Despite experiencing the second, third, and fourth biggest bank failures in U.S. history, the prospects for major legislative changes over banking regulation look dim. However, a more modest change enjoys bipartisan support. Senators Elizabeth Warren and Rick Scott (not exactly a couple of centrists) have co-sponsored legislation (S.915) to change the Inspector General function for the Federal Reserve. Would this proposed change lead to meaningful improvements? The proposal may make sense – in theory. However, I see some practical impediments that might make things worse.
Inspectors General (IGs) are (supposedly) independent and nonpartisan officials tasked with detecting fraud, abuse, and mismanagement within federal departments and agencies. There are 74 IGs, with most falling into one of two categories: Presidentially Appointed and Senate Confirmed (PAS) and Designated Federal Entity (DFE). Agency heads appoint DFEs. PAS IGs are slightly more common (33) than DFEs (31). The Fed’s IG is a DFE. However, the IGs for Treasury (which would include oversight for the OCC) and for the FDIC are both Senate-confirmed Presidential appointees. Making the Fed’s IG subject to Presidential appointment would bring the function more in line with that of other financial regulators.
Supporters of S.915 argue that converting the Fed IG to a Presidential appointee would make the function more independent and accountable. Appointment by the President, rather than the agency head, puts more space between the auditor and the audited. Only the President can fire a PAS IG, while the Fed’s Board of Governors (by two-thirds vote) can remove the Fed’s IG.
A PAS IG makes more sense for agencies with insular cultures, and the Federal Reserve seems more insular than most. Senator Warren has pointed to ethics “scandals” and the Fed, which include trading activity involving Chair Powell. Jay Powell’s blind trust made some trades during a blackout period, which shows some carelessness but otherwise strikes me as a bit of a nothingburger. Still, that audit must have been more than a bit awkward. IG reviews of more serious allegations involving Federal Reserve District Bank Presidents are still in progress.
Supporters of S.915 have also pointed to the failure of Silicon Valley Bank. There’s certainly a lot to criticize there. The Board’s internal assessment of the San Francisco Fed’s supervision function as either “effective” or “strong” for each year from 2018 to 2022 is a good place to start. Bear in mind, though, that the FDIC was the primary federal regulator for Signature and First Republic. A PAS IG didn’t prevent those failures.
Another example of this insularity involves the Fed’s IG himself. IG Mark Bialek sent a letter to Senators Warren and Rick Scott describing his opposition to S.915. Bialek also posted the letter on the Fed IG’s website. It’s extraordinary for a career federal employee to publicly lobby Congress to protect his job. I speak from some experience as I’ve had my position eliminated by Congressional action – twice. I can empathize with Bialek’s sense of helplessness and desire to set the record straight regarding legislation that he may consider counterproductive and dumb. Federal employees usually must leave that task to the agency head or to the union. Neither option was available to Bialek. Getting support from Jay Powell would further make the case that the Fed IG lacked true independence.
Bialek’s letter was not well received. Warren and Scott fired back with a letter of their own. The letter accused Bialek of “falsehoods” and “greedy self-preservation.” The Senators toned down the rhetoric during the in-person hearing, but the substance was similar. Perhaps 30+ years as an examiner gives me a contrarian instinct. Taken by itself, Bialek’s letter suggests an inflated self-regard, bordering on arrogance. But I found the senators’ grandstanding self-righteousness even more off-putting. To be fair, grandstanding self-righteousness appears to be Senator Warren’s go to move.
A fundamental problem with the bill is that it tends to assume away political dysfunction and labor market realities. Our hyper-partisan political environment isn’t very good at filling independent, non-partisan positions. The FDIC has an acting IG. The Treasury has had an acting IG since 2019. The example of the Merit Systems Protection Board is even worse. The MSRB lacked a quorum from January 2017 until March 2022, and operated with zero board members for three years.
A Presidential appointment or Senate confirmation hardly assures appointments with the right background and temperament for the job. Consider the case of Janet Rehnquist (the daughter of the late Chief Justice), who was appointed HHS IG by President George W. Bush. Rehnquist ordered the delay of an audit of Florida’s pension fund at the request of Gov. Jeb Bush’s office and purged the HHS IG of all six career deputies. Following bad press and increased scrutiny from Congress, Rehnquist decided to spend more time with her family.
Senator Warren makes much of the point that the Fed Chair currently has the power to fire the IG if he wishes. That’s not quite true. Removal of the Fed’s IG requires a two-thirds vote of the entire Fed Board. That’s more protection than is afforded PAS IGs. A President can remove an IG unilaterally; he merely needs to inform Congress. This is not just theoretical authority. Way back to 2020, President Trump removed IGs at five cabinet departments in a period of six weeks indicating that “we’ve been treated very unfairly by inspector generals.” He saw independent oversight as a tool of the deep state.
Then there is the matter of compensation. Conversion to a PAS IG would involve a substantial salary cut for Bialek or his successor. Bialek’s currently makes $378,000 per year and S.915 would reduce the Fed IG’s salary to just over $200,000. Bialek pointed out that the salary decrease would make it difficult to recruit and retain talent. Bialek is hardly a disinterested party but I find the senators’ characterization of the point as merely “greedy self-preservation” both disingenuous and hypocritical.
Members of Congress make only $174,000 per year but that figure is misleading. For example, Senator Warren has earned an average of $433,000 per year in outside income over the past ten years, primarily from writing. That sort of lucrative side gig would not be available to most career government employees. At least Warren’s financial disclosures are more transparent than most. Then there’s Rick Scott. Scott’s tenure as CEO of Health Corporation of America made him a very wealthy man. While at HCA, Scott oversaw the biggest Medicare fraud in U.S. history and wound up with a multimillion-dollar severance package when he was forced out. Not someone in a position to lecture about greed.
Warren and Scott went on to characterize as “absurd” the idea there “would be no willing takers for a prestigious Inspector General position with a salary that would pay them more than nearly 90 percent of American households.” Two points worth noting here. First, Bialek never indicated there would be “no willing takers.” Instead, he wrote that the lower salary structure for PAS IGs “deters experienced, high-quality candidates from seeking the position.” That statement is a lot less “absurd” than the strawman the Senators presented. Second, in the words of the late comedian Joan Rivers, grow up! Spare us the faux populism.
Someone taking a pay cut to $200,000 is unlikely to elicit much sympathy. But it’s worth noting that PAS IG salary is about that of a first-year associate at a top law firm. (Most IGs have backgrounds in law.) It’s also below the salaries of many senior examiners or of senior career employees in the IG office. Who wants to be promoted to IG if it involves a substantial pay cut?
Examiners frequently reference the “stature” of control functions at a bank. The term is hard to define, but is usually based on some combination of capabilities, independence, and respect. The concept of stature also comes up with government agency positions. S.915 presumes that Presidential appointment and Senate confirmation confers some stature upon the appointee. That may be the case with an agency head, since it signifies the leader’s actions have the imprimatur of the Administration and at least the consent of the Senate.
IG appointments are different. Making the IG a Presidentially appointed position may make the position more independent (from the Fed) but also likely more partisan. That’s especially important considering the Fed IG’s oversight of the Consumer Financial Protection Bureau. Views on the CFPB differ sharply across party lines, and I could easily see IG oversight of the CFPB ranging from soft to vindictive, depending on which party is in power. More generally, how much stature does a function have if it goes for years without a permanent head?
The Federal Reserve System may be too far removed from political considerations or accountability. Neither monetary policy nor banking regulation are entirely objective. It’s a fantasy to see Federal Reserve policies as developed entirely by wise men and women far from the madding crowd. But policies differ from controls. Rooting out fraud, abuse, and mismanagement should not depend on political party or ideology. I don’t see how making the IG position more partisan or less financially attractive improves things.