In last week's blog post, I wrote about Ginni Rometty, Fortune Magazine’s most powerful business leader, and how she is trying to transform IBM. This week I will write about Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, and touch on her organizational challenge that is almost too large and complex for one human being.
Most of you probably missed this - the Federal Reserve Bank (“The Fed”) celebrated its 100th birthday this week. Without boring you too much, you should know that The Fed is a large, relatively independent organization responsible for supervising and regulating the U.S. banking system, member banks’ foreign activities, and foreign banks’ activities in the U.S. They also now have responsibility for “supervising” how banks are following all the new laws passed by Congress that dealt with abuses contributing to the financial meltdown in 2008-2009.
And, it is this last responsibility that concerns me most.
New Bank Regulations. Congress passed a series of very complex laws and ordered banks to comply with these new regulations. Our country has a history of passing laws that often punish the innocent and fail to reach or impact the guilty and, in my opinion, these new laws are perfect examples. The impact of these new regulations on small and mid-sized banks, the banks that did nothing to contribute to the meltdown, is ridiculous – just ask your local banker.
And what is the impact on large banks and investment houses like Goldman-Sachs? Virtually zero. Why? Because The Fed’s work culture and passive employee personalities are ill-suited for the direct, aggressive cultures and personalities of the large banks they need to regulate.
A Passive-Aggressive Culture Challenge. The job of most federal regulators is to study paperwork. If we were to review the best personality profile for one who is especially good at this they would likely be passive, introverted, patient, and detail-oriented. And because of the prevalence of these personalities at The Fed, its culture is similar. However, the personalities of the financially successful bankers are nearly the complete opposite – they are aggressive and dominating, extroverted, impatient for action, and likely lower on the detail scale. Any of us can see now who will win the battle of these two cultures.
The Secret Recordings of Carmen Segarra. The Fed in New York tried to deal with this and following a report by David Beim, started to hire regulators who were more aggressive to deal with the larger bank personalities. Carmen Segarra was one of these hires and her case shows what can happen when an outsider with an opposite personality is thrown into a passive culture. (You can either read a brief summary of her story at ProPublica or listen to a podcast of her story and her actual tape recordings at This American Life.)
Segarra was just what The Fed needed - a smart, aggressive, extroverted, impatient lawyer committed to the mission of making sure large banks avoided excessive risks and conflicts of interest. Not too long into her job she found that her supervisors at The Fed were more concerned with how her personality was disrupting The Fed’s cultural status-quo than how she was helping them regulate the large banks.
Supervisors started ordering Segarra to behave in ways she thought were undermining the intentions of the new regulatory directives given to The Fed by Congress. So, she started secretly recording meetings. After she refused to soften her stance on the point that Goldman-Sachs had no real conflict of interest policy, she was terminated. It is unlikely she was fired for that reason; it was more likely related to how she was disrupting the quiet culture at The Fed.
When I listened to the one-hour podcast noted above I could hear how weak the most senior regulator at Goldman-Sachs was – I was astonished. Even I would have been more aggressive than this guy!
What does this all tell me? While the new regulations are hand-cuffing our small and mid-sized bankers, the wolves at the large banks are still running the hen-house. And, Janet Yellen, who is a skilled economist and highly regarded professional, has her hands full trying to change The Fed’s passive regulatory culture.