Federal Reserve Employees Afraid To Speak Put Financial System At Risk

U.S. Faces New Threat From Washington

WASHINGTON -- Regulators overseeing the nation’s largest financial institutions are distrustful of their bosses, afraid to speak out, and feeling isolated, according to a confidential survey this year of Federal Reserve employees.

The findings from the April survey of roughly 400 employees, presented to Fed staff during multiple meetings in June and July and obtained by The Huffington Post, show a workforce that is demoralized, and an institution where teamwork is nonexistent, innovation and creativity are discouraged and employees feel underutilized.

The shaky morale is a legacy of Alan Greenspan’s 19-year term as Fed chairman. From 1987 to 2006, the Greenspan Fed pushed for a hands-off approach by regulators, who then found themselves blamed for the financial crisis that led to the most punishing economic downturn since the Great Depression.

“Supervisors during the Greenspan years were beaten down pretty regularly,” Phil Angelides, former chairman of the congressionally appointed Financial Crisis Inquiry Commission, told HuffPost. “It doesn’t surprise me that you would still have some dysfunction, a lack of morale and something less than a highly energized and well-coordinated arm of the Federal Reserve, where for so long the regulators and bank supervisors were held back by the leadership of the Fed.”

An overwhelming majority of Fed regulators are proud to work at the central bank and believe in its mission of supervising the financial system and ensuring stability. They also trust and have good relationships with their immediate supervisors. But most say that top leaders are failing the organization, in part by not communicating honestly, and that employees are in the wrong jobs, or are poorly managed.

The Fed, concerned about employee morale and its impact on performance, has held numerous group meetings to discuss the survey findings.

The culture of non-regulation is gone, but the Fed has a new problem. Several current and former Fed regulators blame the morale shortcomings on senior officials such as Dan Tarullo, the Fed governor who oversees the central bank’s regulatory and supervision staff, and his top lieutenants. Tarullo is viewed as a polarizing figure intensely disliked by big bank executives, but admired by financial reformers. He is an ideological break from Greenspan, but carrying out the regulatory mission has proven difficult.

The Fed’s inspector general has launched a probe into complaints lodged by Fed staff, employees told HuffPost. John Manibusan, spokesman for the internal auditor, declined to comment.

“You're never going to find the problem unless there's healthy probing, healthy pushing, healthy questioning,” Angelides said. Bank regulators, “already face enormous power coming against them from the banks and their extraordinarily well-paid lobbyists. They need backing from their bosses.”

The survey results come as President Barack Obama weighs candidates to replace Ben Bernanke, Fed chairman, whose term expires in January and will not be renominated. Among potential nominees are Larry Summers, formerly Obama’s top economic policy adviser, and Janet Yellen, Fed vice chairman.

Given the Fed’s crucial role in overseeing financial stability, the candidates' views on financial regulation are said to be significant factors in Obama’s deliberations. The next Fed chairman likely faces challenges in trying to further reform the Banking Supervision and Regulation division.

Obama last week met with the heads of the government's eight financial regulatory agencies, including Bernanke, and urged the regulators to speed up implementation of financial reforms “to ensure we are able to prevent the type of financial harm that led to the Great Recession from ever happening again,” according to the White House.

Josh Earnest, White House spokesman, said the administration was “certainly pleased with the level of cooperation and coordination that's taken place among these independent regulators."

During the 2008 financial crisis, blindsided regulators said they were forced to effectively bail out the entire U.S. financial system after failing to grasp the buildup of risk at financial institutions and the ways in which the fortunes of individual financial groups were tied to their peers through opaque and little-understood financial instruments.

Financial supervisors including Bill Dudley, Federal Reserve Bank of New York president, have partly blamed the “siloed” mentality that existed among U.S. financial regulators in the years preceding the crisis. “Funneling information streams into diverse institutional silos leads to communication breakdowns and too often to failure to ‘connect the dots,’” Dudley said in 2010.

But this year, only a third of those surveyed inside the Fed’s banking supervision and regulation division’s policy unit agreed that “there is good teamwork and collaboration among the departments.” The other two-thirds either disagreed, or neither agreed nor disagreed.

In a report to Congress this year, the Fed said that more active collaboration across the divisions at the Fed’s Washington office and across the 12 regional banks scattered around the country would help to ensure that employees are able to “focus on the policy work and research required to anticipate and address emerging risks to U.S. financial stability.”

“Failure to fully implement new supervisory rules, activities, and processes could jeopardize the soundness of individual institutions and the financial system at large,” the Fed warned.

About a third of workers surveyed in the policy unit agreed that it was “safe to speak up and constructively challenge things around here,” documents show.

“That tells me you don’t have the culture of debate and engagement that you need so that questions are asked,” said Angelides.

Just about half, or 51 percent, of policy employees agreed with the statement: “I trust the senior leaders of this organization.” Fifty-six percent of the entire banking supervision and regulation division felt the same way.

The policy group is in charge of developing and implementing regulations, such as those created by the 2010 overhaul of U.S. financial regulation known as Dodd-Frank and the internationally agreed Basel III capital accords. They involve bank capital and other post-crisis measures meant to prevent another financial meltdown and forever end the perception that some banks are too big to fail.

The stringency of the Fed’s rules on these issues may mean the difference between a banking sector that spends years shoring up its balance sheets while limiting payouts to shareholders and bonuses to executives, or an industry that freely distributes its profits employees and shareholders at the risk of being caught unprepared the next time a crisis hits.

Less than half of workers in the Fed policy unit agreed that the unit’s senior leaders “act in alignment with our organization’s core values or guiding principles.” Fewer than 40 percent said they are encouraged to be creative and innovative.

The policy unit’s results are similar to the entire division’s, though policy employees generally had less favorable opinions of their working conditions and bosses.

In a statement to HuffPost, the Fed said, “Senior leaders of the [Federal Reserve] Board’s Division of Banking Supervision and Regulation initiated an independent survey to solicit employee views of the work environment and followed the survey with focus groups and informal conversations. The division’s employee satisfaction results were within industry and government norms. Division leaders will continue their efforts to foster a work environment that supports employees’ best efforts to promote a safe and sound banking system.”

The banking supervision and regulation division failed to score above the benchmark in every category listed in the survey documents obtained by HuffPost. The benchmark wasn’t identified. The Fed refused to make public a broader set of survey results that would allow for a comparison between the policy unit and other sections inside the banking supervision and regulation division.

The documents listed “trust and transparency,” “safe to speak up,” and “collaboration and alignment” as “opportunities” for the Fed.

The figures highlight how, nearly five years after the height of the 2008 financial crisis, the Fed continues to face internal challenges in reforming and empowering a regulatory workforce that had been depleted and ignored by top Fed officials in the years preceding the crisis, then in its aftermath blamed by lawmakers and senior policymakers for missing the crisis.

Even in a bureaucracy traditionally rife with turf wars and secrecy, the Fed stands out among banking regulators for its low marks on key issues such as trust and collaboration, according to comparable survey results from the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.

The FDIC received the highest overall ranking among mid-sized federal agencies in a uniform 2012 survey distributed by the Office of Personnel Management and analyzed by the nonprofit Partnership for Public Service. The OCC, an independent agency that’s part of the Treasury Department, ranked in the top 10 percent of its group of roughly 290 federal agencies.

Both agencies also scored high with their employees when it came to views on senior leaders and managers, trust and collaboration. The FDIC was tops among 20 mid-sized agencies in questions about agency leadership, communication, strategic management of employees, teamwork, and whether the agency appropriately matched employees’ skills to their positions. The OCC ranked in the top 5 percent to 15 percent in the same categories.

FDIC and OCC survey results include employees from across the agencies, not just those limited to supervising banks or writing new regulations. It’s unclear how rule-writers at the FDIC and OCC feel about teamwork or their senior bosses, for example.

Nearly a dozen current and former Washington-based Fed employees corroborated the Fed survey results, some by offering personal examples of Fed regulators who had been marginalized after challenging senior leaders or pushed out over apparent personality conflicts. They all spoke to HuffPost on the condition of anonymity for fear of losing their jobs.

Most who were critical of the Fed were older and more experienced. Younger workers in the banking supervision and regulation division said they were enthusiastic about their roles and greatly respected their bosses, though they noted organizational challenges such as the lack of teamwork.

Current and former regulators and policymakers in the Obama administration said the Fed’s results underscore their concerns about the continuing lack of regulatory cooperation and the significant chance that siloed regulators may fail to prevent the next crisis, despite reforms.

Dodd-Frank gave regulators more authority to oversee the financial system in hopes that they’d catch what previously eluded them. The Fed emerged with the most new responsibilities.

“The concern coming out of the crisis was that regulators were too siloed and inward-looking,” said one former senior regulator involved in the government’s response to the financial crisis. “This was a lesson we all took to heart.

“But the Fed has always had a problem with this,” the regulator added.

The findings are consistent with previous survey results, Fed employees told HuffPost. Former top officials in the Fed’s banking supervision and regulation division said the unit has been beaten down by years of a light-touch approach to regulation espoused by Greenspan.

A former senior official in the banking supervision and regulation division said the dismal results were “nothing new.”

Past surveys were similarly “discouraging,” the former senior official said. “The division didn’t feel appreciated by board members over the years.”

In a recent report to Congress, the Fed acknowledged that “the crisis revealed that existing supervisory policies did not fully address issues raised by complex and interrelated financial structure.”

The Fed’s Board of Governors in Washington, where policy is created, has taken significant steps to improve, such as attempting to break down the barriers that had existed between policymakers, regulators, market experts and economists. New groups, such as the Large Institution Supervision Coordinating Committee, have been created that combine subject-matter experts from across the Fed’s Washington office and 12 regional banks around the country.

The banking supervision and regulation division has grown since before the crisis. It employed less than 250 people in 2007, and has increased by more than 50 percent to nearly 400 employees today, according to the Fed. The division continues to hire new people to fill newly created positions.

The Fed overall has added more than 400 people to implement Dodd-Frank, it said in a recent report to Congress. Congress mandated that the three federal banking agencies -- the Fed, FDIC and OCC -- write 135 rules to further reform the industry, though just 43 had been finalized as of July 15, according to Davis Polk & Wardwell.

The Fed has also toughened its supervision of large financial institutions, in large part thanks to Tarullo, requiring banks to reduce their use of borrowed funds and restricting their activities. It has implemented new exercises to test banks' ability to withstand crises and required them to draft detailed manuals for how they’d be resolved if they neared failure.

The Fed has heightened its expectations of bank executives and board members, leading top financial groups to bring on more experienced senior leaders and improve how they internally manage risk.

The Fed “has adopted an enhanced supervisory approach that takes a more systemic approach to understanding the risks posed by the combined actions of institutions rather than focusing on the health of individual firms; this includes business drivers, new industry practices, new products, and the potential risk implications of such developments in financial markets and the economy,” it told Congress this year.

Tarullo is an ardent champion of policies and rules designed to make the financial system safer and less prone to panics. While the Greenspan years are now known for dangerously lax regulation and oversight of the financial system, the Bernanke-led Fed, because of Tarullo, has emerged as a vigorous defender of banking rules and a proponent of government oversight.

The number and tenor of financial industry complaints provides the best evidence for evaluating the Fed’s hardened approach, one former senior regulator said. “If the industry is complaining, that means the Fed is doing a good job,” the person said.

Despite the improvements in the Fed’s record as a regulator, employees who help draft regulations say they feel as if they’re working alone and that collaboration between teams and departments is rare, which risks undermining the Fed’s enhanced record as a bank regulator, according to survey results and interviews with Fed staff.

“We’re supposed to oversee a sprawling and complicated financial system and huge banks -- all the while making sure we don’t implement policy that hurts the economy -- and we can’t even properly manage ourselves,” said one Fed official who helps develop regulatory policy. “How can we be trusted to supervise the system when the Fed can barely supervise its own staff?”

Banking supervision and regulation division employees frequently use the word “siloed” to describe the units inside the division. Information isn’t shared; workers in various units dedicated to developing some policies don’t work with employees in other units, leaving policy development fragmented and uncoordinated.

Regulators scattered across the 12 regional Fed banks also have complained to their Washington counterparts about the lack of information-sharing.

One Fed employee argued to HuffPost that the lack of collaboration among regulators inside the Fed may lend credence to a complaint by Jamie Dimon, JPMorgan Chase chief executive and chairman, about the onslaught of new rules and policies.

In 2011, Dimon pointedly asked Bernanke during a televised news conference: “Has anyone bothered to study the cumulative effect of all these things?” Bernanke said no. The Fed employee said that because there is little collaboration or information-sharing among Fed staffers, it’s much harder for the Fed to answer such a question.

The Obama administration, working with Congress, tried to combat the problem by creating the Financial Stability Oversight Council. FSOC essentially is a forum for regulators to come together and analyze potential threats to the financial system.

According to its survey of its supervision and regulation staff, the Fed appears to be struggling to ensure that regulators honestly communicate with one another and share key details that could help the central bank develop effective policy. Some regulators at other agencies who work with Fed staff said they’re concerned the Fed may not be sharing vital information.

“They don’t know what they don’t know,” one Fed regulator who works on bank capital and liquidity issues said about FDIC and OCC policymakers.

Siloed regulators who don’t work together and are afraid to challenge conventional wisdom risk missing the same warning signs as in 2007 and 2008, former regulators and Obama administration officials said.

Max Stier, chief executive of Partnership for Public Service good-government group, said employee morale, feelings of teamwork and collaboration and the freedom to speak up about concerns or shortcomings without fear are “all about leadership.”

“Attitudes towards leadership are the most highly correlated to overall engagement and satisfaction of employees,” Stier said. “An organization’s leadership is the biggest factor when it comes to putting employees in a position to do their jobs as best as possible.”

Matching employees’ skills to positions is the second-most important factor when it comes to motivating employees to excel, Stier said.

“Personnel is policy. Executing on your goals depends on effectively managing people, and whether leaders are succeeding in creating healthy organizations or not will tell you an awful lot about whether those organizations ultimately will succeed in achieving their goals.”

As an example, Stier pointed to the FDIC, which had been scraping the bottom of the government’s employee surveys before former chairman Sheila Bair took over in 2006.

“Bair came in and said, this is not how we want the organization to be managed or run,” Stier said. “She then launched a concerted multi-year effort to improve morale.”

The FDIC’s employees now are among the most satisfied government employees, surveys show.

Stier, whose group doesn’t have access to the Fed’s survey results because the law that calls for government employee surveys doesn’t apply to the Fed, said he was disappointed in the survey results. He praised the Fed for conducting the survey. “You can’t manage what you don’t measure,” he said.

The responsibility of turning things around ultimately may lie with Tarullo. The former Clinton administration official, law professor and aide to former Sen. Edward Kennedy (D-Mass.) runs supervision and regulation. In 2011, Bernanke told Congress that Tarullo was “taking the lead” on regulatory matters, while the other six members of the seven-person Board of Governors play lesser roles.

Employees said Tarullo has a view of what the financial system should look like, particularly with respect to large financial groups, and is focused on developing policy that closely matches his worldview. He can be a bully, people who work with him said, and he relies heavily on the opinions of Mark Van Der Weide and Anna Lee Hewko, employees said.

Van Der Weide oversees regulatory policy inside the banking supervision and regulation division as deputy director. Arthur Lindo, senior associate director, reports to Van Der Weide. Hewko, deputy associate director, reports to Lindo.

Van Der Weide and Hewko are said to be part of a close-knit group of key Tarullo lieutenants. Since joining the division in 2010, Van Der Weide has been promoted twice in the past three years, Fed records show.

Hewko manages the Fed’s implementation of the Basel III capital accords, international standards meant to ensure that countries with major financial centers develop similar rules governing large banks, while Van Der Weide oversees the Fed’s implementation of Dodd-Frank. He helped craft the proposal while detailed to the Treasury Department in 2009 and 2010.

Tarullo dislikes holding policy meetings with large groups of Fed staff, current and former Fed employees said. “Tarullo literally likes smaller rooms. He doesn’t want a lot of people in there when he’s discussing issues,” one former official said.

In the past, banking supervision and regulation division leaders would brief members of the Fed’s seven-person Board of Governors in the Fed’s large board room, with a big contingent of Fed staffers seated inside the room listening to -- but not participating in -- the discussions.

That no longer occurs, employees said.

“The staff is so weak that they can’t credibly go to him with alternative views to change his mind,” said one former top banking supervision and regulation division official. “They go to him only with possible solutions that they know Tarullo wants to hear. They play to his biases, rather than looking at nuance and balancing what the Fed is trying to achieve.”

Van der Weide, Hewko and Tarullo all declined to comment through a Fed representative.

“Mark, Art, and Anna Lee are smart, rigorous regulators with enormous personal integrity,” Tarullo said in a statement to HuffPost.

Employees tasked with spotting risks in the financial system also have little trust in their boss, Todd Vermilyea, a senior associate director who oversees risk and surveillance for the banking supervision and regulation division, survey results show. In addition, employees in charge of spotting emerging risks are afraid to speak up, according to the survey results.

Vermilyea, however, had only been in his position for a few months when the survey was taken. The unit had been without a permanent chief for about two years before he took over risk, officials said, and he spent roughly the first year on the job working on the Fed’s stress tests and commuting between his home in Philadelphia and the Fed’s Washington headquarters.

The Dodd-Frank law created a “vice chairman for supervision” role among the Fed’s seven-person board. Congress directed the person occupying the position to develop policy recommendations for the Fed and oversee supervision and regulation. Though Tarullo presently operates in that capacity, three years after the measure was signed into law, Obama has not yet nominated him for the position.

“That lapse unfortunately leaves open the question of whether the administration and the Federal Reserve really appreciate the significance of maintaining the Fed’s supervisory responsibilities over time,” Paul Volcker, who served as Fed chairman from 1979 to 1987, said in May.

“Volcker -- from the top on down -- he took regulation seriously, and we all knew that,” said Cornelius Hurley, a former assistant general counsel at the Fed’s Washington headquarters who now leads the Boston University Center for Finance, Law & Policy. “A lot of responsibility was delegated to you early in your career, so it was a wonderful place to work.”

Several top regulators at the Fed’s headquarters in Washington who helped combat the financial crisis have since left, many for lucrative positions either at leading banks or at consultancies that work for banks. Current regulators fear experienced staffers will continue to leave the Fed for the financial services industry, depriving the regulator of key experience as it finalizes several post-crisis measures and sets about gauging banks’ compliance with new rules.

“A lot of the experienced people who are not afraid to voice their opinion in a manner that’s not viewed as disrespectful have left the Fed, so you have a lot of inexperienced folks at the Fed who don’t know how to deal with sort of complex situations,” one former senior banking supervision and regulation division official said.

In a report to Congress this year, the Fed acknowledged that its abilities to supervise the financial system could be harmed by the loss of experienced employees.

“The [Federal Reserve] Board also faces risks to its operational capabilities through staff turnover, as some staff continue to labor under crisis-levels demands on their time and functional capacity,” the Fed said. “They may leave the Board due to the demanding pace of work, and the Board would have difficulty replacing their specialized skills.”

Among the Fed’s six strategic goals it hopes to accomplish by the end of 2015 include “maximizing the value of human capital.”

“The more proactive approach to supervision reflected in the Dodd-Frank Act has meant re-thinking the type of skills required at the [Federal Reserve] Board, and improving coordination of new and existing skill sets across the [Federal Reserve] System,” the Fed told Congress.

“The success of the Board’s financial stability and supervisory strategy depends on retaining the right mix of skills and expertise, developing sufficient Federal Reserve System capacity, and ensuring high levels of coordination across divisions and across the System,” the Fed said.

Forty-seven percent of surveyed banking supervision and regulation division workers did not agree with the statement, “My job makes full use of my skills and abilities.” The policy unit scored even lower, with just 40 percent of workers agreeing with the skills-match statement.

Fifty-two percent of surveyed banking supervision and regulation division employees said they thought they had career opportunities within the organization. Inside the policy unit, just 42 percent of employees felt that way. Employees who think they have career opportunities inside an organization tend to be more satisfied with their jobs, according to BlessingWhite, which conducted the survey for the Fed.

In its latest annual report on employee engagement, BlessingWhite suggested that employees who trust their managers tend to be more engaged in their work.

The company, which counts Citigroup, Credit Suisse, Deutsche Bank and Charles Schwab among its financial clients, described engaged workers as “enthused and in gear, using their talents and discretionary effort to make a difference in their employer’s quest for sustainable business success.”

Fraser Marlow, head of marketing and research at BlessingWhite, declined to comment on the Fed results.

The Fed is studying the survey results to determine possible changes to boost morale, improve collaboration and ensure that regulators are confident enough to raise concerns without fear. The central bank faces an uphill climb to convince a skeptical workforce.

Only 19 percent of banking supervision and regulation employees agreed with the statement, “I believe that real change will come as a result of this survey.” Just 18 percent of the policy unit said they felt that way.

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