Today, members of the House Financial Services Committee (HFSC) are hearing from leaders of the federal government’s prudential banking regulators: the Office of Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC). The Senate Banking Committee will hold the same hearing tomorrow.
We expect serious fireworks — and not because the Fed held interest rates steady at its last meeting or because legislators have concerns about the regulators’ proposed bank capital requirements.
FDIC Chairman Martin Gruenberg will be subjected to spirited questions in the wake of a scathing, 234-page independent investigation released last week about the workplace culture at the agency. While we won’t spend any time rehashing the troubling contents of that report in this blog post, it is important to acknowledge the investigation and this week’s grilling of Gruenberg could have serious consequences for the FDIC, the Biden administration’s agenda, and the financial services industry.
Let’s examine those, but first, a short reminder about the makeup of the FDIC, how commissioners and chairs are appointed, and their terms of service.
Does The FDIC Chair Serve At The Pleasure Of The President?
As the agency itself explains, the FDIC is an independent federal agency that receives no Congressional appropriations — it gets its funding from premiums that banks and thrift
institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.
It is managed by a five-person Board of Directors, all of whom are appointed by the president and confirmed by the Senate, for five-year terms. No more than three commissioners can be from the same political party. Currently, the FDIC is split 3-2 — there are three Democrats, including Gruenberg, and two Republicans.
Gruenberg has served as FDIC chairman since he was elevated to that position by President Joe Biden in 2022. But he’s been on the FDIC board since 2005 and has been the Chairman of the agency several times before.
While President Biden does have the ability to remove Gruenberg from his position for cause, it is much more likely that, if the atmosphere in Washington gets too hot, Gruenberg will simply decide to resign. Indeed, that is what happened just two-and-a-half years ago when the previous chair, Republican Jelena McWilliams, resigned after a partisan kerfuffle regarding changes to bank merger regulations.
McWilliams’ term was not supposed to end until June 2023. The fact that she left early gave control of the FDIC to the Democrats since President Biden and a Democratic Senate got to fill the slot McWilliams had left. It was at this point that Gruenberg was elevated to chair.
Gruenberg’s current term is his third stint occupying the chair. This point is important since, in the eyes of the public and lawmakers, it makes it more difficult for him to deny he had knowledge of, or should assume responsibility for, the culture the 234-page report outlined.
Republicans Want Gruenberg To Resign, But Where Do Democrats Stand?
Unsurprisingly given the partisan makeup of the FDIC, a number of prominent Republicans called on Gruenberg to resign immediately after last week’s report was released.
Democrats, including HFSC Ranking Member Maxine Waters (D-Calif.), Senate Banking Chairman Sherrod Brown (D-Ohio), and Banking Committee Member Sen. Elizabeth Warren (D-Mass.), have held their fire, meanwhile.
Some HFSC Democrats have indicated their continued support would depend in large part on Gruenberg’s performance on Capitol Hill this week. Rep. Sylvia Garcia (D-Texas) told Politico, “He is accepting responsibility, and he is willing to make the reforms that are necessary … [but] I’m going to wait to see what else happens” in today’s hearing. Rep. Joyce Beatty (D-Ohio) said, “I’m not asking him to step down at this point … [but] if people have to be terminated, they have to be terminated — and I’m not opposed to that with some of this stuff that I’ve heard.” Finally, Rep. Gregory Meeks (D-N.Y.) said, “The report is very troubling, but I’ll hear him out. I plan on asking some hard questions and depending upon what happens, I’ll make a determination.”
As of this morning, only One Democrat, Rep. Bill Foster of Illinois, has called on President Biden to remove Gruenberg. Still, as Politico’s “Morning Money” reported earlier today, the embattled chairman “failed to win the outright backing of a number of House Democrats” after a closed-door meeting last night.
At least seven Democrats on the HFSC reportedly were in that meeting.
Ranking Member Waters is doing her best to make sure that, in spite of last night, support holds today. “Morning Money” noted she circulated a memo before the proceedings began that included suggested questions and talking points. “The document argues that past Republican and Democratic leaders of the FDIC share in the blame for the agency’s toxic work culture,” Politico said. “It also echoes Waters’ public statement last week that the external review unfairly focused on Gruenberg’s leadership without scrutinizing Jelena McWilliams, his Republican predecessor.”
Some left-leaning thought leaders have called for Gruenberg to step down, meanwhile. “The stakes are never too high to fire a regulator so apparently isolated and obtuse about the workplace over which he presides. Especially on a Democratic issue like sexual harassment,” said Timothy Noah, a staff writer at The New Republic. “The toxic workplace environment at the FDIC hasn’t received much attention from the general public, but if Biden does nothing it won’t be hard for Republicans to turn this into a campaign issue. Gruenberg’s got to go now.”
News outlets like The Wall Street Journal also are putting pressure on Democratic lawmakers to abandon Gruenberg.
So, what happens if they do?
What Would Happen If Gruenberg Is Fired Or Resigns?
Federal law says, “In the event of a vacancy in the position of Chairperson of the [FDIC] Board of Directors or during the absence or disability of the Chairperson, the Vice Chairperson shall act as Chairperson.”
Currently, that statute means the Republican vice-chair of the FDIC, Travis Hill, would automatically become the acting chair of the FDIC if Gruenberg were to leave the agency. Such an outcome would create a 2-2 gridlock on the FDIC’s board, likely imperiling not only any future FDIC rulemakings through the November elections, but also any substantive interagency efforts. Efforts to address the power and scope of larger financial institutions through mergers and acquisitions also would be curtailed.
Indeed, the memo sent by Ranking Member Waters to her Democratic colleagues earlier this week outlined exactly what is at stake for Democrats in this controversy. She noted a report from Renaissance Macro Research said, “A 2-2 vote would stall and probably doom politically sensitive banking policy,” including the Basel 3 Endgame capital overhaul, the AFS capital treatment rule, the regional bank long-term debt rule, and an expected proposal on bank liquidity.
Regarding antitrust concerns, the memo said, “It’s time to rein in the economic power of megabanks and put an end to the rubber stamping of bank mergers. Regulators can start by blocking the proposed merger between Capital One and Discover and moving quickly to strengthen bank merger reviews.”
That enforcement would be much less likely to happen under a Chair Hill.
President Biden can, of course, nominate a replacement for Gruenberg as a member of the FDIC and as chair should Gruenberg decide to resign.
Getting someone confirmed by the U.S. Senate just five-and-a-half months out from a presidential election would be nearly impossible, however. As Punchbowl said earlier this week, “If Gruenberg does step aside, the Biden administration will need to move quickly to find a replacement if it wants to try to salvage Democrats’ financial policy agenda. Senate nominations are never exactly easy. But this one would be particularly difficult. … A potential change in White House control being just around the corner will make finding someone willing to take the job that much harder.”
And while the FDIC is hardly the Supreme Court — with its nine justices and, more importantly, their lifelong terms — remember what happened in 2016 when former President Barack Obama attempted to appoint Merrick Garland to the highest court in the land. Then-Senate Majority Leader Mitch McConnell (R-Ky.) said the next justice should be chosen by whomever won the White House in November 2016, and he drew out the process long enough to ensure that happened.
Republicans are not in control of the Senate now, and there is no filibuster to keep senators from taking an up-or-down vote on a Biden FDIC nomination, but with departing Sen. Joe Manchin (D-W.Va.) and, perhaps more importantly, the pro-business – and also departing – Sen. Kyrsten Sinema (I-Ariz.) still part of the Democrats’ majority, the White House would have to choose wisely, and someone from the ideological center, lest the president risk losing their votes.
In other words: is there any Democrat intrepid enough to take on the role of FDIC nominee right now? That is far from certain, and it is why we will be glued to these hearings until tomorrow afternoon.