WASHINGTON — For the past two years, the Federal Deposit Insurance Corp. has maintained a consistent crisis-response posture — bulking up its manpower, swooping in to resolve failed institutions and standing behind their depositors.
But the FDIC will undoubtedly need to pivot in a new direction in 2011. With failures slowing, an agency that has been in constant overdrive will face a fresh set of challenges as it begins to apply the brakes.
The last time the agency downsized from a crisis was after the savings and loan crisis, and it left the FDIC with years of morale issues, a problem officials are hoping to avoid this time around. At the same time, the remaining staff will need to sharpen their focus on long-term receiverships, failed-bank litigation and not getting too comfortable before the next crisis occurs.
"We are trying to explore ways in peacetime to keep them occupied and relevant and fully engaged, so that when we get into the next cycle we won't have to have this rushed hiring process," FDIC Chairman Sheila Bair said in an interview.
By all accounts, the agency is in a better position than in the last crisis to handle staff reductions. Compared with a heavy load of permanent positions that were cut in the downsizing of the 1990s, the vast majority of expected losses this time are among temporary and contract workers, who have been prepared all along for a short tenure.
"In terms of the mechanics of winding things down, it should be relatively easy for the FDIC to do so," said Dwight Smith, a partner at Alston & Bird and a former deputy chief counsel in the Office of Thrift Supervision. "And in contrast to last time, thanks in large part to [the] Dodd-Frank [Act] there are a number of possibilities for these contract personnel to find other positions in the bank regulatory area."
The drawdown will also be less stark than in the '90s based simply on size.
The FDIC announced last month that it was trimming its spending this year ever so slightly from the 2010 budget, a move more significant when compared with the sharp increases of prior years. Overall, the agency plans to add 2.5% in staffing — to a total of 9,252 in authorized positions. But that includes a net drop of 133 positions in its division of resolutions and receiverships, to just over 2,300.
The FDIC has projected that 2010 was the peak for failures stemming from the 2008 crisis.
With failed banks still expected to be elevated this year and possibly next, the FDIC's downsizing will not be in full swing until further down the road. But even at that point, it will not approach the magnitude of the last cycle. At the height of thrift failure activity, the FDIC and the Resolution Trust Corp. maintained an army of 23,000 workers, which was gradually trimmed to about 4,500 by 2006.
"The agency did not blow it up to handle this crisis, and therefore it doesn't have a significant amount of slimming to do," said Tom Vartanian, a partner at Dechert LLP. "When this started back in 2007, people at the agency said their corporate strategy this time was not to hire up the same number of employees, so they wouldn't have the same problems turning off the spigot."
Of course, failures, while persistent and costly, have been nowhere near the level of the savings and loan crisis.
The 2010 total of 157 eclipsed the 140 that were closed the previous year. But failures gradually have been getting smaller. The FDIC's price tag last year was an estimated $22 billion, compared with $37 billion in 2009.
Overall, the 322 institutions that failed over the past nine quarters are projected to cost a total of about $79 billion.
By contrast, in the thrift crisis, from 1986 to 1991, the FDIC handled more than 1,000 failures. In that span, failures averaged 170 a year, and the annual total reached 200 twice.
But regardless of the degree of difficulty, observers credit the agency with learning from past mistakes in responding to the turmoil stemming from the mortgage meltdown, particularly in being more cautious about hiring.
"My sense is they just managed it a lot better this time," said John Douglas, a former general counsel at the FDIC and now a partner at Davis, Polk & Wardwell.
As the staff in the division of resolutions and receiverships expanded, the agency made a conscious effort to hire retirees as well as temporary workers. In 2010, of the more than 2,000 in staff personnel in the division, more than 80% were classified as nonpermanent. (The division had just 219 total positions in 2007.)
"There will start to be some gradual downsizing next year, but I don't think it will be in full swing for a few years," Bair said. "When it happens, our temporary hires understand that. We try to give them at least one year's notice that they will not be renewed so they have plenty of time to adjust and plan for it. Hopefully this will coincide with an improving economy as well so there will be more job opportunities for people. We did this with temporary hires so we could avoid the pain that we had after the S&L crisis."
Bair said the costs following the thrift debacle were greater because the FDIC had to let go of so many permanent positions.
"This will hopefully be a more efficient model," she said.
Other priorities in the coming year will likely include the agency's continued investigations and civil claims against directors and officers from failed banks, which can result in jury awards to offset the FDIC's failure costs. The agency has filed only two such lawsuits stemming from the crisis, among droves of letters to former executives threatening possible action. But with the statute of limitations on such suits approaching, most observers expect a flurry of court actions in 2011. (On Jan. 4, the FDIC said it had already authorized suits against 109 individuals, seeking a total of $2.49 billion in claims.)
Many observers said the FDIC will be careful not to pull back too far during its slowdown period. In addition to fighting litigation, and a "problem" institutions list that is still robust at 860, the agency must manage and find buyers for assets still tied to its receiverships.
"The manpower requirements for the division of resolutions are not going to drop as fast as the failure rate, simply because it takes a while to work through all the receivership assets and all the litigation," said Bert Ely, an independent consultant based in Alexandria, Va.
One lesson from both crises, Bair said, is not to draw down staff so dramatically that the FDIC is left without a "skeleton crew" in place to respond to the next downturn.
An overly small resolutions division at the start of the financial crisis left the agency needing to rush to meet the demand of so many closures. Partly as a result, the FDIC is planning to add more than 100 permanent positions this year for DRR to focus on longer-term planning.
"The good news is we got through it. The resolutions were handled very well — very smoothly," Bair said. "But it was a lot of stress on the corporation to get staffed up quickly and I don't want go down to that low of a level again. There will be another cycle. Hopefully, it will be many years from now, but we want to make sure we're prepared."
The FDIC is also exploring ways to keep resolutions specialists seasoned for future crises. Bair cited a perception among agency veterans that without much work to do during the recent boom, some staff were "a bit like the Maytag repairmen."
"We want a larger DRR platform even in good times so we can make sure we're prepared when it comes again," she said.
Others said sharp fluctuations in FDIC staff between cycles are inevitable.
"As an insurance company for the banking industry, they're under a lot of pressure to manage themselves efficiently. If there are no failures and none on the horizon, they would downsize and would try to keep people busy, but obviously on other things completely unrelated to failures," Smith said. "In all probability, the next time there is a crisis they will have to go through the same kind of rapid expansion that they've had to do now, and the same kind of big reduction a few years later."