In the Eye of the Storm

As comptroller of the currency from 2005 to 2010, John C. Dugan had a front row seat at one of the scariest movies that financial regulators have watched since the Great Depression. The “movie,” of course, was the financial crisis of 2008 (an appropriate Hollywood title would be “The Monster that Ate Wall Street”), and the comptroller has regulatory authority over many of the largest U.S. banks, including the bank subsidiaries of Bank of America Corp., JPMorgan Chase & Co. and Citigroup.

We all know the script by now. The collapse of the country’s home mortgage market sets off a chain reaction that begins with the failure of IndyMac Bank and is soon followed by the bankruptcy of Lehman Brothers and collapse of Washington Mutual Bank (Wamu)-the most expensive bank failure ever. Three other large institutions-Wachovia Corp., Bear, Stearns & Co. and Merrill Lynch & Co.-are sold off in what amounts to shotgun weddings. These convulsive shocks to the U.S. financial system reverberate throughout the global economy. It was a frightening time for regulators like Dugan.

We’ll never know for sure, but the crisis might have brought us that close to Great Depression II.

Dugan served out his five-year term and left the Office of the Comptroller of the Currency (OCC) in August 2010. A graduate of the University of Michigan and Harvard Law School, Dugan has spent most of his career in Washington, DC, beginning with a stint as minority counsel for the Senate Committee on Banking, Housing and Urban Affairs. He later moved over to the U.S. Treasury Department as under secretary for domestic finance, then spent 12 years in the private sector as a banking lawyer and lobbyist before being appointed to the comptroller’s post by President George Bush.
In August 2005, the U.S. economy was riding high thanks in large measure to a booming housing market, and large U.S. commercial and investment banking companies-which helped drive an explosion in mortgage finance activity-were in tall cotton. Dugan would be an extraordinarily prescient man if he had known or even suspected what lay ahead.

Dugan had already left the OCC when he sat down with Bank Director for an extensive interview in the comfortable living room of his suburban Washington home. Dugan offered his thoughts about the landmark Dodd-Frank Act, which he believes is likely to bedevil the banking industry for years to comeu2013although he believes there are some redemptive aspects to the legislation as well. Dugan also strongly defended the federal bailout, including the controversial Troubled Asset Relief Program despite some of its inconsistencies and early stumbles, arguing that the aggressive actions taken by Treasury Secretaries Hank Paulson and Tim Geithner, and Federal Reserve Board Chairman Ben Bernanke, kept the U.S. economy from spiraling into a depression.

Dugan also says it’s imperative that Washington rebuild the mortgage finance market in a way that does not rely as much on asset securitization, but makes it easier for banks-including smaller community banks-to hold home loans on their balance sheets. And in what might be his most controversial statement-and one that many bankers might not be pleased to hear-Dugan argues that regulatory agencies like the OCC should enforce minimum loan underwriting standards for the good of the industry-and one might add, the country. Had the regulators prohibited some of the more dangerous mortgage products like zero-payment option-ARMs, or required lenders to adhere to a strict income verification rule, the mortgage industry might not have self-destructed the way it did.

When Bank Director caught up with Dugan in late October of last year, he had not yet decided on what his next ca-reer move would be. “I’m thinking about a lot of things,” he said at the time. “I’ve enjoyed some time off after that quite intense period. I have been giving a few speeches around the country and taking my time looking at opportunities going forward. There’s a lot of concern about the increased regulation that’s coming into the world, and a lot of opportunity for someone in my position.”

Indeed there is. Dugan subsequently announced in December that he was returning to Covington & Burling in Washington DC, where he practiced law before his appointment as comptroller-and who better to safeguard your chicken coop against predators than an old fox who knows his way around the barnyard.

What do you think the impact of the Dodd-Frank Act will be on the industry long term? And will it be effective in preventing a financial crisis similar to the one we had two years ago?

There are some things in the Dodd-Frank bill that I think are critically important not only to help avoid a crisis in the future but to deal with one if it should arise. One of the problems we had was a regulatory system that was very intensively focused on banks, but not so focused on non-bank financial institutions. And a huge part of the crisis started outside the banking system in very highly leveraged and under regulated companies like the big securities firms, American International Group and even the big thrift holding companies like Wamu, which did not have the same level of regulation as the bank holding companies. A big part of what Dodd-Frank does is say that we can’t have that system in place again. We can’t ever put the financial system of the country at risk by not having the ability to go in and see what’s going on at financial institutions as they get larger and to regulate them intensively like banks if they become systemically significant. The Dodd-Frank bill does that.

First, it says that the federal government, working through the Financial Services Oversight Council, can get information from any financial institution to determine if there are risks that threaten the system, and no institution can say no to that. And second, if the council determines that a company has become systemically significant, then it will become subject to very intense bank-like regulation. And I think that is a very fundamental reform that has not been focused on as much because it was a non-controversial piece of the legislation, although I do think it’s really quite critical for the future. So that’s point one. Point two is that there will be, partly from Dodd-Frank and partly from just what we learned in the crisis, an intense focus on raising equity capital and liquidity levelsu2013particularly at larger institutions around the world. A third thing it did was try to build an orderly resolution regime for companies that get into a crisis so that we don’t have this terrible conundrum of either creating a train wreck by failing an institution, or protecting stakeholders beyond the protection they would get in a bankruptcyu2013the too-big-to-fail issue.

I hope this new approach works better. It’s a bit of an experiment and there’s always going to be a trade off between having a regime to resolve insolvent or critically illiquid financial firms, on the one hand, and having the tools the government needs to arrest a financial crisis that is caused by these failing firms. I think there’s going to have to be more work done on this to make the new orderly resolution regime function correctly, but I think it’s critically important.

What don’t you like about Dodd-Frank?

Dodd-Frank had some very important reforms in it, but because it was enacted in the political climate that it was, many different actions were taken that were cumulative in ways that will dramatically increase regulatory burden going forward. I think that’s going to be a hard thing for the industry to deal with over time. Part of the problem is that so many different regulations have to be put in place.

Most of these are aimed at larger institutions, but there will be plenty of spillover to smaller banks and there is tremendous uncertainty about how they all will fit together. There’s also this great expectation in the wake of this massive bill that a lot is going to happen right away, but it’s not. It’s going to take time. It’s going to take more time than the legislation envisions and regulators are just going to be overwhelmed trying to comply with all the deadlines for implementing literally hundreds of rules. So I think there will be significantly more regulatory burden, although it will take time for that to play out.

I also think there will be some mid-course corrections along the way where legislation passed in the heat of a politically difficult climate will be exposed as having gone too far and will need to be adjusted. I’ll give you one example. There was a provision in Dodd-Frank that prohibits regulators from relying on credit ratings because of the problems we had with them, including in structured credit products where there were undeniably some very significant credit rating problems. But there have been other instances where credit ratings have worked very well over a long period of time-for example, the ratings for corporate debt-and that has allowed regulators to appropriately rely on these ratings. So, one test for allowing community banks to make investments in corporate debt has been whether the debt is highly rated, and that regulation has worked well.

If you say that bank regulators can no longer rely on those ratings, community banks will have to perform a top-to-bottom credit analyses on a big company like General Electric in order to invest in its debt, and that doesn’t make sense. It’s going to be hard for regulators to come up with a substitute that’s going to work. That’s not to say that there weren’t fundamental problems with some credit ratings, and that regulators shouldn’t reduce their reliance on them wherever possible. But an absolute elimination goes too far.

Can you give me a few more examples where the bill went too far and created new regulatory burdens that are not justified by the benefit?

I think regulating debit fees-the cost of fees and the kinds of fees that can be charged-went too far. We have a long history in this country of not regulating fees or amounts charged, but instead regulating the manner in which ser-vices are provided, and then allowing the market to set prices. The provision in the bill that regulates the price of debit fees was a significant departure from this paradigm. I think it will be potentially harmful to a number of banking institutions in ways that I personally don’t think is appropriate.

Another example arises with the new Consumer Financial Protection Bureau (CFPB), which has generated a tre-mendous amount of controversy. It doesn’t have a lot of new regulatory powers if you really look at it, except the ability to define products as “abusive” and broader disclosure authority. Most of its powers come from statutes that are already on the books. Now, I think it’s a good thing to have one agency writing the rules that apply across the board to everybody that’s engaged in a particular kind of activity, not just banks. But whether this agency uses its power aggressively in ways that become defacto fee regulation is a bit of an open question. It’s going to depend on who gets the job as the agency’s director and how that person performs that job. I know many bankers are fearful about that, but we’ll have to see how it plays out over time. However, I think there will be significantly more consumer protection regulation and enforcement over time, because that’s clearly what Congress wanted.

Prior to passage of Dodd-Frank I believe you had some concerns about whether an independent consumer protection agency would interfere with the ability of the OCC to regulate for safety and soundness. Are you comfortable that all the wrinkles have been ironed out in terms of how this new agency will work with the OCC and the FDIC?

Well, my position had long been that it was a good idea to have a single rule writer setting the consumer protection policies for all companiesu2013not just banksu2013that provide a particular type of financial product. So that part of the CFPB I never objected to. I do believe it would have been a good idea to have structured the CFPB in a way that bank regulators could have input onto the rules that are being written. Unfortunately they did not do that. In fact they went in the other direction by placing the head of the CFPB on the FDIC board where he or she will have input on safety and soundness issues, which makes a lot less sense to me.

Now, in terms of supervision and enforcement of consumer protection rules, I don’t think that was where the prob-lem was. Bank examiners are good at enforcing rules, and I’ve never bought into this idea that a conflict exists be-tween consumer protection and safety and soundness. I do believe that by being in the institutions more regularly examiners have a better feel for what the institutions do and how they do it. My fear has always been that by taking that power away from bank examiners you will just create redundancy because a separate agency that doesn’t know the institution as well will now have to go in and try to learn about the institution separately and that’s not an efficient way to regulate.

But even more importantly, I think the enforcement authority of the new agency ought to be focused on non-banks because we already have a mechanism for banks, which is the bank examiner. You’ve got to hold financial providers accountable-I get that. But the non-bank piece of consumer protection enforcement is much more difficult because you don’t have an examiner-based enforcement regime in place-and nonbanks were the part of the system that was clearly broken with subprime mortgages and a bunch of other problems. The CFPB will have responsibility for non-banks, but the worry is that it will focus more of its time on banks and less of its time on the nonbanks, and even if you have the same rules you won’t have them implemented in the same manner. Congress made a judgment that that argument made sense with little banks but not with big banks. So with community banks with $10 billion dollars in assets or less the consumer protection examination function will still stay with the bank regulators. For larger institutions I think they’re going to have this problem of regulators running into each other and duplicative things going on, which is unfortunate.

But the bank regulators will adjust, and the one thing I will say about it is that it will get bank regulators to focus more on safety and soundness issues and hopefully that will allow them to do that job even better. But I think it will be harder for the banks themselves.

The OCC was criticized for not being a strong enough consumer watchdog during the home mortgage boom. How would you react to those who would say it’s good that we have an independent consumer protection agency because the bank regulators weren’t doing the job to begin with, so have them focus just on safety and soundness and let another agency be the consumer watchdog?

I understand the argument, but I don’t think it’s the right view of what happened historically. The OCC did not have rule writing authority in this area. We did not write the rules; we implemented the rules. And I think the problems that occurred were less because bank regulators didn’t enforce rules that were on the books regarding banks, and more because the rules themselves were not as rigorous as they should have been, which is the job of a consumer protec-tion rule writer. In the case of consumer protection for mortgages, I still think that by far the most poorly underwritten mortgages came from outside the banking system. But I want to step back and say one other thing. This is not a popular thought, but I believe it to be true.

I don’t think the lack of consumer protection was at the heart of the financial crisis. I think there were many legitimate complaints and concerns about consumer protection, but to me that wasn’t really what caused the big problems. The big problems were caused by a failure to put in place strong prudential underwriting standards across the board, especially for mortgages. And to me, poor underwriting standards is not a consumer protection issue-it is a safety and soundness issue. And I would add that the problem was compounded by the fact that so many of the loans were sold and not carried on bank balance sheets and as a result the normal prudential system of safety and soundness broke down because the normal focus of bank regulators is on the risks that sit on bank balance sheets. The heart of the problem was that we should have had better underwriting standards at the point of sale with the consumer.

Obviously banks have an interest in making good loans. But isn’t it an indictment of the bank regulatory system that it did not impose the demanding underwriting standards that you are referring to?

Yes and no. I definitely think that the regulators should have done more in the area of minimum underwriting stand-ards. I think we just lost our way as a country. But in defense of the bank regulators, I would say that underwriting standards were always much better for the loans that the banks held on their own books. Where the standard was not as high was on loans they sold to third parties. It was harder to enforce minimum mortgage underwriting standards on institutions that were selling loans to third parties. And if we had enforced a minimum underwriting standard the banks would have complained that they would lose the business to third parties who were underwriting substandard loans. And so the lesson here is you have to have rules that apply across the board so that you don’t have business migrating out of the banking system. And secondly you have to have standards that apply evenly whether they’re held on the books or whether they’re sold.

And there really is no prudential regulator for the securitization market, is there?

That’s correct, although a better way to say it is that regulation was really fragmented and uneven and nothing like what applies to a bank. The Federal Reserve did have authority to set some rules related to subprime loans and later did so, although they have been criticized for not doing so earlier. The rules applied to nonbank affiliates of bank holding companies that made subprime loans were not the same as what applied to a bank holding company’s bank subsidiary. And there were certainly no regulatory requirements that applied directly to the mortgage broker on the ground, nor was there an enforcement mechanism that applied to them when they sold loans to a securities firm that then packaged them and sold them to third parties. In essence, the credit rating agencies became the underwriters because investors were willing to put money in mortgage-backed securities based on the strength of credit ratings. And when the credit rating agencies got things badly wrong it rippled throughout the system.

Do we wait for the mortgage market to heal itself?

Oh no. I think you absolutely have to do something because the current effective nationalization of the mortgage market is not a sustainable model for the United States for the future. I think it’s clear we cannot go back to the days of what Fannie Mae and Freddie Mac were before, which were publicly owned companies with an implicit federal guarantee. But I also think we can’t go in the other direction and have a federally guaranteed and nationalized mortgage market because that is not a good solution for the future. So there is a process of reform that’s going to have to be taken up. We’ve put it off during this crisis, which I understand, but everyone’s agreed that we have to take this problem up and figure out how are we going to go forward and get the financing of home mortgages back to the private sector in ways that don’t unduly disrupt the housing finance market.

A huge part of the mortgage finance market was built on the notion of securitization and there’s a real question about whether that market can come back anywhere near what it was without government support, and if you need explicit government support you’re back into this question about whether it should be nationalized. Part of the problem is that mortgage finance was built on a securitization model, but another part of the problem is that our country has become addicted to the 30-year fixed-rate mortgage with no prepayment penalty, which is a very difficult asset for a bank to hold. So if you can’t hold it, it forces you towards a securitization model. I think it is really imperative as we go forward that policymakers take a hard look at what works in other countries. And the one I always look at is Canada, where they had a market that’s not dissimilar from ours-their home ownership levels are pretty similar to ours-but they did not have a mortgage crisis. They don’t have much of a securitization market; institutions hold the assets on their balance sheets.They do have government involvement in that there is a federal insurer up there that takes a piece but not all of the credit risk, and they do it in a way that banks can still hold the assets on their balance sheets, including-and this is an important point-smaller banks. Mostly they have large banks in Canada but there’s no reason why smaller banks couldn’t also hold mortgages under a similar system. However, they don’t have 30-year, fix-rate, no-prepayment penalty mortgages. We ought to look harder at this model.

And this dovetails into a different concern that I have about the future of the banking industry. Community banks don’t have enough products to put on their balance sheet and as a result they tend to overly concentrate in assets like construction and real estate development, which gets them in to trouble every time there’s a real estate recession. It would be a solution well worth exploring if there were a way to get community banks back in the mortgage business through a model that allowed them to hold more of those loans on their balance sheet in a safe and prudential manner. That might mean having to look at the kinds of mortgages that Americans are used to, and that’s going to be hard. No easy choices here but fundamental choices are going to have to be made because the current state that we have is a disequilibrium that needs to be fixed.

Do you think the community-banking model is sustainable in the future because of this lack of product diversification?

Commercial real estate loan concentration is something we spent a lot of time on at the OCC and it was a little discouraging in some ways. We had a bunch of examiners who came up through the 1980s and saw what happened in Texas and Oklahoma and even the Northeast with bad commercial real estate loans, which basically wiped out parts of the industry. So it wasn’t like examiners didn’t see this part of the problem coming again with the high levels of concentrations identified before the most recent crisis. The OCC and the other regulators spent a lot of time trying to figure out how to deal with this issue as community banks began to get more involved in real estate. Interestingly, the last real estate crisis was more heavily concentrated in mid-size and larger institutions; this time it was more in community banks because on the liability side, in the services they provide and on retail credit it has become harder for community banks to compete. They’re basically left with commercial lending and there the hard part is that the biggest margins were smaller commercial real estate loans. The problem was not that they were in those businesses; it was that a number of banks got overextended in them and the system allowed that to happen. We as regulators were reluctant to put in hard concentration limits and got excoriated by the industry for even suggesting stepped up standards for institutions that had higher concentrations. But you just can’t have a system where institutions have 1,000 percent of their capital in commercial real estate loans, and particularly where they fund it with broker deposits and also when you do it with newly chartered de novo institutions. I think that part of the community-banking model is broken, but I also think you can scale part of that back while still allowing community banks to do a lot in the com-mercial real estate business. But if you allow them to get that concentrated and funded with hot money you are going to keep putting the industry at risk and causing the massive deposit insurance losses for the fund, losses that weren’t caused by failures of larger banks. Those losses were caused by smaller banks that had these excessive concentrations. There has to be a better policing mechanism for this concentration risk. Policymakers haven’t come to grips with that yet because they’ve been focused on many other things. But do I think that the community bank model is still viable? I do, it’s just going to have to evolve and not be as out there on some of those extreme forms of concentration as was true in the past.

How well do you think Washington-including Presidents George Bush and Barack Obama and Treasury Secretaries Hank Paulson and Tim Geithner, along with the bank regulators-handled the financial crisis?

I would say hugely successful as a policy matter, and completely unsuccessful as a political matter. We are in this counter factual world where the success of the government efforts are not based on things being great today, because they aren’t, but on them being far better than what they would have been if the government hadn’t taken the steps it did during the crisis. Making this type of counter factual argument is always hard to do politically when things are not great, but it’s the truthu2013things really would have been much, much worse if the government hadn’t taken the extraordinary steps that it did. As Chairman Bernanke recently said, we wouldn’t be talking about 10 percent unemployment now, but 25 percent, or Great Depression levels. And we can all argue about the steps that should have been taken leading up to the crisis. But in terms of crisis management and acting aggressively to get money into the system, the fact that the government was able to stave off the crisis and do so in a way that did not result in the massive nationalization of the largest institutions in the United States-which could have happened at great cost to the taxpayer-I think is a huge success story. I think things would have been much, much worse if the government hadn’t acted as aggressively as it did.

We made some mistakes, but at the critical times actually made quite good judgments, I think. For example, the initial plan to use TARP money to take bad assets off of bank balance sheets turned out to be the wrong policy prescription and it was necessary to change gears and put money directly into the institutions, although that was not exactly what had been debated before Congress and it made people very angry. I understand that but it was the right decision and it saved the system. So I am proud of the work and the participation of the OCC in that process in getting the system back up on its feet. I’m proud of the successful use of the stress tests and the decision not to nationalize the banks, but instead to try to get the private markets to come back in as soon as possibleu2013that proved to be unbelievably successful. And so I think the financial system is in a much better position to fund an economic recovery than it otherwise would have been. Without the government’s actions, I think we wouldn’t have had the Great Recession–we would have had a depression. I firmly believe that. I think the country is lucky to have had Hank Paulson, Ben Bernanke and Tim Geithner in those positions at that time, and for them to act as aggressively as they did even though it was unpopular.

Some of the political criticism that’s occurred is probably just politics. But I wonder if some of the populist anger stems from the fact that most people don’t understand how the global financial system works. They don’t understand how all the pieces fit together, how interconnected everything was and how profound the damage that would have occurred if we had done nothing. Finance over the past 30 or 40 years has just changed so much and become more complex and beyond the ability of most people to understand.

Well I certainly agree with that point. It’s hard to understand why it was necessary to take these extraordinary actions if you don’t see the direct effect on your own situation. But the flip side of that is, if you don’t understand why and at the same time you see people getting thrown out of their homes because they’re being foreclosed on while big financial institutions are getting assistance from the government, it creates this almost visceral reaction that it violates all sense of fair play and ought not to be something that governments do. I understand that emotionally, but as I said, the alternative would have been far, far worse. The lesson we learned from the Depression was that if you didn’t do the right things aggressively you could prolong and deepen the economic slide for Americans and people all over the world. Not only this government but other governments acted with extraordinary and unpopular measures to put the financial crisis in check, and even though it’s going to take a long time to get out of the ensuing recession, it would have been so much worse if we had allowed institutions to go over the cliff.

What did you learn as comptroller that people might find interesting, or might find a little unusual? It’s a position that has a great deal of power but at the same time it’s not a position that is perhaps as publicly well understood as, say, chairman of the Federal Reserve or FDIC.

I hope people don’t learn the wrong lessons from the crisis. One of the great strengths of the Office of the Comptroller of the Currency is that it only has one real job, which is to focus on supervision. It doesn’t do monetary policy. It doesn’t do deposit insurance. It’s not in charge of promoting home ownership. There is a tremendous value at the core of a banking system to have an entity that’s focused solely on supervision. There’s a tendency to think that part of the problem was we should have had the economists more involved or other experts more involved, but I don’t think that’s the answer.

The answer is to focus on supervision, take the strengths of it and make it better. That’s the core of the supervisory culture at the OCC and there was a point when I thought that would get cut way back during the legislative process that culminated in the Dodd-Frank Act. I’m glad it didn’t because as I said, that culture is a real core strength and backbone of the industry.

Another point is that we have lived in a world where it was almost exclusively the market that set loan underwriting standards, not regulators-as long as sophisticated people were assessing and willing to take underwriting risks as originators or investors, and you had adequate disclosure and adequate risk management practices, then regulators were supposed to focus only on risk management of loans and not on more prescriptive underwriting standards regarding those loans. I think we’ve learned from the crisis that the model needs fixing. Regulators need to be more muscular about requiring minimum underwriting standards and stake out places where we just shouldn’t ever go, like loans with zero down payment requirements, or loans where you don’t verify the borrower’s income. We have to be more prescriptive about setting limits for the market in order for it to work properly. That was a lesson I think that we learned during the crisis that I think is quite important.

I’ve heard a lot of complaints from bankers who say that their examiners have come in and taken a much tougher view of their loan portfolio and classified many more loans than they had previously, almost as if they were applying a tougher underwriting standard on a retrospective basis, and this has strained the relationship in many instances. What advice would you give to CEOs and directors in terms of managing the relationship with their bank regulator?

I would say a few things. One, it’s absolutely imperative that communication lines stay open. The worst thing that can happen is when bankers become upset and withdraw and decide they’re not going to bring problems to the attention of regulators, or that regulators begin to think that management is uncommunicative and isn’t getting the situation. So it’s kind of a first principle-and this always gets put under stress during crisis-that bankers need to bring problems to the attention of their regulator and discuss them. It may sound counterintuitive, but if examiners have to find problems that management was already well aware of, it can often lead to more restrictive or unilateral government action.
A second point is a reaction to something that bankers like to say, most often in a very well intentioned wayu2013that they view the OCC as their “partner.” I can tell you that that often rubs examiners the wrong way, because they don’t view themselves as partners of the bank, or on the same team, because the core of their job is to be disinterested skeptics.

They take their distance and separateness from the bank very seriously, and they should. Having said that, examiners do have the same fundamental interest in seeing the institution succeed, not become distressed or fail. So bankers and examiners do have a shared goal of addressing problems in ways that make sense, and are not counterproductive.
Now, getting back to the substantive part of your question, I think it is fair game for bankers to raise direct questions with their examiners when they believe underwriting standards-or any other standards for that matter-have changed.

And believe me, all the banking regulators, including the OCC, have received plenty of those kinds of comments. We were very sensitized to this concern and we worked hard to have consistent standards. We had numerous sessions with our examiners to address concerns that, being human, they were overreacting and heading off in a different direction than where they had been previously. And we carefully issued clarifying guidance to try to make sure that our standards, especially in the commercial real estate area, were understood and consistently applied. So, in that context, I think it is fine for bankers to bring examples of inconsistency to the attention of regulators. My biggest concern in this area was not that bankers were registering complaints-it’s that often they would not be specific. That’s a hard thing to do but you need to be specific in order for regulators to react, particularly for supervisors who oversee the process on the ground but can’t be present for all the meetings that bankers may complain about. Specifics are critical.

Do you think they were worried about reprisals?

Yes, of course. That’s what they would say, but it puts the regulator in an impossible positionu2013how can they address problems that are not specifically defined? And going back to your fundamental point, about possible retroactivity and lack of consistency over time, remember that when the economy is worse and there are problems going on, you can have precisely the same standard produce much worse results. And so trying to get that balance right is very much the art of being a good supervisor. On the potential retaliation point, I want to emphasize that the OCC provides, and it’s an under-used resource, the ombudsman office. The OCC ombudsman is more independent than in any of the other agencies and reports directly to the comptroller. People should make use of the ombudsman when they have an issue that they can’t work out with their examiners. And they should do so either formally or informally, because the ombudsman really can be a resource for trying to sort out genuine problems.

And again, when bankers know there’s a problem they should take steps to begin addressing it on their own, and not have the regulator come in and have to uncover it. That’s the absolute worse thing that can happen. So those are some of the basic blocking and tackling I think that bankers need to do in order to manage their relationships with their supervisors.

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