Federal Deposit Insurance Corporation
Directors Roundtable of California
Los Angeles, CA
September 20, 1996
This is the first time that I -- as FDIC Chairman -- have
addressed a group of corporate directors. We have a lot in
common. All of us share a deep interest in the quality of corporate
management -- you, because your role as a corporate director is to
assure that senior management does what it needs to do -- and me
because, if bank management errs and a bank fails, it ultimately
costs the FDIC insurance fund.
In fact, one of the five qualities that our bank examiners
rate quantitatively when assessing the condition of banks is
management -- the other four are capital, asset quality, earnings
and liquidity. It will not surprise you to learn that management is
viewed as the most important of the five and the most difficult to
I am also deeply interested in management because I am the
chief executive officer of a government agency, but one that differs
from most others in that we are funded -- not by tax dollars -- but
by premium assessments on the institutions we insure.
From those assessments, we manage two insurance funds --
the Bank Insurance Fund (known as the "BIF") and the Savings
Association Insurance (known as the "SAIF"). Today the bank
fund is fully capitalized at $26 billion, but the savings association
fund is nearly $5 billion short of the required capitalization and is
structurally flawed because of heavy geographic and institutional
concentrations. Legislation is pending in Congress to shore up the
savings association fund as a final payment on the savings and loan
crisis of the 1980s and to establish the framework for a merger of
the two insurance funds, but only two weeks remain in the
I doubt if any of you know whether your bank deposits are
insured by the BIF or the SAIF -- you know that they are insured
by the FDIC. It is the FDIC's strong commitment to financial
stability that we must preserve with the legislation. As a Los
Angeles Times editorial said earlier this week, passage of this
legislation is critically important to the FDIC and to the nation. In
fact, the Times said: "The cause is right, the time is now." I agree!
I want to talk with you today about two issues: one, why
we are trying to manage the FDIC like a business, and, two, what
the differences are between a Federal government agency and a
private sector business that add complexities to managing the
FDIC like a business.
Businesses are successful only as long as they are effective
in responding to change. As Peter Drucker, the mavin of
management, spent a career pointing out, businesses do two things:
they produce goods or services, and they change in response to
their customers' demands.
Most of the time, these demands are not explicitly stated --
rather, they are telegraphed by marketplace decisions -- by what
customers buy and what they do not buy. This sensitivity to
change makes business an instrument of change, Drucker has said.
In fact, he argues that "of all social institutions, it is the only one
created for the express purpose of making and managing change."
Successful businesses are also efficient. Profits and losses provide
business with a test of performance.
The iron discipline of profit and loss has two consequences:
Successful businesses constantly seek efficiencies in the way they
do things and they constantly plan for the future -- planning for
more than the next quarter or the next year.
Like a business, the FDIC also provides a service. It is a
public service. The FDIC seeks to assure a stable financial system
by providing insurance on bank and thrift deposits.
Providing a public service -- as directed by statute -- is
what government agencies do. The FDIC was created during the
Great Depression to restore and maintain stability in the financial
system. The rate of bank failures declined dramatically after the
FDIC began operations -- from 4,000 failures in 1933 to nine
insured bank failures in 1934. More recently, we provided similar
stability during the failure of more than 1,400 banks -- with
combined assets of $235 billion -- in the 1980s and early 1990s.
The great film "It's a Wonderful Life" shows what the impact of a
bank or thrift failure -- or near failure -- would be on a community
if there were no FDIC -- a picture not far from the truth.
Unlike a business, however, the FDIC does not operate in a
marketplace where change is telegraphed by every dollar -- or lira
or yen -- that changes hands. We also do not have the test of
performance that profits and losses provide. We can, however,
through thoughtful analysis and strong attention to weighing the
costs and benefits of everything we do, achieve a responsiveness to
change and a discipline that the marketplace provides businesses.
Since I became FDIC Chairman two years ago, we have
been analyzing everything we do and trying to figure out how to do
it better. As a result of that analysis, we are making changes. I
have had two goals throughout this effort: First, that the FDIC
should monitor and assess risks in the banking industry where
change is constantly occurring so that we can anticipate future
problems for the industry rather than simply react when problems
occur -- in other words, focus our efforts on keeping banks open
and serving their customers and communities, rather than on
closing them as we did in significant numbers -- and at great cost --
from 1982 to 1994.
When I arrived at the FDIC two years ago, I asked two
questions: why were we not better at predicting those bank failures
and how can we assure strong insurance funds in the future? We
had a treasury of data on banks and thrifts that we and other bank
regulators developed -- data that gave us the big picture on the
industry. At the same time, our examiners assess the financial
condition of individual banks. However, the regulators had never
been particularly successful at combining the big picture with the
individual assessment. To bridge the gap between the macro-perspective
of one and the micro-perspective of the other, I created
a Division of Insurance. It analyses economic data and supervisory
reports to look for early warning signs for the banking industry.
My second goal was to provide the highest quality service
to the public at the lowest cost. To that end, I hired a chief
financial officer from the private sector to bring modern financial
management tools and internal controls into the 63-year old
government agency. He has searched for greater efficiency in all
of our activities -- from lessening the cost to our insurance funds
from bank failures to establishing a Board level audit committee
and a unit to assess ongoing adherence to internal controls.
In short, we have business goals: responding to
marketplace changes and improving value. To accomplish these
goals, for the first time in our 63-year history the FDIC is operating
under a strategic plan, a plan that defines -- as our business --
identifying and addressing potential problems within the financial
industry that may cause losses to the insurance funds. The
strategic plan will guide the agency in developing and evaluating
our policies and programs for the remainder of the decade. Last
year, implementing the strategic plan generated approximately 150
projects under a corporate-wide operating plan intended to place
the Corporation on a business footing while dealing with emerging
One of those projects was to define the number of people
we will need to operate the organization once we have liquidated
the remaining assets from the bank and thrift failures of the late
1980s and early 1990s and instituted managerial reforms to make
the organization more efficient. At its peak in 1993, the
Corporation had 15,611 employees. When I came on board nearly
two years ago we had 12,115. In addition, as required by law, we
absorbed more than two thousand employees from the Resolution
Trust Corporation (RTC) when it closed at the end of 1995.
Today staff size is 9,971 employees, a reduction of 29% in two
years, counting the returning RTC employees. According to our
analysis of the FDIC's workload after we dispose of the remaining
$12.7 billion in assets of failed banks and thrifts, we expect to
reduce the number of staff positions to approximately 6,500, based
on current analysis, within the next two to three years.
No one welcomes these painful reductions, which affect
people who have devoted years of service to the FDIC and to the
nation, but a voluntary buyout program in 1995 gave employees an
opportunity to receive a cash payment to help them transition to
other careers or to retirement. The response to the offer was
extremely positive with 940 employees accepting it.
We are at present working on a second buyout program, in
anticipating -- and we hope, lessening the effects of -- a reduction-
in-force next year. The term "reduction-in-force" is how the
government says "lay-off," which is what the private sector used to
say before "downsizing" and "rightsizing" became the terms of art.
In light of these necessities, a discussion of our workforce
and our personnel policies will starkly illuminate the differences
between managing a government agency and managing a business.
I will illustrate the point with three such differences -- where the
constraints and restraints that come with being a government
agency mean that making changes in our workforce will be neither
quick nor easy. The three are: (1) the culture of government
employment, (2) the culture of government operations, and (3) the
culture of Washington.
First, the culture of government employment. No one goes
to work for the government for the money -- or rather, just for the
money. For many people, the attraction is job security. For others,
government work offers the less tangible attraction of serving the
public and making important public policy decisions -- you may
call it doing good, or not, depending upon your perspective, and
California is known for widely different views in this area, but I do
believe the FDIC does perform an important public function.
Additional motivations, as well -- such as family tradition
and opportunity to advance -- also sometimes come into play. I
doubt that one motivation is ever exclusive.
I never liked the expression "it is good enough for
government work." To my mind, nothing but the best is good
enough for government work and for Americans affected by it.
The men and women with whom I serve at the FDIC today did
their best when just a few years ago they worked to stabilize the
financial system under severe stress. They sacrificed -- not out of
desire for personal gain but out of dedication -- by moving across
the country, again and again following rolling regional recessions,
and by working eighty- and ninety-hour weeks under the stress of
trying to prevent or address a bank failure.
As a government agency, however, FDIC employees have
not escaped the belief of employees throughout the Federal
workforce that they hold their jobs for life -- although it was never
stated explicitly as a condition of employment. Downsizing our
workforce under these circumstances requires sensitivity and
delicacy, in part because of the dedication of employees who
thought they signed on for more than a paycheck -- to serve the
public good -- and who deserve fairness and humane treatment,
and in part because we want to maintain for the future the
dedication of the FDIC's staff to the public interest, which has
been the mark of our organization for more than six decades. We
have been working through this challenge for the past two years
and we probably face three more years of challenge while our
workload -- disposing of those $12.7 billion in failed bank and
thrift assets -- continues to decline.
The concept of lifetime employment arose from the second
way the FDIC differs from a business, and that is the culture of a
governmental agency. If business is market driven, government
agencies are process driven. We must follow procedures that are
often detailed and complex. None of these procedures were
established to promote efficiency. Most often, they were
established to promote fairness, or honesty, or responsiveness to
the public -- all worthy goals, and goals that add complexity and
time to decision-making in internal administration.
As managers we still can get where we need to go, but must
cover more ground and take more time getting there than private
sector managers do.
The third way we differ from a business is that we have to
operate in what a colleague of mine refers to as the "national
aquarium" -- Washington, D.C. -- where everyone's actions are
visible to all, and particularly to Congress and to the news media.
We do not change what we do in response to this visibility. We
are, however, sensitive to making sure that our actions -- and
motives for them -- are not misunderstood -- and that reality and
perception are the same.
That can be difficult in a highly politicized environment.
Practically, this means that we spend a lot of time planning what
we do and explaining why we are doing it. Last year, I testified
before Congress 18 times and this year I have already testified 6
times on issues ranging from conditions in the consumer credit
market to the problems of the savings association insurance fund to
why bank regulators prohibited Daiwa Bank of Japan from
continuing to operate in this country to our efforts to integrate the
functions and staff of the RTC into the FDIC.
We must, of course, work with Congress -- and Congress
has an important job to do -- but that also adds complexities. For
example, by law Congress mandated that the FDIC would have to
employ 2,000 RTC employees after the RTC went out of business
at the end of last year -- at the same time the FDIC is downsizing.
There was a good reason for this requirement -- to assist the RTC
in attracting quality staff -- but this statutory requirement is an
example of how an agency working in Washington has less
freedom sometimes than a business does because of other -- often
worthy -- goals.
Given these differences between the FDIC and a business,
we can never be as efficient as a successful private sector business
can -- but we can find ways to improve our efficiency and our
effectiveness and to face the new millennium with up-to-date
operational and financial management techniques.
In managing the FDIC like a business, I often remind
myself that companies must struggle to remain successful and that
the market allows no one to rest on his or her laurels. Companies
as well as government agencies also have a tendency to become
trapped in the past -- to become prisoners of their own success.
The FDIC's chief operating officer, Dennis Geer, a native
of Iowa, has frequently reminded me of the fate of the Hoag Duster
Company in his home state. From a small town east of Des
Moines, the Hoag company at the turn of the century produced
close to half the world's supply of feather dusters -- by far the
largest market share of any company in the business -- and it
exported its product to Europe and South America.
The mass-produced vacuum cleaners that became available
in the 1920s doomed the company's product -- but for fifty years
Hoag kept on producing feather dusters for an ever shrinking
market until it went out of business in 1974.
Most government agencies do not go out of business.
Those that continue operating, however, can lose their edge as an
instrument of policy, reacting to events instead of planning for the
future and becoming less effective in accomplishing the day-to-day
mission they were created to perform because they lack effective
and efficient management.
Peter Drucker has pointed out that the first duty of
management is to answer the question: "What is our business?"
and then to shape the course of the organization around that
As a government agency, we are given a mission -- in our
case, to maintain the stability of the banking system. We could do
that by cleaning up bank failures -- or we could do it by helping
banks avoid failure. We have chosen -- as our business -- to help
banks avoid failure. We are building an organization that aims to
accomplish that. Despite the complexities that come with being a
government agency, we are managing and leading our organization
in that direction in the most cost-effective and humane way
possible, and, in doing so, we are adapting to the changing
marketplace in which we operate.