Who Runs the FDIC in a New Administration?

Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.

Evelyn Hildebrand:  Welcome to The Federalist Society's virtual event. This afternoon, February 3, we discuss the FDIC: "Who Runs the FDIC in a New Administration?" My name is Evelyn Hildebrand and I'm an Associate Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today's call.

Today we are fortunate to have an excellent panel moderated by Mr. Brian Johnson, whom I'll introduce very briefly. Brian is a partner in Alston & Bird's Financial Services & Products Group and the Consumer Financial Services Team. He formerly served as Deputy Director of the Consumer Financial Protection Bureau. And he's currently a member of The Federalist Society's Financial Services and E-Commerce Practice Group Executive Committee, which is sponsoring the event this afternoon.

      After our speakers give opening remarks, we will turn to audience questions towards the end of the program. If you have a question, please enter it into the Q&A feature at the bottom of your screen. And you can enter those questions at any time. With that, thank you for being with us today. Brian, the floor is yours.

Brian Johnson:  Thank you very much, Evelyn. And thanks as well to Wayne Abernathy for his leadership and his role in bringing us together today for this event. It's my pleasure to serve as today's moderator. We are blessed to hear from three panelists who are among the leading minds in financial services law and policy. And it's my pleasure to introduce them today.

      Bert Ely is a financial institutions and monetary policy consultant based in Alexandria, Virginia. He has consulted on deposit insurance and banking issues since 1981. Bert continuously monitors conditions in the banking industry, as well as economic and monetary policy issues. In recent years, he's focused his attention on the resolution of problems in the U.S. financial system, the economic recovery, and the implementation of Dodd-Frank.

      He consults, also, to the American Banker's Association on farm credit system issues. Bert established his consulting practice in 1972. He received his MBA from Harvard Business School in 1968, and his bachelor's degree in economics in 1964 from Case Western Reserve University.

Michael H. Krimminger is Senior Counsel with Cleary Gottlieb Steen & Hamilton LLP. Prior to retiring in April 2020, Mr. Krimminger was a partner whose practice focused on U.S. and international banking and financial institutions. Michael joined Cleary Gottlieb in 2012, after serving for more than two decades in numerous leadership positions with the FDIC, including as Deputy to the Chairman for Policy, and General Counsel.

Thomas P. Vartanian is the Executive Director of the newly launched Financial Technology & Cyber Security Center. Over four decades, he chaired the financial institutions practices at two international law firms. Prior to that, he served in the Reagan administration during the S&L crisis, as General Counsel of the Federal Home Loan Bank Board in the FSLIC. He began his career in the Carter administration as Special Assistant to the Chief Counsel of the Office of the Comptroller of the Currency. His most recent book is 200 Years of American Financial Panics: Crashes, Recessions, Depressions, and the Technology that will Change it All.

Gentlemen, welcome. We're honored to have you today. I think, for the benefit of today's audience, let me level set for a minute regarding the subject matter of today's discussion. First, what is the Federal Deposit Insurance Corporation? It's an independent federal agency created by Congress in 1933 to maintain stability and public confidence in the nation's financial system. Today, it has four main responsibilities: insuring bank deposits, examining and supervising state-chartered banks that are not members of the Federal Reserve System, making large and complex financial institutions resolvable, and managing receiverships.

The FDIC has approximately 5,700 employees and an operating budget of nearly 2.3 billion. By statute, it's to be governed by a five-member board of directors, consisting of the Comptroller of the Currency, the Director of the Consumer Financial Protection Bureau, and three members appointed by the president, by and with the advice of the Senate to serve six-year terms.

From among these appointees, a chair and vice-chair are separately nominated and confirmed, with the chair serving a five-year term. By law, not more than three members of the board may be members of the same political party. And, if an appointed member's term in office expires, he or she may continue to serve until a successor has been appointed.

In recent weeks, the FDIC Board of Directors has been convulsed by a widely publicized dispute over who controls the agenda of the FDIC board meetings, the board chair or a majority of its members. Currently, the FDIC board has only four members: Chairperson Jelena McWilliams, Director and former Chairman Martin Gruenberg, and, serving as ex officio members, Michael Hsu, who's the Acting Comptroller of the Currency, and Rohit Chopra, who is the Director of the CFPB.

There is one vacancy, that of the vice-chairman. Director Gruenberg and the two ex officio members — both appointees of President Biden — moved to take control over the board agenda, specifically with regard to bank merger policies, which led Chair McWilliams, a Trump appointee, to resign as chairman, effective tomorrow, February 4. Mr. Gruenberg may likely become the acting chairman of what would be, for the time being, a three-member board.

The dispute between McWilliams and the other three directors has raised several issues, not just for the FDIC, but also for other agencies governed by boards, such as the Federal Reserve, the SEC, the NCUA and the CFTC. The FDIC is unique, though, with two directors serving at the pleasure of the president, and who head their own agencies without colleagues who have a vote on their actions.

So let's move into our substantive discussion. Mike, I will turn this over to you first. Before we jump into the fine details of the present controversy and its implications for the future, what's your perspective on the FDCI's current structure? There's a historical process that has brought us to this point in time today, in terms of the structure and operation of the FDIC. Why is it structured this way? And what do you think that means for how the agency conducts its business?

Michael Krimminger:  Well, thank you very much, Brian. It's a pleasure to appear before The Federalist Society webinar today. And, hopefully, we can discuss these issues and get a little enlightenment for everyone. Certainly, as Brian pointed out, the FDIC with a five-member board has been really a product of history. If you go back in the mists of time to the FDIC's creation in 1933, in the Great Depression, the FDIC then had a three-member board, which initially consisted — until the appointment of the other two — of only the Comptroller of the Currency. So the Comptroller of the Currency has always been a member of the FDIC board, from the initial establishment of the corporation.

      Then there was a chairman, and then a non-, kind of an internal director, if you will, to that three-person board. You roll it on up to a more recent history and, as a result of the savings and loan crisis of the late '80s and early '90s, the FDIC board has expanded to five. And, at that time, the Office of Thrift Supervision was created to replace the Federal Savings and Loan Insurance Corporation. And the Office of Thrift Supervision became a board member as well.

      The idea behind that, as shown by some of the congressional legislative history, was really to kind of pad the regulators who were dealing with supervision of financial institutions on the FDIC board, which, itself, is a regulator, but is also the deposit insurer, and, as you pointed out, the receiver for failed insured financial institutions. So the five-member board, you then had the OTS, the Comptroller of the Currency, a Vice-Chairman, the Chairman, and then an Internal Director who was supposed to have a certain level of state banking supervision experience. And the idea there being kind of to level set with all of the constituencies that the FDIC was responsible for as a deposit insurer and receiver, make sure there's some input.

      I would say that over the, effectively, the last 30 years of that process, that five-person board, any kind of board, anyone who's participated on boards or advised boards understands that they can be fairly delicate beings, if you will. And you've got to do a -- you've got have a certain skill set to make sure you can balance the various interests. So it's always been a little bit of a challenge, because, with the OCC on the board, you've got the institution that charters national banks.

And, as a charter, the authority occasionally has an interest — as does the OTS, as well — in being the supervisor at that time for savings and loans. You could argue that there is a similar tension between the FDIC's desire to reduce any losses to the FDIC's deposit insurance fund by moving to receivership before those losses get exacerbated, versus the ones who are the chartering authorities, the primary supervisors to those entities, who may be a little bit more reluctant to pull the plug on them and put them into receivership.

      In my experience, when I was at the FDIC from '91 to 2012, I certainly saw that on a number of occasions. And we saw it during the financial crisis that started in 2007, etc. Some pressure and tension on that. But I personally think that that tension and that debate and those disparate responsibilities of board members is a positive feature. I'm a firm believer that the idea of checks and balances as part of the American system of government is a very important thing, and, I think, does ultimately lead to better results, by and large.

I would say that even during the financial crisis, with all of the problems and issues that were there, and well-recognized debates and disputes amongst various parties -- having the ability to debate those issues at the FDIC board level, as well as among the various institutions that were responsible for helping deal with the crisis, was a better thing than having it driven by a single individual or by, let's say, the Secretary of the Treasury, as the dominant authority. Because it gave interests of the deposit insurer-receiver the ability to speak. It had the interest of the OCC Comptroller. And you have the interest of the OTS, the Thrift Supervisor.

Of course then, when Dodd-Frank was adopted, the OTS went away, was dissolved. And its place on the FDIC board was put in place by the Director of the Consumer Financial Products Bureau, which has less of the -- I'll call it old-fashioned supervisory responsibilities — than do the OCC and the FDIC. So it's a little different of an entity. But, certainly, those other entities are responsible also for consumer protection. So there's a bit of a coalescence there.

      One thing I would note too is in looking at the time when there was a lot of controversy about issues at the FDIC board level back in 2006 when Sheila Bair took office as Chairman of the FDIC — and I was, at that time, a senior advisor to her — there was a very extensive process put in place then, about how to deal with desires for more information by board members and board deputies. And we'd spend a lot of time reviewing the bylaws.

There was a great debate about a provision of the bylaw now, which is in Article VI, Section 4, which says that the chairman has the general powers and duties normally vested in the office of the chief executive officer in corporations. And then what would be the authority of various board members? There was a lot of debate about what information they should get. We put in a more formalized process in 2006 to provide information to deputies, make sure the information flowed, and how those different interests could be balanced, which, thank god, we did it in 2006, before we were in a time of war in 2007 and '08. So just fortuitous chance on that one. But it worked out pretty well.

      And then, so the bylaws now, defined in Article VI, about the various responsibilities of the various executive officers of the corporation, including the chairman, general counsel, etc., and then, in Article IV of the bylaws of the FDIC, particularly in Section 6, defines the various roles of the various parties in the meetings of the board. So, in Article IV, Section 6(a), the chairman normally calls the meeting, is responsible for putting in place the meetings and putting the meetings in form. Section 6(b) gives board members, however, the chance to call special meetings, whatever that may be. It's not defined in the bylaws.

And, then, in Section 6(g), it also gives the board the opportunity to make decisions and resolve issues by written consent, by written votes. And that's been used quite extensively. Probably, if I were making a comparison between the various chairmen, probably Chairman McWilliams has probably used the written consent board meetings a little bit more frequently than prior chairmen have.

       I know that there's been some debate at the board level at the FDIC about whether that's a good thing or a bad thing. And those debates extend back long before McWilliams' tenure. So that's certainly some of the authorities that the board has to be able to deal with various issues. And, obviously, we can get into how those apply, why they should be applied, how they should be done, etc. But, certainly, I would say, just to put on the table that the bylaws were not intended to create a situation where the chairman would refuse to take up issues that were of concern by various board members. The special meetings provision was put in place, in part, to allow for board members to set up a meeting on something that they wanted to have discussed, even if it wasn't on the chairman's agenda.

      However, as I've mentioned in other fora, I'm incredibly sympathetic to Jelena McWilliams' concerns about making sure the issues that are issued for the FCID for public comment or for any other purpose are fully vetted through the FDIC. Like any board, I will simply say that I think the management of the board concerns and stresses that inevitably can be there, because you, by definition, have members from two different parties that may have two different goals — may have multiple goals that are different from each other, and the responsibility of running their own agency — I think, while they benefit, can lead to stresses and strains that require a lot of diplomacy and diplomatic skill to resolve.

I'm not putting any blame on anyone in this. I think this was a very unfortunate circumstance to occur. Whether it could have been resolved without it coming to this pass, I don't know. But certainly it's been a big focus of chairmen in the past. I'm sure Jelena McWilliams as well is trying to deal with the stress and the strains of a complex board. But I would just note that I think the FDIC board has, by and large, worked amicably much better than the boards of some other agencies that seem to always divide exclusively along partisan lines. The FDIC board has not really been that way, historically. So, I'll turn it back to you, Brian.

Brian Johnson:  Thank you for that. And I'll turn it over to Tom and Bert for a response. We did bleed a little bit into what I think is the next logical kind of topic of discussion here, which is what precipitated the present crisis, or the present clash on the board. And that was — just to lay the factual predicate — an announcement on the CFPB website, indicating that the FDIC board had authorized the issuance of a request for information seeking public comment on the Bank Merger Act.

And, that act — I guess, that announcement — was announced by Mr. Gruenberg and Mr. Chopra, but not Mr. Hsu of the OCC. And that announcement drew a swift rebuke from the FDIC, which issued a separate press release on its site, saying that the board had not, in fact, authorized issuance of the RFI because it had not gone through the FDIC process for drafting and then subsequently approving the issuance of the RFI by the board.

      So that was factually what transpired just a couple of weeks ago. And, then, from there, there was, I guess, presumably, legal analysis that had been released by the CFPB to three news outlets, which shed light, at least, on the arguments that the CFPB director was making for the authority of the majority of the board to bring matters to the board for a vote during board meetings.

      There was an FDIC board meeting, in which Mr. Chopra did try and raise the issue for board consideration, and the chair rebuffed him. So that was kind of the confluence of events that led to the nature of this legal dispute. Mikey raised issues relating to the bylaws and the internal governments of the FDIC. But, at this point, I'd like to turn it over to Tom. We'll start with you. And then I'll turn to Bret for your thoughts on present events, legal or otherwise. And then, I think after that, we'll turn to what we see, in terms of short-term and long-term implications for the agency.

Thomas Vartanian:  Great. Thanks Brian. And, Mike, thanks for your comments. I want to dovetail off those a little bit. But just a little bit of background. I was both Counselor to the Comptroller at the Office of the Comptroller of the Currency, and then General Counsel of the Bank Board. So I saw in a period of seven or eight years how to deal with both of those different organizations. With the Comptroller, John Heimann was the one I worked the most with. You basically walked into his office, had a discussion, senior staff was there. And then he signed a regulation. It was extraordinarily efficient. Not that a lot of work didn't go into it. But it was extraordinarily efficient.

      When you have a board, as Mike well knows, there's a lot of care and feeding for all of the people to make them integral to the process, to make them feel like they are part of the process, to give them their say, to compromise. And that can take as much as six months going back and forth. So you're talking about something that can done in a few days or a few weeks being turned into a much larger process because there's a board.

Now, you can argue whether that's good or bad. Everybody knows what the arguments for and against are. On the one side is efficiency, on the other side is sort of getting input from both sides, from both parties, from all different aspects, and funneling them in to get a better decision. And the question I always asked myself when I was at the board was are we getting a better decision or are we getting a three-humped camel? Either one of those could be the result of that process.

      So, I'm going to go now to the question you raised about mergers to make another point. But I want to get back, at the end, to the structural issue. And, that is, what we heard is this was about the merger of banks in the United States and merger policy. Well, I think that's sort of artificial, because I don't remember the last time the FDIC was involved in large bank mergers. If we're talking about the concern over the consolidation of banking in this country, the FDIC looks after and decides a lot of community bank mergers, but I don't know that they -- I don't remember them, when I was practicing, being involved in a lot of the big bank mergers, which are what most people are concerned about from a consolidation point of view, from a public policy point of view. So if we're saying that this is all about whether community banks should be merging or not, I'd be shocked if that was really the issue, frankly.

      And, when I started in 1976 at the comptroller's office, there were 28,000 national banks and savings and loans in this country. We're down to about 5,000. So, if you've missed that trend, you're really not paying attention. The business is getting smaller and smaller and more efficient every day, and more consolidated every day. And I'm not sure that we're going to stop that. But I don't think this issue is about merger policy in the United States. I think it could be about whether to serve meatloaf or green beans in the cafeteria and it would be the same thing. It's about people who aren't getting along trying to figure out how to bring it to a head.

      And, what Mike said, I think is very important, in terms of working with the board. And that is, most of these issues, in a board context, get resolved behind closed doors. People work very hard to get them resolved behind closed doors. Sometimes the chairman has to exert some influence. There was a story in the 1980s about one director of the FDIC who had his office confiscated from him and put into a very small office because of his obstreperous behavior. And the chairman's got that authority. The chairman's got the executive and the administrative authority.

      But, as Mike suggests, the ultimate here, the ultimate bottom line is that the statute says the board runs the FDIC at the end of the day because they vote. They can vote on anything. And if they can vote on anything, you go back to what a congressman told me in 1981, when I was brand new in Washington. And he said, "Kid, if you're going to be successful in this town, you've got to know how to count noses." Right? And it's all about counting votes, whether you've got the votes, or you don't have the votes. And, so, look, you can play this any one of a number of ways. And this could have been -- the chairman has enough power to sort of make things ugly for the other directors. And the directors can make things ugly for the chairman.

      The question is, is that what people want to be doing? People generally don't like confrontation. As Mike suggested, I spent 20 years doing takeovers, hostile takeovers in the banking world in the '80s and '90s when they were sort of in vogue, particularly with savings and loans. And this stuff happens every day in a board room. It just looks a little different when it's in a regulatory agency. But there's not a day that goes by that this stuff doesn't happen in a board room.

And you, as a lawyer have to deal with it and try to figure out how to solve these problems. And, at the end of the day, in a corporate board room, the numbers always decide the case. And it's either the stock prices — one set of numbers — or the votes you have behind you. But it's always going to be that that you've got be focused on, in terms of drawing a practical solution here.

      So I take from this that, one, I don't really think there's an issue here. I think this is real-life playing out at the FDIC like it does in every other corporate boardroom in America. And I don't know that there's any precedent to draw from this. But I sort of step back a little. And one thing I thought about — and Mike, I don't know if you thought about this — I'm not even sure how you run a coup at an agency anymore, with the Sunshine Act. Because directors aren't supposed to be talking to each other without sunshining a meeting. So there's that aspect of it too.

      But what I come back to at the bottom line here -- and I talk about this in my book an awful lot. What I come back to is, what's the right answer, in this kind of stuff, for public policy? What's the right public policy answer? What's the right amount of money we should be spending of the taxpayer's money? And stuff like this says to me, does this make sense that we're worried about and fighting about and spending money and time over a bunch of directors fighting?

Now, this may be an exclamation point on the continuing politicization of the banking agencies, which I think is a very bad thing. I think, as far as I've known from the very beginning, money is green. It's not red or blue. And that takes a certain expertise. And it takes a certain experience to make sure we have the right regulatory people. But, at the end of the day, to have people fighting in the boardroom about this stuff, I don't think is what we really need or want, from the point of view of efficiency.

      And so I have my own particular perspective on the structure of the FDIC. I don't know why the CFPB director is there, and not the vice-chair of the fed or the chairman of the SCC. Because they are more intimately involved in what banks are doing than the CFPB, in terms of the safety and soundness side. But, look, Congress did what it did. And the bottom-line question I sort of focus on is why do we need these kinds of distractions? Would it be better if the FDIC were single-headed? Would that make more sense?

      And so -- and I do think we need to de-politicize these banking agencies. I think that's a very, very disastrous trend, and one of the things I spoke in my book about, over the last 200 years, is how many times politicizing economics and finance had caused negative reactions in the marketplace and perverse sort of circumstances to produce financial crisis.

      So those are my thoughts. And I really look forward to getting into some of these issues with Bert and Mike.

Brian Johnson:  Thanks, Tom. Let me turn it over to Bert, here. One quick observation. I think you raise a very interesting point about how, under the Bank Merger Act, it's the OCC that has responsibility over combinations that result in either the entity being a national bank, which tend to be the larger banks, and it's the FDIC that has responsibility for combinations that result in a state-chartered non-member bank.

And it occurs to me that the OCC, on its own authority, under the Acting Comptroller of the Currency, has existing authority to issue an RFI, regarding a review of the Bank Merger Act, but elected not to do so in this circumstance and, instead, joined Mr. Gruenberg and Mr. Chopra in seeking to issue the RFI under the auspices and authority of the FDIC.

      So, it's an interesting development there. Bert, why don't I turn it over to you. There's been a lot of discussion so far. We'd love to hear your perspective.

Bert Ely:  Okay. I think that the merger issue just happens to be the issue that brought things to a head. I think the thing that's unique about the FDIC is -- I've looked at the other federal agencies. And, you have, on a five-member board, you have two ex officios. As I -- I haven't done a thorough review of this, but as I look at other independent regulatory bodies, not just in financial services, you don't find ex officio members, in other words, someone who is a member of a board and that's the only federal position that they have.

And so, the directors are all truly independent for the period of their term of office. But, here at the FDIC, you have, number one, two ex officios on a five-member board. But then, also, at this point in time, you had one vacancy on the board. And with McWilliams leaving, you're going to have two vacancies on the board. So, effectively, the ex officios — who are presidential appointees — are in a position to control things.

      So my sense is that while the merger issue is what kind of caused things to explode, the really fundamental problem that continues, and that is the relatively, I believe, unique structure of the FDIC board, in terms of who serves on it. And my understanding is that some legislation has just been introduced to address this issue. I don't know the specifics of it. But it's something that I think we ought to consider.

      There's also another issue. And that is that, at the moment, with McWilliams gone, you will then have three directors. And Marty Gruenberg, who will probably be the acting chairman, and then the two ex officios. And might the administration want to kind of keep things that way indefinitely, and not fill the other two slots on the FDIC board so that there is more of a, shall we say, political influence, if you will, driving FDCI policymaking in its position on regulations? And, if that's the case, is that good? Or is that really a big negative for banking regulation, going forward. So I'll leave it there.

Michael Krimminger:  Bert, if I could just -- could I just make a couple of comments on that? I think what Tom and Bert said I agree with a lot. Where I may differ a little bit with Bert is I do think there's a value — as I think I said in my earlier remarks — a value to having ex officio members on the board, as well as from, say, background on state regulatory authority, etc., because of the unique nature of what the FDIC does.

I also made this point — I do believe it to be the case. I've thought for a long time about why is it the FDIC board — usually in the past, up until this point — always has, I'll call it frank and intense debates, but has usually worked pretty well, as a matter of comity. It's almost like the process, if you will, of the board has been one of "We'll come to an agreement eventually. We may debate it in detail." And, at times, you've had the comptroller taking a different view than the FDIC board. And the comptroller might vote against what the FDIC board is doing, or etc.

      But I do think that having other agencies on that board helps the FDIC in coordinating on supervision of national banks. And, in fact, there was even some discussion during Dodd-Frank of having a fed board member — or the fed vice-chairman, or something like that — be part of the FDIC board as well, to help coordinate that process, too. And there are a variety of reasons that may not and was not appropriate at the time. It was not done.

But I think having -- at the time, we had the OTS and the OCC board. It allowed, on the FDIC board, during the crisis, it allowed for debates about how to deal with troubled thrifts and how to deal with troubled national banks that would have not been as informed, I don't think, had they not been on the board. Were there disagreements? Absolutely. In fact, it's well known there were very active disagreements with the OTS Director John Reich at the time about issues related to thrifts.

      There were certainly similar active debates with John Dougan about the comptroller's responsibilities with the OCC. But I think having those debates on the board level were actually fairly helpful. On your point, Bert, about a short-handed board, I do think that's a problem. The Trump administration also didn't fill certain positions in a number of agencies, including on the FDIC board. I was concerned about that then. I would be concerned about it if the Biden administration does the same thing. Because I think having a more politicized view or a politicized perspective, in some ways, at the FDIC is almost the most dangerous, because the FDIC has got to have to be the receiver. It has the authority to close banks. It has the authority to be a supervisory authority for all these banks. You would hate to see that becoming even a perception by anyone that that was being driven by political concerns, which I think is why it's very important to have a bipartisan board at the FDIC and not have it be a rump board that can be driven by the party that's in presidential power.

Bert Ely:  Mike, I'm certainly going to agree with you. And as one who has sat through a number of FDIC board meetings in the audience, I appreciate everything you're saying, in terms of debate. But the key thing is that you have then, basically, had a full board of all five members. Or maybe there would be one vacancy. But we now have -- there's a very unusual situation which I think has revealed, if you will, a structural flaw in the board.

And whether or not that gets fixed by filling the board out or through some kind of legislative action, what has happened is we're now seeing this structural problem. And the question is, what's going to be the best way to work it out, going forward? And how soon will it get resolved? Or are we going to be in for several years, at least, of potential divisions like this, between the outside directors and the board, and the FDIC itself?

Michael Krimminger:  I do. I agree. I think there's a significant issue about we've seen that in the past. We've seen three-member boards. They've tended, in the further past, have tended to be some bipartisan element on the three-member boards in the past. Under President Trump, there were periods in which it was a 3-1 ratio. Now it would be a 3-0, if you will, ratio. And I don't think that's a good thing.

Brian Johnson:  Well, that's a good segue into our next topic here, which is -- let's prognosticate a little bit. What are the short-term implications for the board? And, Bert, you and Mike have both discussed some of these, which is, as of tomorrow, we'll have a three-member board, two ex officio and one acting chair. There's normally a nominations process that would take place to fill the vacated or empty seats. It's not lost on anyone that we're in a midterm election cycle shortly, and congressional midterm elections. I wouldn't care to handicap the outcome of those elections.

But there has been an immediate response with statements made by members of Congress on both sides of the aisle. There was a bill introduced to deal with the structure and terms of service of the FDIC board members. So there's already been some response. But what do you all see, I guess, both internal to the FDIC moving forward in how it conducts its business, and also external, in terms of the response of Congress and perhaps others as the short-term implications of this event and the chair's resignation?

Michael Krimminger:  I would note, I'll add one thing on that, if I might, Brian. We've certainly seen situations in the past where there was a kind of a convoy system for nominations being approved, so that you would have a Democratic and a Republican representative who would be on the FDIC board. They would kind of be approved jointly. That kind of broke down over the last number of years.

It would be nice, in some ways, if there could be that level of bipartisanship at some point, where there would be a Republican member who would come on the board as vice-chairman, let's say, and a Democrat would come on the board as chairman, under President Biden, so that you would have more of a balance, I think, to my prior point. I'll just stop there. I think having a sole-party control of the FDIC is not a good thing.

Bert Ely:  Let me just -- to follow up on your point there, Mike. The FDIC cannot have more than three members of the same political party on the board. And I believe all three of the current members would have to be -- are Democrats. So, if there were two more put on the board to fill the vacancies, my understanding is that both have to be Republicans or independents. And so then the question rises, can you have a -- does the convoy system work, where both of them would be, both of the nominees would be Republicans. That might be harder to accomplish.

Michael Krimminger:  Well, you might -- I think the way I would view that is -- because Marty Gruenberg's term is already expired, you need someone to replace him to become chairman, because, technically, there's not a chairman. As you know, separate approval -- getting really in the weeds here, but that's a separate approval, to be chairman. It has a different term, even. But I would envision it being someone who's chairman, and then the two Republicans would be part of the convoy system. In former days, you could say, "Okay. That could happen." I'm not so sure right now.

Brian Johnson:  That raises an interesting question, which is the politics of the situation right now. Assuming, for the sake of argument that the president were to re-nominate Mr. Gruenberg as, say, the chair of the FDIC. In a 50-50 split Senate, it's not a foregone conclusion that confirmation would occur, given the razor-thin margins it would take to discharge a nominee out of the banking committee and then subsequently confirm through a floor vote.

Michael Krimminger:  Probably, you'd need to have that Republican convoy to get that through.

Thomas Vartanian:  You know, Brian, I think the [inaudible 00:38:40] implications of this is that it might be the status quo for some time. I mean, you can go back in the banking business and look at this kind of thing, the disappearance of directors happening, and seats not being filled for a year or two at a time. It's just not a process that's going to happen overnight. And Marty Gruenberg's a known commodity. He was chair. He's been at the board for how many years? He's a known commodity. So I don't think this is going to be viewed as a crisis, apart from people sort of creating a crisis out of what is sort of a normal event in every corporate boardroom.

So I think we could see this as the situation for some time to come. I don't think this president's going to be in a rush to change the situation. He's got his hands full with so many other problems, right now. The Senate's got its hands full. So when those kinds of circumstances arise in the past we've seen them hang on for -- those things sort of drag along for months and months, if not years.

Bert Ely:  Tom, I agree with you on that point. I think the only thing that would maybe accelerate action is if there was a future flap on the board. But, assuming that things calm down, I think we could continue with the status quo for, easily, another year or two.

Michael Krimminger:  I tend to agree. And one thing I would note on that is that we continue with the status quo for another year or two. I think there's a broader problem we have in government. We've had a great deal of difficulty of getting a confirmed nominee, or nominees confirmed for a number of agencies. You've got the acting comptroller of the currency. You've got an acting chairman of the FDIC.

We need to get back to the position where we confirm - I don't even think it's a question. Talk about constitutional issues. When you require a Senate confirmation, you've got people running the government who have never been presented to the Senate for confirmation. And that was under the prior administration or this administration so far. And I think we need to get away from that. That's not the way the system is designed to work.

Brian Johnson:  One other factor, I guess, to consider, to seek your feedback on, is who knows what the outcome of the midterm elections are? But, let's assume, again, for the sake of argument, that the change of control or change or power in one or the other Houses changes. That, of course, means that the gavels transfers hands to the other party, and subpoena authority and oversight of agencies comes with that.

And, historically, oversight is more vigorous when you have one party in Congress controlling subpoena power, and the other party running an agency. Do you think that this incident increases the likelihood that, should there be a change in control of either the House or the Senate in less than a year's time, that the FDIC itself would be subject to heightened scrutiny as a consequence of this event?

Michael Krimminger:  I think there's certainly a very high likelihood of that. That's why it kind of goes back to a point I made some time ago, and I think the others agree with, is that you need to have someone in the chairman's office who is good at working across the aisle. Sheila was not perfect, but I think she did a fabulous job at working well across the aisle. She had very strong relationships with Republicans because she, herself, is a Republican -- very strong relationships with those on the Republican side of the aisle of the Senate and the House, as well as on the Democratic side. And that made things work much better, I think, and able to get things approved at the FDIC board level, because there was huge political support on both sides.

If you end up with a sole party at the FDIC, I can see that heightened scrutiny. Let's say, if the House or the Senate changes party control, it will definitely be an exacerbated issue. And I think the worst possible thing for the U.S. banking market is if you end up having the creation of an impression by bankers or the public at large that the bank regulation is being run entirely through a political process of whether you create a certain aura about that process through these gotcha type of investigations which occasionally occur in Congress, or you end up having that, in fact, occur.

Bert Ely:  Let me just jump in with a question that relates to what you were just saying, Mike. And that is, let's assume for the moment that this, the present status quo, continues for a period of time. How is that going to affect the ability of the FDIC to work with the other federal financial regulators? Because, obviously, there has to be close coordination on a number of issues, including with regard to rulemaking. So I'd be interested in what your sense, and Tom's also, as to how this is going to affect the FDIC's working relationship with the other financial regulators, and, specifically, the comptroller and the fed.

Thomas Vartanian:  I think --

Michael Krimminger:  Please go ahead, Tom. I was going to let you go first anyway.

Thomas Vartanian:  I was just going to say quickly, I don't see any, I don't see any real impact, frankly. The one thing that's always been great about the regulators is whoever's there, whoever's running the shop, they work together. They do what they have to do because they know their job. They understand safety and soundness. This has nothing to do with safety and soundness of the banking system or systemic stability, right, which are the keys points that we ought to be thinking about, from a public policy point of view. But, I think, Bert, I think it has very little impact on the working relationship.

Bert Ely:  What about with regard to rulemaking, which is where you can get some differences between the agencies.

Thomas Vartanian:  Well, look --

Bert Ely:  Is that going to [crosstalk 00:44:23]

Thomas Vartanian:  But my experience is that the agencies bump heads all the time, and they work it out. These agencies are always fighting for turf and jurisdiction and press releases and acclamation. It's not like they're walking down the aisle singing kumbaya all the time. There's a lot of head-knocking going on there. And that will continue, I think, in the real world.

Michael Krimminger:  And, I think, frankly, as I said before, I think it's kind of a healthy thing, in some ways. You like to have the competition of different ideas. The OCC has a responsibility for national banks. The Federal Reserve has a responsibility for overall stability of the bank holding company system and all of the other aspects of monetary policy of what the fed does. The FDIC has receivership supervision, backup supervision in many cases, and deposit insurance. They come with different interests, which is going to lead to some degree of headbutting, no matter what the parties are.

      If we had to say, for example, a hypothetical — counterfactual hypothetical — with Jelena staying in office, and you had a Democratic comptroller and a Democratic head of the CFPB, you, as we saw in this example, you might see more headbutting. But those are the types of things in which we've seen in the past the ability to get along and the ability to resolve issues. And, I would point out, I think it's relevant in that context. Look at Michael Hsu's failure to join the press release by Marty Gruenberg and Chopra. He has responsibility for running his own agency.

I have seen, in innumerable situations where the comptroller, like, put the gloves on, or didn't say things about what was going at the FDIC, and kind of kept quiet about them because he or she had to run their own agency. And the FDIC had to run that agency. And they were conscious of how difficult that is. That's one of the reasons, frankly, having other agency heads on the FDIC board can be beneficial. Because they understand what it's like. I'm not just spending all day — and I don't mean any disparagement to the FCC board members, commissioners — but I'm not just spending all day focusing on what battles I'm fighting at the FCC. I'm focusing on, also, how do I run my own agency. That makes a difference and leavens the debate a little bit.

Thomas Vartanian:  Yeah. We sort of backed in, Brian, backed into an issue that I hinted at at the beginning. So I'm going to come back to it. And that is, from a public policy point of view, I've finally concluded, after 45 years of doing what I have done, is that the regulatory structure is just so redundant and inefficient. It's just -- it needs to be redone. It was set up in the 1930s. There's nothing about today's economy from a fintech, or economic, or financial point of view, that looks like the 1930s. And we've just got to do something about having so many regulatory eyes look at every movement by every financial institution and sort of ignore everybody else who has their fingers in the financial pie but aren't banks. Right? We regulate only banks. We don't regulate financial activities.

And, as fintechs are showing us, that's insane. It's just completely insane. Because now, what we're doing is banks are now about 35 percent of the financial market — they used to be 100 percent in the 1930s — about 35 percent. So what we're doing is we're forcing all the risk out to places where it isn't regulated, as we saw in the 2008 crisis. And so, look, if you're a nationwide lender in this country, and you have a bank holding company in a bank, for you to turn on the lights every day, you've got to satisfy about 165 federal and state regulators, at a minimum.

One hundred and sixty-five regulators can look over your shoulder, all the states, all their consumer regulators, all their SEC regulators, all the state commissioners. The attorneys general are all looking to be governors of their states. That's an awful lot of regulatory oversight to deal with. And, at some point -- and I think this sort bubbles that issue up, in terms of what happened at the FDIC. Why do we have so many people doing so many of the same things at the same time, and then fighting for jurisdiction and fighting for the role that they think they should have. It just doesn't make any sense.

Bert Ely:  Tom, I'm going to agree with you on that point. But we've had this kind of debate going on for decades, all of the time that those on this call have been in Washington. And my question is, what's going to make it change? I just don't see it. As bad as this situation is, I just don't see it changing in any way. We have a, basically, a paralysis that has set in. But I don't see what's going to loosen things up. Maybe you have some [inaudible 00:49:14]

Thomas Vartanian:  I do think what's going to get it to change is technology, because technology is going to make such enormous changes that artificial intelligence, 5G and the internet of things, and the way it's going to affect the creation of financial products, the delivery of financial products, and who's going to be doing that -- we're going to be facing an existential problem here because the banks aren't going to have a business left if we keep regulating the way we're regulating.

And that's going to be an enormous problem to deal with. And so I do think the technology is the trigger here. It may be only after there's some sort of crisis. But I think technology is changing the financial world so dramatically. That's going to be the trigger to change.

Bert Ely:  Or maybe a stick of dynamite.

Michael Krimminger:  Tom, Tom and Bert, I would say I share your concern. But I come at it from a different perspective. And because, to my point earlier, I don't have as much problem if you have a limited number of regulators that deal with banking — central bank, chartering authority at a national level, and a deposit insurer — I actually think that having it separate allows for a better, more leavened debate. I've seen what happens in Europe when all three of those are combined in a single institution. That doesn't necessarily work either.

I think what the problem is, in some ways, is that because we have this regulatory system for banking and we have one for securities and commodities, we tend to slot everything into those three categories, so that you've got things in fintech, for example — to your point, which I totally agree with — that are very much in banking and securities and commodities in some ways. They need to be regulated in some fashion to make sense. But we tend to want to regulate them as if they are securities brokers, commodities dealers, and banks. They may not be any of the three.

You could argue they're doing some of the functions of one of the three, but I think it's -- I'm not a big fan of, for example, the proposal to make sure that any kind of stable coin, for example, is issued out of a bank. What makes me think that banks are necessarily going to do that better? It means it's because I've got a regulatory system that regulates banks. Well, that doesn't necessarily mean it's the best way of dealing with some of the fintech or some of the other financial innovations we've seen. And I think always relooking at the system we have makes a lot of sense.

If anything did emphasize the risk of non-banks, the financial crisis was certainly it. But what did we do in response to that? We regulated banks. And we have areas in Dodd-Frank that are supposed to deal with non-bank risk. But, because of the pushback of all those non-bank actors, everything ended up devolving on regulating it like regulating banks. That was my concern at the very beginning, when Dodd-Frank was passed. I remember telling somebody, "Now, the biggest challenge will be to actually make sure we apply some of these things to the non-banks. But they're just regulating what we already knew how to regulate."

Bert Ely:  But, Mike, as you know, this kind of leads into the issue of other proposals to consolidate the regulatory agencies. And that certainly hasn't gone anyplace. So my sense is that, at least for the foreseeable future, we're kind of --

Michael Krimminger:  -- Oh, I agree.

Bert Ely:  We're stuck with the regulatory structure.

Thomas Vartanian:  I agree.

Bert Ely:  --and all of the parties of interest who want to maintain that because that's what they know how to influence.

Thomas Vartanian:  Yeah.

Brian Johnson:  Let me ask the group this, then, in terms of -- Bert just said -- a follow-on question, based on your observation that maybe things won't change. We are living now in the post-Supreme Court, state of the law world, where the structure of the CFPB — sole director of structure, but an independent regulatory agency, like the rest of the financial regulators — was challenged on separation of powers grounds. And the Supreme Court's opinion, in my view, effectively said Humphrey's Executor is now cabined and kind of in a corner, unclear whether any agency could avail itself of the general exception under Humphrey's to Myers, which is effectively holding that heads of agencies should serve at the pleasure of the president so that he can faithfully execute the law.

So there's at least a question in my mind, but would love to hear your thoughts on whether or not this type of controversy at FDIC or this type of stasis at other independent financial regulatory agencies is likely to draw a challenge on the basis of, say, the law. And, presumably, if that type of case were to go up to the Supreme Court, you might have a variety of outcomes. One could potentially be that Humphrey's is not just placed in the corner, but completely overturned. That was Justice Thomas's dissenting opinion, in part, in the state of the law decision. So it could be that, in answer to your question, Bert, or at least for consideration by the group, that the Supreme Court might have a say on this matter on separation of powers grounds.

Bert Ely:  Well, I think that that is a very important point, that, in effect, it may come down to the courts and the Supreme Court to kind of shake things loose, in terms of how the financial sector has been regulated. And that might force Congress to take some action. But, even then, that's not going to happen very quickly because all of the competing interests that are going to be fighting over whatever Congress tries to do.

Michael Krimminger:  I agree with you, Brian, that the current state of the law on presidential appointments and the authority of independent agencies is certainly up in the air. I don't have a great deal of distinctions to make between some of the recent decisions and some of the boards that are out there as well. But it does raise, in my mind at least, the question you probably — again, to speculate — you probably are going to assume what I'm going to say here is [inaudible 00:55:13] does raise in my mind the difference between sometimes what might be the legal analysis, even at a constitutional level, of what might be wise policy.

I think it would be very unwise policy for the direction of financial operations, financial regulation and bank regulation at the federal level, to be quite so determined by the politics of the party and the executive branch, so that there is a feeling that I fear that the decisions and the safety and soundness of institutions is perceived as being in some ways a political decision rather than one on the merits. Because I've done a lot of international work over the years, and I have seen many countries, legion, if you will, that that has been a serious problem. And it's continued to be an issue for the financial sector. So we have to make sure that everything that's done in the U.S. financial regulatory regime realm complies with the Constitution.

But we need to at least see that there can be some -- we need to find a way of dealing with it in a way that still provides for what I think is a better policy of having a little bit of independence from pure political direction on some of these decisions.

Brian Johnson:  I do want to interject here. I see our time is running short, unfortunately. But I want to give each of you a minute for closing thoughts or additional analysis. Bert, would you like to start?

Bert Ely:  Okay. I think that we're in a situation with the FDIC where it's going to continue to be somewhat in limbo, in terms of what the makeup of the board's going to be and the direction it takes. And so I think that we just have to accept the fact that nothing of significance is going to change over at least the next few years. And that, of course, is going to raise a whole set of policy issues that are going to give us plenty to talk about over the next couple of years.

Brian Johnson:  Tom?

Thomas Vartanian:  Yeah. So I guess I'll sort of finish where I started. And that is, I think that the FDIC controversy here is sort of a symbol, or, if not, a bubbling up of the political situation in the country. And that is sort of the defiance back and forth and the fighting back and forth. And, to the extent that that kind of politics and politicization of the banking business continues, it is going to create very difficult circumstances. And it's going to lead to financial crisis. There's no doubt about it in my mind. This is an issue that we've really got to come to grips with, and our leaders on the hill have got to come to grips with. And we've got to find some adults to sort of regulate money as money, not as politics.

Brian Johnson:  Thanks. Mike?

Michael Krimminger:  The one thing I would say in closing is I kind of laid out my views on a number of the issues. I would just note that I agree with what Tom and Bert both said. We do need to deal with these issues in a professional way, in a nonpartisan way or bipartisan way — there's no such thing as nonpartisan — bipartisan way, to the extent possible, for exactly the reasons that Tom laid out.

And I would just note, as an inside-baseball issue, with regards to the function of the regulatory agencies. It goes back to a prior point I've made. My view, when I was at the FDIC for as long as I was, is that the FDIC was much more effective in advancing both its views and doing the public's job, when it had confirmed chairmen, vice-chairmen, and board members. And I think the same is true for other agencies. And I think we've got to move back to confirming people, rather than having acting.

Bert Ely:  Agreed.

Brian Johnson:  Well, with that, I will wrap this. Thanks to each of the three of you for your participation today. This was an excellent discussion. It was an honor to help moderate this debate. I wish it could go longer. And maybe we'll have to reschedule round two.

Thomas Vartanian:  Thanks to you, Brian.

Brian Johnson:  But with that, I will turn this back over to Evelyn. Thank you very much.

Michael Krimminger:  Thank you very much, all.

Thomas Vartanian:  Thanks Brian and Evelyn.

Evelyn Hildebrand  Thanks so much everybody. I'll just chime in with adding the thanks of The Federalist Society to our excellent speakers, for our excellent moderator, and also to our audience for tuning in and participating. We welcome listener feedback by email at [email protected]. If you have any questions or critiques, please send them to that email address. Please keep an eye on your emails and our website for upcoming virtual events. And, without further ado, we are adjourned.

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Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.