Trump's FDIC has work cut out for it in repairing culture

Bloomberg News

After months of complaining about the pace and earnestness of the Federal Deposit Insurance Corp.'s efforts to turn around a pervasive culture of sexual harassment and discrimination at the agency, Republicans will soon take the reins of the agency — and custody of the problem. 

Current FDIC Vice Chairman Travis Hill and Board Director Jonathan McKernan — both Republicans — have long called for fast-tracking measures to promote accountability and replace agency leadership after a report by law firm Cleary Gottlieb in April found pervasive instances of sexual misconduct and a retaliatory culture at the agency. 

McKernan said in an interview he believes it is time to turn the page on FDIC leadership.

"In the past, the FDIC has too often brushed wrongdoers under the rug, moved them around, or even promoted them, all with an aim of avoiding the bad press and potential litigation of actually disciplining wrongdoers … that choice wasn't driven by policies, procedures, or training. It was driven by values, and values are set by our leaders," he said. "The truth remains that we can't and won't have real change at the FDIC until we have a fresh start at the top."

Following the report, FDIC chair Martin Gruenberg testified to Congress on the issues in May, but outgoing House Financial Services Committee chair Patrick McHenry, R-N.C., and other Republicans have since criticized him for what he sees as insufficient transparency and his rumored temper towards employees.

After the hearing and amid mounting calls for his resignation, Gruenberg announced he would resign from the agency when the White House nominates and the Senate confirms a replacement. The structure of the FDIC is such that the agency would be deadlocked along party lines if Gruenberg had left before a successor was confirmed. 

The White House tapped Goldsmith Romero to replace Gruenberg, but outgoing Senator Sherrod Brown, D-Ohio — who chairs the Senate Banking Committee — has since signaled doubt that Romero's nomination will advance before the next Congress is seated.

With Trump's victory, many in the industry say Hill is the heir apparent, but the Trump transition team has yet to formally announce its nomination for FDIC chair — a position that is typically predicated on appointment and consent of a Treasury Secretary. The Trump transition team has not yet named a nominee for this key position. 

Joseph Lynyak, a partner at Dorsey & Whitney, acknowledged Gruenberg's leadership during bank failure in 2023, but agreed that a change in top brass at the FDIC is one step toward remedying the misconduct. Gruenberg has been on the FDIC board since 2005, having been confirmed as chair by the Senate twice and served as interim chair on other occasions. 

"I think [Gruenberg] did a yeoman's job during the series of bank failures when he was a senior person. But you can also make an argument that somebody being in a senior agency position for that period of time, you lose track of perspective," he said. "There's going to be a Republican [chair] and whether or not they institute the proper cultural changes remains to be seen, but I'm frankly very hopeful."

Others say real culture change requires cleaning-house at the senior staff level. One attorney who asked not to be named when talking about sensitive internal FDIC matters said that many of those eligible for retirement may leave after Gruenberg's departure out of uncertainty about what direction the agency will go. 

Industry observers said FDIC vice chair Travis Hill — known for his pragmatic approach to difficult issues — would be a good candidate to lead the beleaguered independent agency after Gruenberg leaves. Lynyak said that is in part because many of the issues detailed in the Cleary report happened in regional offices over a period of almost two decades, creating an amorphous cultural problem that emerged over time and will take time to correct.

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"It is a structural issue that arises based upon how bank examiners co-examine banks, and the the amount of constant contact … there's probably got to be very strict enforcement of rules in terms of the way that people treat each other, which is done in American businesses now," Lynyak said. "It probably got ignored, I would say, on the regional level."

The next phase of the agency's cultural change will involve addressing deeper and systematic issues at the FDIC, says Alexandra Barrage, a partner at Troutman Pepper and former FDIC executive. While the glaring and headline-making conduct detailed in the report had been happening far away from headquarters, there are ongoing issues around staff morale, including the agency's remote work policies. 

"I know senior people with years of experience who unfortunately left the FDIC because of an inflexible attitude towards [remote work]," she said. "The FDIC's new chair should have a clear vision for implementing steps to improve staff morale across the agency."

Hill recently suggested the FDIC board establish a Board Committee, independent from the chair, to oversee our response to the workplace culture challenges. The measure failed with a lack of support from the Democrats on the board.

Given the overwhelming evidence of problems at the agency, Attorney Gregory Lyons of Debevoise and Plimpton said the incoming chair will be expected to right the course at the agency.

"They know they're going to be under a microscope as the Republicans taking over the FDIC," he said, adding there may be additional congressional inquiries coming. "And they'll want to demonstrate — for political reasons, in addition to just being the right thing to do — that they are continuing that rehabilitation work."

Barrage says she is seeing positive signs, like the FDIC's recent decision to tap Carrie H. Cohen, partner at Morrison Foerster LLP, to serve as the agency's independent cultural transformation monitor. But while part of the challenge is reforming the behavior of the current staff at the FDIC, another related challenge is creating a workplace that will attract new employees — whose ranks are already thin, she said.

"Carrie Cohen's involvement is a positive step, but there's a lot of work to be done across FDIC leadership. It's not just about improving staff morale for current staff," she noted. "It's also about recruiting people to the FDIC who are committed to the mission and want to serve."