other people's money, which leads to anger and mistrust among those left out. Bailouts also cause a loss of market discipline, setting the stage for more bailouts in the future. The first step in preventing these chain reactions is to end the too-big-to-fail problem.

Imagine the public anger if during the next financial crisis the government once again resorts to bailouts. People have been told there will be no more bailouts. We've heard this from a number of high-level officials, starting with President Obama. The responsibility to deliver on that promise primarily falls on my former employer, the FDIC. I worry about the repercussions if they are not prepared for the next crisis.

Statutory independence for federal agencies alone is not the answer. The FDIC is independent, but at times has allowed politics to interfere with its decision making. Leadership has to be capable and willing to use its agency's independence appropriately. Some political appointees are too cautious. They don't make decisions because they could be criticized, negating the value of independence. Others try to avoid personal criticism by making politically based decisions more in their self-interest than in the public interest. Independence is important, but so is leadership that knows how to, and is willing to, use it effectively.

Checks and Balances

Checks and balances are necessary within and among the regulators. These agencies hold a large amount of power and responsibility. Federal employees can lose sight of the weight of that responsibility. As a chief operating officer at the FDIC, I did not always welcome these checks and balances. I did not want to be subject to layers of coordination, review, oversight, and second-guessing. I know many others have felt the same way. In retrospect, it is clear that these checks and balances are critically important. No one has all the answers; some level of oversight and healthy tension and debate between decision makers leads to better results.

There has been debate over the desirability of having a single, all-powerful financial regulator. I believe moving too far in that direction would be a mistake. The temptation to abuse that power is too great. A single regulator easily could become insular, opaque, unresponsive, and susceptible to regulatory capture. I have provided numerous examples where the FDIC's use of its backup supervisory authority and the interplay among the various bank regulatory agencies produced better results. The government has to sacrifice some efficiency in order to be fair, transparent, and effective.

A Career Perspective

Having worked for 10 FDIC chairmen and served for many years as a buffer between political appointees and career staff, I saw the inherent tension between the two groups. To be effective, they have to work together.

In my experience political appointees generally come into their positions with some degree of mistrust of the career staff because the staff is viewed as career bureaucrats (which can't be good) or because they worked under previous leadership, which often was from the other political party (which also can't be good). Most get over it quickly once they start working with, and seeing the value of, the career staff.

Part of the job of career employees is to apply existing rules consistently. Of course, that leads to bureaucracy and a certain level of inflexibility. Yet it also permits standards to remain in place over time and be resistant to political pressure.

Inherent to being a good government employee is suspending personal politics. They have the weight of the federal government behind them. That is a lot of power. The best government employees don't abuse that power. They strive to treat people fairly, spend the government's money wisely, and keep the long-term perspective in mind.

Importantly, career staff needs to avoid becoming myopic. They should make an effort to learn the viewpoints of the businesses they regulate and the broader impact of their actions—with the goal of finding the best solutions, even if that means trying something different.

The best government employees have the courage to put themselves at risk in order to serve the public interest. The challenges of public service are great, but there is a sense of purpose and gratification for those willing to step forward and do these important jobs the right way.