WASHINGTON — Bipartisan concerns about
Jaret Sieberg, a Washington analyst at TD Cowen, said the sprawling timeframe of the allegations outlined by the Wall Street Journal last week — allegations that span at least a decade and several regional offices — weaken the political case for Gruenberg's resignation. The fact that Travis Hill, the Republican vice chair of the FDIC, would assume the interim chairmanship upon Gruenberg's resignation would make the administration even more loath to push him out, Sieberg said.
"It never seemed likely to us that Gurenberg would resign, as we believe Democrats would not want to lose control of the agency [and] media reports suggested these workforce troubles may have been worse under Jelena McWilliams, the former chair," Sieberg said. "That matters, as Hill served as McWilliams' deputy for policy."
Todd H. Baker, a senior fellow at Columbia University said past FDIC chairs also shoulder the blame for insufficiently addressing workplace culture. But even without Gruenberg's resignation, the scandal could nonetheless slow the agency's efforts to get capital rules out the door.
"The problems at the FDIC took place under several chairs, two of whom were women. The issue is pervasive agency culture problems over many years," he wrote in an email. "The investigation and publicity will hurt the Agency's standing with Congress and will provide more ammunition for industry efforts to slow down pending capital proposals, but won't itself be determinative."
If the FDIC chair were to be vacated, Republican Vice Chairman Travis Hill would take over as chair, leaving the FDIC with a 2-2 deadlock partisan makeup until the Senate confirms a Biden appointee — an already-deliberative confirmation process that Senate Republicans would be highly incentivized to delay.
"The fate of Gruenberg and Hill are tied together," Seiberg added. "If House Republicans want to investigate Gruenberg, then Senate Democrats could probe Hill. It would likely become mutual assured destruction."
Dennis Kelleher, CEO of Better Markets, also noted that the FDIC dealt with the allegedly abusive workplace issues under the leadership of both parties, which weakens the argument that the workplace culture is solely to be attributed to Gruenberg.
"There are only two reported topics related to Chair Gruenberg: One, an informal complaint from 2008 — 15 years ago — that he allegedly got overly angry about an issue, which did not result in a finding of wrongdoing; the other is that when he became Chair in 2022, he should have done more about the IG report from two and a half years earlier in 2020 when Republican Jelena McWilliams was Chair."
Ian Katz, an analyst with Capital Alpha Partners, said a major incentive for Gruenberg to stick around is the fact that his departure would delay and complicate the release of the bank regulatory agencies' Basel endgame rule — one of the most important bank regulatory agenda items this administration. He said the pressure to resign, however, could increase if the investigations uncover more damning evidence.
"Marty Gruenberg is more likely than not to withstand the Republican pressure on him to resign, [but] more bad news would make it more difficult for him to stay," he said.
The political controversy comes at a time when the FDIC has a variety of pending consequential rulemakings including capital hikes, long-term debt requirement and a resolution planning revamp.
The bank agencies' joint capital rule — which implements the Basel committee's most recent global capital standards — would make major changes to the current U.S. risk-based capital framework for roughly 40 of the nation's largest banks. While the banking industry has long opposed the measure as unnecessary and potentially harmful for consumer lending, regulators have portrayed the rule as a responsible tradeoff: Improving banks' resilience over the long term in exchange for what regulators expect would only be a marginal increase to the cost of loans.
Regulators were already facing
House Financial Services Committee Chairman Patrick McHenry and fellow House Republicans have since
"If that's the end of the bad-news cycle for Gruenberg and the FDIC, he can probably survive," Katz said. "But that's a big if."
Democrats, including Senate Banking Committee chair Sherrod Brown, D-Ohio, have also called for the FDIC's Office of the Inspector General to conduct an investigation into the workplace culture.
"That's a way for the Dems to show they're taking the workplace accusations seriously without asking Gruenberg to quit," said Katz.
Since then, the FDIC has established what they call an independent special committee to oversee an independent review of the agency.
Kelleher said the potential for Hill to take over at the FDIC presents Republicans and banking groups with a ripe opportunity to slow down the agency's implementation of new rules.
"Their goal is to use these very serious issues as a pretext to pressure chair Gruenberg to resign," he said. "The longer it takes, the better it is for the industry, because every day a rule is delayed is a victory for the industry. Pushing finalization past the election is always the goal, in the hope they can get a change in administration and therefore regulators."
Katz notes that, while partisan attacks are unpleasant but manageable, if the calls for resignation become more bipartisan and based on demonstrable wrongdoing by Gruenberg personally, they could be a real deciding force for the Chairman's future.
"Once a floodgate is opened, it's hard to shut. Republicans smell blood in the water and will keep pushing Gruenberg to step down," said Katz. "The thing to look out for would be wavering support among Democrats."
Some experts like Karen Petrou of Federal Financial Analytics think the rules will get done with or without the current chairman.
"Even if the FDIC can't pull itself together, the Fed and OCC could issue new capital and long-term debt standards all their own that apply to the [Insured Depository Institutions] they govern and the parent companies of FDIC-supervised IDIs no matter what the FDIC thinks of them," she wrote in a note. "The [Fed] and OCC won't want to do this, but they can do this, and indeed they've done it before."
Others, like Todd Phillips, a former FDIC lawyer, aren't so sure. He notes the banking regulators all effectively move forward on rules in tandem to avoid regulatory gaps and 'charter shopping.'
He finds it hard to believe the slate of regulations would move forward without the FDIC on board.
"This is a practice that they started doing after the financial crisis," he said."It would be surprising, if not inappropriate, to see the Fed or the OCC move forward on rules for IDIs on their own without the FDIC."
He added that because the Fed is the sole regulator of bank holding companies, it could be appropriate for the Fed to implement rules just for those firms, even if the agencies don't move forward on rules for FDIC overseen IDIs.
Kelleher is also skeptical about the prospect of the other two agencies going without the FDIC board.
"The Fed and OCC will be reluctant to move forward on such key issues as raised by Basel III without the FDIC," he wrote in an email. "On the other hand, those issues are so important, there will be — and should be — pressure on the Fed and OCC to move forward without the FDIC."
Kelleher said unfortunately much of the political footballing distracts from the real issue: The years-long failure of FDIC management to properly investigate, punish, and stop sexual harassment. That's something that was detailed in a 2020 FDIC
Kelleher says her leadership team — which included Hill, who served as McWilliams' chief of staff — failed to take appropriate action upon receipt of that report
"That's the real story that merits a thorough and independent investigation," Kelleher said. "However, in an attempt to re-write history, Republicans want to blame Chair Gruenberg for everything and are hoping the media will ignore the facts of the IG report and the failures of McWilliams, Travis Hill, [her] chief of staff, and those who should have ended the sexual harassment and abuse in 2020."
