December 13, 2021|CFPB, Corporate Governance, Professionalism
A (lack of) Comity Happened on the Way to the FDIC
Stephen Sondheim, the acclaimed and recently deceased, writer and composer, may be best known for his work on Broadway musicals such as West Side Story and Sweeney Todd, but a familiar line from a song from one of his lesser known musicals came to my mind recently while reading about the dirty laundry aired among CFPB Director Rohit Chopra and the Federal Deposit Insurance Corporation (FDIC)[1]Board and its Chairwoman, Jelena McWilliams. When the news every day is full of pandemic virus mutations and performative politicians and journalists provoking outrage and dunking on the other side, it might have been easy for my readers to miss the significance of what happened there (or to miss it entirely), but it definitely struck a nerve for me.[2] Read on if you want to find out why I think this matters to financial service professionals (and government administrators and regulators as well) or if you are just looking for a good book idea to help explain what is going on with institutions today.
FDIC governance context
To understand this dust-up it helps to have a little understanding of how the FDIC Board is presently structured[3]. By virtue of the Dodd-Frank Act, the CFPB Director serves as an Ex-Officiomember of the FDIC Board as does the OCC Director (in this case Acting OCC Director Michael Hsu[4]). In addition to the FDIC Chair, the CFPB Director and OCC Director there are two other FDIC Board members, but presently there is a vacancy for one of those (inside FDIC) Board positions. So, with just four Directors currently in place, there’s a bit of a governance question about what happens in case of a tie vote at the FDIC Board. Apparently, Mr. Chopra’s CFPB, it seems, did their own research on the issue.
The lack of comity isn’t funny
With the foregoing in mind, on or about December 9, Mr. Chopra and the other inside FDIC Director, Martin Gruenberg[5], claimed the Board approved a formal Request for Information (RFI) relative to modernization of the Bank Merger Act. Chopra and Gruenberg penned a joint statement supporting the RFI, claiming it would be shortly published in the Federal Register. Chopra, meanwhile, used his CFPB platform to issue his own statement about the RFI asking, How Should Regulators Review Bank Mergers? | Consumer Financial Protection Bureau (consumerfinance.gov).
Incredibly, the FDIC, however, emphatically disagreed that any action had formally been taken by the Board, instead issuing its own press release[6] denying that the RFI had been officially approved, and, in no uncertain terms, dressing down the CFPB (and by implication, its Director) for jumping the gun on the RFI.[7]In my view, the FDIC’s statement went far beyond a clarification of a relatively innocuous governance misunderstanding about approval of an RFI, leaving me almost breathless in its implications.[8] It is worth reading in its entirety:
Earlier today, the Consumer Financial Protection Bureau (CFPB) posted on its website a document, purportedly approved by the FDIC, requesting comment on bank mergers. No such document has been approved by the FDIC.
The FDIC has longstanding internal policies and procedures for circulating and conducting votes of its Board of Directors, and for issuing documents for publication in the Federal Register. In this case, there was no valid vote by the Board, and no such request for information and comment has been approved by the agency for publication in the Federal Register.
The FDIC has a proud 88-year history of Board members working together in a collegial manner. This history has spanned many Presidential administrations, and countless philosophical differences on substantive issues among Board members over the years. Notwithstanding the actions taken today, the FDIC expects this time-honored tradition of collegiality and comity to continue.
“Nothing to see here, please disperse.”
So, what’s the big fuss over a mere request for information? Isn’t that about the most innocuous thing a federal agency with lawmaking and massive enforcement powers can do?[9]All they are asking for is information, right? I mean, really, who cares if the FDIC wants to look at how it assesses bank mergers and is asking for input on the factors it considers in its approval process? Yawn. Let the trade association folks and the big bank lobbyists send their comment letters. Yada yada.
Well, it is a big deal because the issue isn’t the RFI at all. The policy implications of the RFI itself may be quite laudable, but it’s the public governance and comity breakdown of the Board of Directors for one of the most important institutions in the country’s financial system (probably only second to the Federal Reserve) that has me worked up and inspired to write this Musing.[10]
Tragedy tomorrow
Please go back and look at footnote 1 about the FDIC’s mission and purpose: “…, an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system.”[11]Confidence, trust and stability go hand in hand and none of that is threatened in the least by an RFI proposal about bank merger approval factors. But, when the Board of an independent agency that has operated for almost 90 years to maintain trust and confidence in the US banking system can’t agree when it has taken action and which then publicly chastises its own members for a lack of cooperation and comity, one has to wonder about what that might do to the public’s trust.[12]
A Time to Build
All the people involved in this matter might want to read the book, A Time to Build, by Yuval Levin, about how the efficacy of societal institutions is eroding due to people using those institutions as personal platforms rather than as something to help improve society and mold and model desired behaviors.[13] Levin’s book contains the following passage,
“From the formal vote that indicates a decision at a meeting to the letterhead that signifies the authority of an official notice to the structure of a scientific claim, formalities distinguish the exercise of legitimate power. They send us vital signals about what to take seriously and what to take lightly, when to speak and when to listen, who to trust and who to question. They offer us the architecture of behavior that makes it possible to have some predictability and security in high stakes situations so we might successfully navigate the social world.
Levin was also quoted in an NPR interview in January 2020,
We trust an institution when we think that it forms the people within it to be trustworthy — so that not only does it perform an important social function, educating children or making laws or any of the many, many goods and services that institutions provide for us, but it also at the same time provides an ethic that shapes the people within it to perform that service in a reliable, responsible way.”
I don’t have any information about the process undertaken by the FDIC Board to discuss the RFI (nor have I researched the governance issues), but clearly Chair McWilliams thinks that process was unfinished.[14] Meanwhile, as an Ex-Officio FDIC Board member, there is nothing wrong with Chopra using his CFPB platform to inform a wider audience about how bank mergers might impact consumer protection and community issues, but the governance power grab misses the larger point about institutional trust. Dispensing with the customary governance protocols of the FDIC with a hostile and tenuous governance maneuver strikes me as classic case of a Progressive knocking over Chesterton’s fence with gusto. Unfortunately, regardless of his intent, Chopra is likely to cause precisely the dangerous loss of faith in the FDIC as an institution warned of by Levin. I think all would agree that loss of trust in the FDIC would be very bad for the US banking system.
Chopra’s gambit
Chopra was quite outspoken in his disagreements with his former fellow FTC Commissioners about many things, but one of his last disagreements before taking on his CFPB responsibilities was regarding the FTC’s conclusions about the effectiveness of the FTC’s remedies when it finds antitrust concerns indicated in merger approval applications. See, Statement of Commissioner Rohit Chopra Regarding Flaws in the FTC’s 2017 Study on Merger Remedies. Clearly, government oversight of merger effects is an important subject for Mr. Chopra and he wants to change how the government is doing it. In particular, Chopra wants to see a greater assessment of community and consumer impact to the government’s merger approval authority. As evidenced by the FTC Statement above, Chopra was clearly miffed that the FTC didn’t follow his counsel on that topic and now sees the FDIC’s RFI (and his role as CFPB Director) as another bite at the merger oversight apple.
Director Chopra appears to be taking the first step in a plan to give the CFPB more control over big banks by asserting greater consumer and community interests in bank mergers. The CFPB’s existing enforcement powers, however, are already quite large under the CFPA because the agency was designed by Elizabeth Warren to be powerful enough to take on the big banks.[15] Yet, apparently, Director Chopra doesn’t think the CFPB has enough regulatory authority over financial service providers’ community impacts, and isn’t too concerned about the implications of testing the limits of his power to get what he wants.[16]
[1] Per the FDIC’s website About the Federal Deposit Insurance Corporation (FDIC) “The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system. To accomplish this mission, the FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.”
[2] Hat tip again to Rob Chrisman for his intrepid reporting highlighting this in his daily email when many other industry news outlets seemed to miss it.
[3] I also assume my readers have a rudimentary understanding of how a corporation is generally governed by a Board of Directors operating under Articles and Bylaws.
[4] Mr. Hsu’s tenure as Acting Director of OCC was recently extended due to the failure to obtain Senate approval of President Biden’s nominee for OCC Director.
[5]Gruenberg is also a former FDIC Chairman appointed by Barack Obama.
[6] It is not unimportant that the press release was issued by the FDIC itself and not Ms. McWilliams or any other individual.
[7] Having personal experience with serving as Secretary to Boards of Directors with responsibility for the interpretation and enforcement of bylaws and parliamentary issues in Board governance, my heart goes out to the FDIC’s General Counsel/Secretary who likely has primary responsibility for helping the FDIC navigate these waters with a clearly divided and even numbered Board that now appears highly politicized.
[8]Only true bank regulatory geeks like myself (I know a few others) would react in such an exaggerated fashion.
[9]Normally, this would be a rhetorical question, but in the words of Dr. Rick, “The answer is ‘yes’”
[10] The editors of the Wall Street Journal also weighed in. No Rules for Progressive Radicals – WSJ
[11]See also, FDIC: A History of Confidence and Stability
[12] Can you imagine if the Federal Reserve Board members publicly disputed their own governance and decision-making process? I think a lot of people would rightfully say, “And these guys are in charge of the economy?!!”
[13]This unfortunate development is easy to see in Congress these days.
[14] It is unclear what Mr. Hsu’s position might be.
[15] CFPB, however, often seemed to have missed that part of its mission prior to Mr. Chopra’s tenure.
[16]Someone involved in the CFPB’s Townstone case might want to consider what the implications of that desire are for the Bureau’s position on CFPB’s existing enforcement powers under ECOA relative to affirmative marketing requirements.