Originally broadcast October 1, 2012

Arlington, VA

Welcome to The Business of Government Hour.  I’m Michael Keegan, your host and Managing Editor of The Business of Government Magazine.  Sound financial management is essential to the effective stewardship of taxpayer dollars and enabling federal agency decision makers to make tough choices on day-to-day and long-term management challenges. 

Good government, that is government fiscally responsible to its people has as in its charge making operations more efficient and accountable, getting rid of waste, saving money, and making services more responsive.  In an era of tight budgets this charge has taken on new significance beyond the fundamentals, to ensuring the improvement of financial management government-wide. 

What are the top federal financial management priorities?  How does the Office of Management and Budget work to implement them?  What is the federal government doing to reduce and eliminate improper payments, and how is OMB working to transform the way government does business? 

We will explore these questions and so much more with our very special guest, Danny Werfel, Comptroller, Office of Federal Financial Management within the Office of Management and Budget.  Danny, welcome to the show.  It’s great to have you back.

Danny Werfel: It’s great to be here, Mike.

Michael Keegan: Also joining our conversation from IBM is Steve Watson.  Steve, welcome.

Steve Watson: Thank you, Michael.

Michael Keegan: So, Danny, before we delve into specific initiatives, perhaps you can provide us with a brief overview of the history and mission of the Office of Management and Budget?  How is it organized?  What’s the size and scale of its operation?

Danny Werfel: The Office of Management and Budget has a long history.  I think its birth was in the 1920s, actually, when at that time it was called the Bureau of Budget, and it moved out of the Treasury Department and became a standalone entity that had more direct nexus to the President, the White House, and the Executive Office of the President.

Later on in its history it added management functions to it, and the name expanded to the Office of Management and Budget.  We have roughly 500 people in the organization, which is small by government standards, so it’s a place where everybody knows your name, and it has a relatively flat hierarchy, which what I mean by that is because of our size and because of the need for us to be nimble and dynamic in meeting the various challenges that we have it’s not unusual for anyone from the highest ranking political appointee, to an SES branch chief, or even a GS9 policy analyst right out of graduate school to be meeting with the Director of OMB and to be involved in a lot of kind of dynamic and high profile situations.  So for that reason it’s an enormously exciting place to work.

And just to give you a little bit more detail on how we’re structured, of the 500 people that we have it’s about two-thirds are on what we call on the budget side of the house, and one-third on the management side of the house.  And on the budget side of the house we essentially break-up the government into smaller pieces and have dedicated offices that work in those areas.  So we’ll have a labor branch, an education branch, and a homeland security branch. 

And some of their core responsibilities involve, of course, developing the budget requests for that agency.  And then the examiners, in addition to working on the budget, involve themselves in a whole host of activities, just soup to nuts, everything that you can imagine is involved with that agency. 

And that’s really where - that’s likely a good segue to the management side of OMB, which takes much more of a horizontal view.  The offices that are set-up on the management side for things, like financial management, which is the organization that I currently lead, procurement, performance, information technology.  We have an office that deals with information and regulations, and they are looking across - those offices have responsibility across the entire government. 

So, for me, as an example, I have relationships with every chief financial officer in the government.  I learn about what they’re doing, what their challenges are, and what the solutions that they’re looking to initiate to overcome those challenges. And that’s where our role can be so critical, because our responsibility is across government we don’t have a particular responsibility to dive deep into the Education Department or the Homeland or the Defense Department.  Instead our focus is on the area that we’re responsible for, in this case financial management, across the whole government. 

Steve Watson: That is a good overview.  If we go a little deeper can you talk a little bit more about your duties and responsibilities as Controller and how the Office of Federal Financial Management supports OMB’s overall mission?

Danny Werfel: Absolutely.  The Office of Federal Financial Management was created in the Chief Financial Officers Act of 1990.  What was going on at the time was there was a growing sense through a variety of different inputs, such as reports from the government Accountability Office, reports from inspectors general, that were pointing to fundamental lapses that were going on in agencies and our ability to track funds, account for federal funds, mitigate instances of fraud, error, and waste, and there was a desire to develop a framework across government to manage these challenges more effectively. 

And they looked to the corporate environment as a model.  And one of the things they saw as a gap was the fact that corporations generally have chief financial officers in place and also have kind of a rallying cry around a set of standard financial statements and an audit of those financial statements that helps instill some discipline and some rigor around fundamental questions of how the money is being tracked, how assets are being accounted for, how liabilities are being recorded and looked at, and how these items are being made transparent to shareholders in the corporate environment and, obviously, the analogy for the federal government would be the taxpayer.

And so that - the CFO Act was born out of the desire to establish a framework across government that could help us improve our discipline and our approaches on these basic issues of accounting internal controls and finance, and modeling it after the private sector, the CFO Act of 1990 created a chief financial officer position within all of our major federal agencies, further initiated the process of financial statements, annual financial statements, and put the CFO in charge of the development of a system and a process and technologies that were going to help capture all that information, put it in financial statements and have it audited.

Michael Keegan: Well, I’d like to pick-up on the idea of challenges and, in particular, given the portfolio you manage and the expansiveness, what are your top three challenges that you face?  And how have you sought to address those challenges?

Danny Werfel: Well, let me start with the most obvious challenge that I think anyone sitting in a government leadership position is looking at right now, and that is the declining resource environment that we find ourselves in.  It is no surprise that the budget cuts that we’re facing impact all parts of government, and chief financial officers are no different.

And so you have this dual-edged challenge of trying to modernize and make government more efficient and, you know, we say a lot it’s never been more critical for us to do so because of the challenging budgetary situation that we find ourselves.

The number one challenge that I have right now is working with federal agencies to define those steps that they can take and those investments that they can make that are going to have the highest impact and that are going to be the most shrewd for lack of a better term in managing this tension.

The second one that I would articulate is in order to navigate the tension that I just described of a lower resource base and a need, a necessity to become more efficient, we’ve got to break old habits that - and we’ve got to innovate to do so.

So the example I’ll use is with respect to information technology, and we have an approach that we’ve taken to modernize business systems in government over the last decade.  And the approach has proven to be slow and expensive. We have to do them more quickly and get more critical performance out of them.

And the third issue, and it’s very related to the other two, is what I call creating a culture of collaboration. If one agency has a success, how do we create an environment that other agencies are obsessed with what that success was, how was it achieved, and how can I learn about how that success might impact my area?  Or a failure, what happened, what went wrong?

Michael Keegan: Very interesting. Speaking of infusing this passion that you have, I’d be remiss in not asking you, what are the characteristics of an effective leader?  Because you really, I mean your story is a testament to that.

Danny Werfel: There are three things that I think are critical to professional development and advancement.  And I say patience, competence, and relationship building.  And I think they’re all three, they’re interrelated and they’re all critical. 

Patience is that you stick around, you don’t jump at the first sign of trouble, you don’t jump at the first great thing that comes your way, you’re patient and you’re plodding and you stick around. 

Then there’s competence; being good at what you do.  Not only are you demonstrating an ability to see the long term and not react in a particular moment, kind of that steady hand at the tiller, and also to the extent that you have studied your craft and understand its various moving pieces.  I mean I don’t think you have to be a genius to be successful, but to the extent you’re competent and you’re a student of what you’re doing and trying to improve.

And then, third, relationship building, and that is, you know, it sounds trite but it’s being a team player.  Sometimes I use the term low-maintenance; you want to be low-maintenance.

My new favorite phrase, I use it and my staff is getting bored with it, but I use it all the time, I say I do not have a monopoly on the right answer, and I don’t. That recognition upfront that I don’t have a monopoly on the right answer helps develop kind of a collaborative spirit to how we attack these challenges.

Michael Keegan: What are the top federal financial management priorities?  We will ask Danny Werfel, Controller, Office of Federal Financial Management within OMB, when our conversation continues on The Business of Government Hour.

(Intermission) 

Welcome back to The Business of Government Hour.  I’m Michael Keegan, your host, and our guest today is Danny Werfel, Comptroller, Office of Federal Financial Management within OMB.

So, Danny, you mentioned in the last segment, you identified some of the challenges you face in your role, and I want to step back a bit and talk about some of the priorities that you have, some of the top Financial Management priorities the administration is focusing in on towards the tail end of its last year?

Danny Werfel: Well, the way I think about the work that we’re doing, I put it into two different buckets of activities. It’s either about cutting waste or it’s about building a government for the 21^st Century.

We have this initiative we call the Campaign to Cut Waste.  It was launched by the President through an executive order last spring, in June.  He put the Vice President in charge of it, which relates back to my - I’ve had several opportunities to work with the Vice President directly, first, on the Recovery Act, now on the Campaign to Cut Waste, and the whole Vice President’s Team, who are fantastic to work with.

And we have a whole variety of different things we’re trying to achieve under the Campaign to Cut Waste.  We are cutting administrative savings, things like IT, printing and travel, vehicles or fleet.  This is kind of the bread and butter stuff that won’t necessarily eliminate our deficit by any stretch, but represents two things.  First, they represent dollars and every dollar counts.  I’m the most frugal guy I know, so if I hear about an agency that are involved in something where $5,000 was wasted or $5 million or $50 million I’m upset in either way, you know, every dollar counts and these are practical things that can be - we don’t have to, for example, maintain - we don’t have to get rid of an automobile that’s fine just because we’re interested in the next upgrade.  We can hold on to our vehicles longer.  We don’t need a printer on every desk.  We don’t need to travel just for the sake of travel without a critical purpose for that travel.

We issued that 20 percent cut requirement back in November of 2011, and then we put in the President’s budget all the agencies’ commitments on that 20 percent cut, and it totaled $8 billion. 

Within the Campaign to Cut Waste, there are other things.  There’s improper payments, and managing our real estate more effectively. 

I’d say on the 21^st Century government there’s a lot going on, but to pick a top priority, I’d pick how are we going to move forward in open government and transparency.  And, in particular, where I have the most responsibility and where I lose the most sleep at night is how are we making federal spending more transparent. All of those things are part of a strategic set of priorities that I’m working on with the financial management community.

Steve Watson: Danny, you mentioned improper payments, can we dig into that a bit?

Danny Werfel: Yes.

Steve Watson: The government makes trillions of dollars in payments over a year and I’m sure there’s going to be improper payments to some degree no matter what you do.  Could you talk a little bit, first of all, what is an improper payment?  And then get into; I know it’s an important area for you, the actions you’re taking to reduce improper payments in government?

Danny Werfel: We pay a lot of money out.  We pay benefits to individuals, we pay contractors, we reimburse doctors for Medicare bills, grants to states, all different variations of payments, we guarantee loans, et cetera.  And we make mistakes.  The money goes in the wrong amount.  It can go to the wrong individual.  It could go in the right amount to the right individual but then be used for the wrong purpose.  And so these are the types of mistakes. The more typical improper payment occurs when we lack the ability to validate whether the payment is right or not. 

The largest sources of error in the government are in Medicare and Medicaid, they make-up half our balance sheet, and there’s a whole different, you know, it’s just a very complex terrain in terms of how we can make different types of errors in Medicare.  And sometimes the issues can be really, really challenging to authenticate.

But within all of this what we’ve tried to do is find the errors where we have the best chance of initiating changes to improve, and there are some promising areas where we are leveraging data and technology and innovations and ways to drive down these errors, and I’m very excited about that.

Steve Watson: Danny, following up with that last theme of using technology, can you give us some success stories or types of technology you’re using to reduce improper payments?

Danny Werfel: Absolutely.  I think the way I’d summarize it as a global matter is we all know that we live in an information age, and that information age is changing rapidly and it’s very dynamic and game changing. We have access to so many different sources of information that federal agencies didn’t have before that can help us make smarter decisions about who a person is, what their household size is, if that’s relevant to the eligibility determination, what their income is. We can manage that data more effectively. 

Let me give you some real life examples.  So in Medicare, as an example, one of the causes of error can be that we have people that are defrauding the government. What HHS is getting better and better at doing is figuring out when there’s an unusual number of procedures in a certain location.  So they’ll say, oh, look.  There have been six endoscopies in a three-day period in this rural part of Texas. That is an anomaly, that’s unusual.  HHS has set-up an entire what they call Fraud Lab, where they have data analysts kind of looking at this network and macro of data to look at these different issues.  And, again, that is a major game changer.  That did not exist five, six, seven years ago, and it is the advent of new technologies, new forensic approaches that is making those changes happen.

Michael Keegan: Well, I’d like to go forward about transparency, you had mentioned transparency and making financial information from the federal government more transparent to the user, I want to tackle that as one of your priorities.  What did you learn from the Recovery Act, and what are some of the key lessons learned in that area?  And what more needs to be done?

Danny Werfel: Well, it’s a great question.  When the Recovery Act was enacted in February 2009 it required the development of a new nationwide cross-government data system, and for it all to be done in a matter of months, the technology, the definition of the data, and then the various training and outreach to what turned out to be over 100,000 different recipients that were going to have to report.

And we learned so much about ourselves as a government, about the challenges we have with the fact that our data and our accounts are not standardized, that in many ways the information that we hold in our financial systems doesn’t lend itself well to being produced in a way that the citizens are demanding and can be well understood.  And we learned about some of the challenges that can take place when you rely on the recipients to report the information. 

I first thought this is great because it takes all the pressure off us, the recipients will be the responsible party.  So if the City of Oakland, as an example, reports the number of jobs they created then the City of Oakland is going to feel the wrath of the local media, of Congress, of GAO, you know, because they have the responsibility to report. 

And boy was I wrong, because when mistakes were made it ultimately fell, as I should have predicted, on the President and on the Executive Branch of government. 

And the big lesson learned there is that at the end of the day you have to route everything back to the agency.  The agency has to have a solid and comprehensive understanding of what it’s paying out, who it’s paying out to, and needs to manage any anomalies in the data.  They 

needed - ultimately even though the recipient was the one reporting, the agency should have immediately picked up on the fact that the Congressional District was wrong there. 

And so as we move forward on spending transparency I think there is this debate that’s going on in some circles about whether we anchor the program to what the agencies are reporting they spent out versus what the recipients are reporting they receive.  And I think the ultimate answer is that both data points are going to be necessary, they have to reconcile to one another, but ultimately it’s the agency that’s going to be, what we call, the control total.

Michael Keegan: Well, that’s interesting.  Are you folks doing anything, are there any key initiatives around strengthening and improving the quality of reporting for financial information?

Danny Werfel: Yes, and that’s another place where the Recovery Act came into play/ 

Let me give you an example of what I think is the most important thing that we’re doing and why it’s so important. We have the federal version of an income statement.  And that information is produced, it’s audited, and we spend a lot of resources on technology and processes to report that information and have it audited and have it be reliable, and we do a very good job at it.  Over time we’ve gotten much, much better at it.

The issue is that all of that energy around making sure that every “I” is dotted and “T” is crossed and all that data is accurate, is done outside of the context of our USA spending reporting. What happens is that you’re missing an opportunity there to build into an existing quality control process that we’ve spent a lot of time on and invested in and have up and running and have developed very well, you’re not using that to audit and to initiate quality control on your Recovery Act or the USA spending information.

So we’re trying to do something to bring those two together, so we created, OMB did, what we call the Statement of Spend.  It’s a new statement that hadn’t existed before, and we’ve had different agencies piloting this Statement of Spend.  And the notion would be it would be a financial statement that would aggregate critical information on what you’re spending that if you were to get a clean audit opinion on that Statement of Spend it would be an indicator that the information you’re feeding into USA spending is reliable and it’s comprehensive.  We think that’s going to have a large impact on improving reliability over time.

Michael Keegan: Wonderful.  How is OMB working to transform the way government does business?  We will ask Danny Werfel, Comptroller, Office of Federal Financial Management within OMB, when our conversation continues on The Business of Government Hour.

(Intermission)

Welcome back to The Business of Government Hour.  I’m Michael Keegan, your host, and our guest today is Danny Werfel, Comptroller, Office of Federal Financial Management within OMB.

Danny, I’d like to talk a little bit about the administration’s efforts to get legislative authority to reform and consolidate the federal government.  Would you tell us more about this effort?  What are some of the benefits of doing such a thing, and what are some of the challenges?

Danny Werfel: I’m glad you asked.  I think the President was very clear and has been clear, and I mentioned it earlier in his interest in a government for the 21^st Century. It’s kind of just a fundamental question of whether you design your objectives and your goals around what your organizations of government are set-up to do, or alternatively do you pick the right objectives and goals and then align your organizations to most effectively meet those goals.

And I think the President believes that the latter is the right approach to better government, and in order to do that, in order to breathe life into that, to make sure that our agencies are structured in a way to meet 21^st Century realities and priorities, you need a mechanism by which to more fluidly realign and reorganize government.  And right now we don’t have an effective mechanism in place. 

From the 1930s to the 1980s there was this authority that the President had to initiate proposals to reorganize government, and Congress would - could get the proposal and it would be done on a fast track basis.

What the President asked for is authority that is similar, but we think improved, to the authority that existed for 50 years, from the 1930s to the 1980s, where the President would be able to submit for up or down vote proposals to reorganize government, and we made some enhancements that we think are important. 

For example, and I’ll just mention the most critical, under our proposal for reorganization we can only submit proposals that save money, that actually add to efficiencies. And so, you know, to make sure that this is being done out of a desire to limit the complexity of government, to streamline government, and to make it more user friendly and to have it reflect, again, 21^st Century realities.

The trading competiveness proposal alone would save $3 billion over 10 years, but would also kind of bring together a variety of different critical resources, and how important is it today to have an effective set of programs around job growth, economic growth, trade and competitiveness, it’s as important as it could ever be. 

But the bottom line here is that if you want a government that’s going to be dynamic to meet emerging challenges, and we have many emerging challenges, then you need a flexibility that needs to be in place to reorganize government in ways that reflect what’s going on in the 21^st Century. 

Steve Watson: Switching gears here, let’s talk a little bit about the government-wide financial statements and the audit of those statements.  I know most agencies now have clean, unqualified opinions, but we still don’t have it yet on the government-wide financial statements.  Can you talk a little bit about the impediments to getting a clean opinion and a schedule for ultimately getting there?

Danny Werfel: Just about every agency has a clean opinion or at least a qualified opinion.  We only have one agency that still does not get an opinion on their financial statements, and that’s the Defense Department.

And so, we’re reporting in timeframes that are much quicker than we ever imagined.  For over a decade these financial statements were coming in six months or later after the fiscal year, and now they come in 45 days after the fiscal year.  The number of weaknesses that are found in these financial statements are not only getting clean opinions, but each of these opinions have findings of where the auditors are raising concerns, and those are steeply declining over time.

So we are hitting a rhythm and getting to a stable kind of performance environment where it’s almost the, you know, we almost take it for granted at this point, where virtually every agency is going to have a clean opinion or at least a qualified opinion.

And one of the main reasons why we don’t have a clean opinion at the consolidated level is the Defense Department.  They’re really kind of the last domino to fall.  The challenge is that it’s a very large and complex domino. It’s the largest and most complex organization in the world.  It has grown-up in an environment over many, many decades of having different approaches to its procedures, to its account structures, to the way in which it makes transactions and captures information on those transactions.  The systems don’t integrate and/or are not interoperable with one another.

In order to modernize those systems it’s expensive, it’s complex.  They are geographically dispersed.  They’re internationally dispersed; they just have domestic and international presence.  And the clean up that needs to be done in that organization is exponentially more challenging than every other organization in government. 

That’s not to make excuses because they need to do it, they need to get the job done, and they have made progress, but there is still a lot to be done in this area.  I think the roadmap that they’ve set out for themselves is the right roadmap.  I think Secretary Pineta has been clear in terms of asking the Defense Department to accelerate their timeframes for getting some, hitting some key milestones on their audit. 

Michael Keegan: Yes, I had the pleasure of having Bob Hale on the show and he outlined some of the challenges.  But it’s a good strategy for getting it done, even the accelerated timeframe to 2014. 

But, Danny, you mentioned accomplishments, when we talked about the audit ability.  This year marks the 22^nd anniversary, as I understand, of the CFO Act of 1990.  As you reflect on the federal financial management community’s progress over the last 20 plus years, what are some of those key accomplishments you want to talk about?

Danny Werfel: Well, there’s many.  I mean I know obviously there’s - we still have a long way to go to meet all of our financial management goals, and I don’t know that you ever get there because you constantly shift your risk profile to make sure that you are in a zone and in an area of continuous improvement.

But let me start, if I could, with some specifics and then make a general point.  Improper payments are an example, which we’ve spoken a lot about on the show today.  We are at a place right now where just about every major program is seeing error rate declines every year.  So there are over $100 billion in improper payments each year, and that is a staggering number that we need to do better on.  The issue is we are doing better on it. 

Several programs, about 10 or so programs make-up most of that $100 billion plus amount - Medicare, Medicaid, SNAP or what used to be called food stamps, Social Security, public housing, to name a few, the earned income tax credit.  These are some of the programs that make-up this large amount. And in every case except for one, we are essentially seeing declines in the error rate. 

That doesn’t diminish the fact that all the other programs - Medicare, Medicaid, the HUD program, SNAP and others are seeing precipitous declines in their error rate, and that’s having an impact on the number of improper payments we’re making.  And I think that is a reflection of these error rate declines, the fact that in these major programs the improper payments are going down, that the work that we’re doing is starting to have an impact.  One of the lessons learned in improper payments or in anything is that modest corrective actions and modest strategies are going to lead to modest results. 

You need to have innovation and you need to push the envelope in order to get changes and, in particular, at HHS, they are really, really passionate and I would say almost relentless in their pursuit of driving the error rates down in Medicare, Medicaid, and that is starting to resolve.  If you just look at the numbers those error rates are trending downward.

Now on a government-wide basis because the error rate is trending downward over the last two years those error rate reductions equate to $20 billion in improper payments avoided.  In other words, if the error rate would not have declined the way it did we would be at an improper payment amount $20 billion higher than we are today.  So we’re very proud of that.

Let me shift gears to real estate and make a key point.  In the previous - it’s an interesting thing to do, to compare the executive order on real estate that President Bush issued in 2004 versus the executive order that President Obama issued in 2010. 

The Bush EO establishes kind of the foundations of real estate management.  It put in place a senior property officer.  It required us, the government, to develop a worldwide inventory of real estate that didn’t exist at the time. 

Now compare and contrast that with President Obama’s executive order, which said very simply save $3 billion in civilian by the end of 2012 and save $5 billion in military, so save $8 billion.  I mean that was kind of the bottom line.  And I mean that was made, in part, that kind of directness of just a bottom line expectation and performance target, obviously, was made possible by the work that was done in the previous years, but it’s also a growth of the community now that we’ve built this foundation around. We’ve got the inventories, we’ve got the clean audit opinions, we’ve got more stable financial management structures in place; it’s time to make sure that we are using that foundation to execute on bottom line results for the taxpayer.

Today government waste is a national consciousness issue.  Today the transparency of where Federal dollars are going, makes up front and center issues, and the CFOs are in many cases connecting with doubles and triples.  And we’re having our setbacks, too.  That’s always part of the fabric of what we do, but I’m confident and I think that the road ahead is going to be filled with important accomplishments.

Michael Keegan: Well, Danny, looking forward, thinking about the road ahead, could you give us a sense of some of the key issues that will affect CFOs going forward?

Danny Werfel: Well, I think the number one challenge is the question: people and human resources or human capital?  We have a lot of individuals in the federal government that are eligible to retire, and so there’s some succession planning and

Also the challenges are changing and the skill sets have changed with them.  Much more specifically in the financial management community, analytics are becoming more important as we figure out how to put kind of traditional accounting functions on a more stable platform, it enables us to shift into more analysis rather than blocking and tackling and nuts and bolts accounting, which is a great thing to be able to do but you have to have the right skill sets in order to drive those analytics.

In other words, everything we talked about today in terms of executing on a set of results to cut waste or to bring government into the 21^st Century the road to get there is clearer and ultimately shorter if you are driving strategic decisions about what you’re investing in, what your critical path is, and those strategic decisions are based on analysis, they’re based on looking at data, at looking at our organization, at looking at our business processes and figuring out what the right navigation points going forward are to be successful. 

Michael Keegan: Well, as we close today, I want to actually talk about that new workforce, if you will.  What advice would you give someone who is considering a career in public service?

Danny Werfel: That’s funny, I gave a speech a few months ago to the directors of about 300 public policy schools from around the country, and I didn’t intend to but I just to make it kind of a recruiting message, but I very simply stated what I was working on, what the community of people that I work with are working on, what our challenges are, and gave some examples. 

My advice for people is that it’s less advice and it’s more a kind of challenge and a sense that if you are an individual that wants to be stretched, to use your various abilities that you’re learning in school today or that you’re learning in your careers in other ways, if you want to come into an environment where the work that you do is critical to helping our country, to helping the people of this country,  if you like to be challenged and you want to serve our country in the same way that I do and the same way that the people that I work with do then it’s really an unbelievable opportunity to be here.  And we’re going to have a lot of job openings.  In some ways the budget constraints are going to constrain us going forward to a certain degree, but also we have a lot of retirements coming up.  So it’s going to be a dynamic environment.  Our workforce is going to obviously change going forward.

Michael Keegan: Well, Danny, I want to thank you for your time today.  It’s wonderful to have you back.  It’s always great to have you here.  You are very passionate and insightful about the work that you do.  But, more importantly, Steve and I would like to thank you for your dedicated service to the country. 

Danny Werfel: Well, Mike and Steve, I appreciate it.  I appreciate you having me here today.  I really enjoyed the discussion, and I think you’re doing a great service, too, by bringing on people, government leaders, to tell their story.  It’s part of that culture of collaboration that I discussed earlier.  This is one of those key pieces.  So I appreciate you for your work you’re doing.

Michael Keegan: This has been The Business of Government Hour, featuring a conversation with Danny Werfel, Comptroller, Office of Federal Financial Management within OMB.  My co-host today from IBM has been Steve Watson.

Be sure to join us next week for another informative, insightful, and in-depth conversation on improving Government effectiveness. For The Business of Government Hour, I’m Michael Keegan, and thanks for joining us.

 Announcer: This has been The Business of Government Hour. Be sure to join us every Saturday at 9:00 a.m., and visit us on the Web at businessofgovernment.org.

There, you can learn more about our programs, and get a transcript of today's conversation.

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Originally Broadcast June 21, 2008

Washington, D.C.

Announcer: Welcome to The Business of Government Hour, a conversation about management with a government executive who is changing the way government does business. The Business of Government Hour is produced by The IBM Center for The Business of Government, which was created in 1998 to encourage discussion and research into new approaches to improving government effectiveness. You can find out more about The Center by visiting us on the web at businessofgovernment.org. And now The Business of Government Hour.

Mr. Morales: Good morning. I'm Albert Morales, your host and managing partner of The IBM Center for The Business of Government.

Bank failures, more so than any other corporate collapse, directly undermines the stability and public confidence in the nation's financial system. As a result, preventing and mitigating bank failures is major public policy concern and goes right to the core of the mission of the Federal Deposit Insurance Corporation, the FDIC.

Through its various programs, the FDIC seeks to mitigate and limit the ripple-effect bank failures have on the U.S. economy while maintaining the stability and public confidence in our national financial system.

With us this morning to discuss his office's effort in this area is our special guest, Mr. Mitchell Glassman, director of the Division of Resolutions and Receiverships at Federal Deposit Insurance Corporation.

Good morning, Mitchell.

Mr. Glassman: Morning.

Mr. Morales: Also joining us in our conversation, from IBM, is Dennis Kaizer, partner in IBM's federal civilian programs.

Good Morning, Dennis.

Mr. Kaizer: Good morning, Al.

Mr. Morales: Mitchell, we all see the FDIC moniker on the doors, teller windows and ATM machines across the country, but perhaps you can set some context by starting with the history and the mission of the FDIC.

Can you tell us when it was created and a bit about its mission today?

Mr. Glassman: The Federal Deposit Insurance Corporation was organized and created in 1933, so we are having our 75th anniversary this year. Its function and its creation was based on maintaining stability and public confidence in the nation's financial system, and we do that really in three different ways, and that mission is still the same as it was back in 1933, it's by insuring deposits in the institutions that belong to the FDIC through our examination function, but also in managing receiverships.

Mr. Morales: So with that mission, can you tell us a bit about how the FDIC is organized, perhaps tell us a little bit about the budget, number of employees, and how you're organized across the country?

Mr. Glassman: The FDIC is not a very large organization, but it does have 4,500 employees. We're organized really in three major driver divisions. This is our Supervision and Consumer Protection, our insurance and research and the division that I'm over, in Resolutions and Receiverships.

We do have other divisions and offices that supply vital services whether it's in information technology, or administration, finance, legal and we have a corporate university which provides the, you know, the amount of our training that is necessary.

We're located not only in Washington, but we also have six regional offices -- but also we have 85 offices throughout the country, where our examiners also reside; and our budget right now is, you know, approximately $1.1 billion.

Mr. Kaizer: Mitchell, now that you've provided us a sense of the larger organization, perhaps you can give us some more specifics about your division and your role as a director there?

Mr. Glassman: Well, as director, I wear multiple hats. As I was saying before, I'm also the chief claim agent. In other words, as institutions become insolvent, we're very much concerned about the payment of insured deposits back to those particular depositors, but also as we manage the bank's receiverships, we also manage those receiverships.

So we're basically serving as the deposit insurer, but also in the liquidation of the bank for the benefit of the claimants, including that of the FDIC's.

Mr. Kaizer: So regarding your specific duties, can you tell me what you're, maybe, top three challenges might be in your role, and how you're addressing those?

Mr. Glassman: Well, my number one priority is readiness. One thing that the FDIC has to be prepared is to handle any particular institution, insured institution that may have its charter removed by the primary regulator.

That requires me to be not only to be on standby, but to have teams of people ready to move at a moment's notice. For us that is absolutely critical, that we meet the needs of the depositor, but also get into those communities as quickly as possible.

My second priority is that in our management of the receiverships, we want to use the best business judgment, but in particular, we're very much interested in customer service. You know, we believe that providing good customer service is also something that is a depositor not only deserves, but also the creditors who we may have to deal with.

And I would say the third, which is not as -- is part of the top three and could be considered the number one, is employee development. One of the things we work through is our people, and we're very robust in not only in developing our people, but also making sure we have a succession.

You know, as many agencies, you know, we do have an aging workforce. We want to make sure we got well-trained people ready to take over and to continue the function of the FDIC for the next 75 years.

Mr. Morales: Mitchell, I wanted to just go back for a moment about something you said earlier, about the 4,500 employees. Roughly, about how many of those employees reside within your organization?

Mr. Glassman: Well, I'm very -- leveraged quite a bit. I have approximately 250 currently, but you know, we're going to be adding some additional resources. We really try not to get a very large number because we're more of a think-tank kind of organization, you know, one that organizes resources, so that's all we have as now, but we have the ability to expand our resources on an as-needed basis, either through contracting or through, you know, leveraging bank employees if we need them.

Mr. Morales: Great, so you mentioned the 75th anniversary of the FDIC. I also understand that you've now spent some 35 years in the business, and with this organization. Could you describe your career path for our listeners? How did you get started?

Mr. Glassman: Well, I can honestly say my family got me started. My mother was a career banker. My wife's family owned the bank, so I got started off with banking in my blood. I actually worked at a community bank, not my family's, where I really got the taste of what banking is all about, and just what a great career path.

Eventually I did get recruited by the FDIC. At the time I was the youngest employee to have been recruited at the time, and actually joined what used to be called the Division of Liquidation, which is now the division, you know, we're running and that we're calling Resolutions and Receiverships.

So from that aspect, I have moved to various management and leadership jobs throughout the country, and basically whenever there was a crisis, I was able to move in and to be able to organize around it. So eventually they asked me to come to Washington, D.C., and I'm here before you now.

Mr. Morales: That's great. So, Mitchell, as you reflect upon these experiences both in the industry and now on the government side, how have these experiences in various roles prepared you for your current leadership role and have they sort of shaped your leadership style?

Mr. Glassman: Well, I learned early on, just the way we operated that you know, you have to work in a team environment. You have to work where cooperation was of the essence. You had to work in a way that was smart.

You had to work in a way that if there was technology you needed to leverage that technology but also to be absolutely open and honest and to be certain that -- that you were taking certain actions with your employees that they would trust, because when you're operating in a very stressed environment, which a lot of us we do, you're very dependent on your employees, and you have to have a trusting relationship with them.

So over time, I tried to view not only my employees but you know, really the rest of my colleagues at the FDIC as family, and just like in family, you need to communicate, you need to be able to give them responsibility, but also be able to criticize in such a way that it adds value, not takes away.

Mr. Morales: It's interesting you use the word trust. This obviously also gets to the core of your business. It's about trust and the trust that people have in the financial system and the banking system of this country.

What happens when a bank fails and goes into receivership? We will ask Mitchell Glassman, director of the Division of Resolutions and Receiverships at the FDIC to share with us, when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host Albert Morales, and this morning's conversation is with Mitchell Glassman, director of the Division of Resolutions and Receiverships at the FDIC.

Also joining us in our conversation from IBM is Dennis Kaizer.

Mitchell, the FDIC examines and supervises more than half of the institutions in the U.S. banking system, if I have my facts correct. Could you tell us a bit more about the characteristics of banks or depository institutions insured by the FDIC?

But more specifically, what's the composition of, say, regional versus large national banks and institutions and how do these insured institutions typically belong to the Federal Reserve System?

Mr. Glassman: Well, first of all there, you know, insured institutions have to be chartered and it could be under a state charter, it could be chartered by our Office of the Comptroller of the Currency or the Office of Thrift Supervision.

Currently there's about 8,500 insured depository institutions. There's about 7,200 that are commercial banks and approximately 1,200 that are what you would consider thrifts. Of that number, you know, the FDIC regulates 5,100 of them and the banks that we regulate are state non-member banks of the Federal Reserve System.

As far as size, you know, you could have a large regional bank that may cover a multi-state area, or you can have a very, very large bank that may be the top three or four in the country.

But overall, we have about approximately a 160 banks that are over $2 billion. That only represents about 2 percent of the total banks. The vast majority of the banks that the FDIC insure are small community banks, so you know the numbers aren't -- are more in the favor of the community banks.

As far as the Federal Reserve System, if the charter is the national bank, and it automatically becomes under the Federal Reserve System. State banks have a choice, either they are state member banks, in other words, state charters who belong to the Federal Reserve System and they are regulated by the Federal Reserve.

If they are non-members, as I was mentioning before, then the FDIC would be the primary insurer, then you have the Federal Thrifts and those are also not members of the Federal Reserve System, but they are you know, regulated by the Office of Thrift Supervision.

Mr. Morales: So there's really different flavors of banks out there depending on who charters them, size, those are a couple of different dimensions of how you would categorize banks or depository institutions?

Mr. Glassman: That's correct. It provides great diversity in the financial system and that's probably one of the, you know, one of the best things about our current -- not only our current regulatory system but also the strength of our financial system.

Mr. Morales: So, Mitchell, we've been using the term bank failure. What constitutes a bank failure, and could you give us a historical perspective on the history and trends of bank failures in the U.S., since the inception of the FDIC program 75 years ago?

Mr. Glassman: Well, first of all the FDIC never closes a bank. It's usually -- it is the primary regulator that actually has the ability to pull the charter. But by law, if the charter is pulled, then the FDIC becomes the receiver and as receiver we have multiple functions, but one of the primary roles we have is the deposit insurer.

That's one of our first priorities, it is to take care of depositors. We have to do a determination of the liability side of the balance sheet which is where the depositors accounting is and then determine who is insured and who is uninsured and make sure that that money is provided to the depositors as quickly as possible, whether through another assuming bank or through what we call a payoff.

We also have the role of receiver, which is also very important and this is very unique. No other country in the world has this role as receiver -- what we basically control the liability side of the balance sheet, but also the asset side of the balance sheet.

It's the role where we have to be not only be very careful, but also the way we handle the receivership has to be where it's not only fair and equitable but that we also do it in a least-cost manner. One thing we want to do is very business-like, very customer-service like, but also try to get the best dollars out of the remaining assets, not only for the benefit of the FDIC but for all other creditors that are doing owing.

So it's a huge responsibility, it's very unique and one that we always take very seriously. So we use all means that we can to be able to accomplish that task. So that is something we're very, very crucial and as far as the number of failures, you know, it -- there's peaks and balances with failures.

You know, during tough economic items, you know, failures can go up; you know, in recent history, during the savings and loan crisis during the last, you know, economic disruption, there were thousands of banks that closed, you know, with very large dollar amounts.

But that is sort of an anomaly. On average, from really since the time of the FDIC's existence, there's only been an average of maybe 3 to 12 banks that have actually have failed.

There are some years in past history here where we have no failures. So it's one of those things that depending on the economy, depending upon what would happen at the banks, sometimes failures do not occur because of loan losses, there maybe fraud, so those also would trigger potential failures.

But overall, you know, there's really no magic number, but the idea is the FDIC needs to be prepared whether there's one failure or multiple failures.

Mr. Morales: And this goes back to your point about readiness, that was one of your key concerns?

Mr. Glassman: Readiness is a key concern.

Mr. Kaizer: So Mitchell, you kind of walked us through what happens, you know, after closing and it goes into receivership at a high level. Can you actually maybe provide a little bit more detail?

So I understand the FDIC doesn't actually close the bank, but what happens? How does the FDIC get notified and then what steps do you take to mobilize for managing all those activities in your receivership?

Mr. Glassman: Well, we work pretty closely with our examiners, with our division of supervision and consumer compliance. And then we also have relationships with the office of the comptroller and OTS.

As a mater of fact, both the Comptroller of the Currency, and the director of our Office of Thrift Supervision are actually board members. We also have a very, very strong relationship with the Federal Reserve System, so we basically work very closely together to share information. But in particular, the FDIC collects a lot of information on bank performances.

We also have a very robust examination function so that we have examiners going in including the other regulators. So as information is gathered, as we start to see certain trends, it may be become evident that a bank may be having problems, whether it's loan losses that deplete capital to a certain point, or where they may have a liquidity issue.

When it reaches a certain point, we would be notified, you know, by the primary regulator that they have some deep concerns about a particular institution. We try to get hopefully at least 90 days notice that there is an issue, but there are occasions where we may only get one day's notice.

But regardless of whether it's 90 days or one day, I'm in the role where we have to be able to react quickly, efficiently, and that we're going to try to accomplish the same task whether we had 90 days to prepare versus one day.

So we have five teams of people standing by. I created what they call a "watch commander program," where basically every week somebody is on call. I've got a model where I only make one phone call and we can mobilize a lot of people.

If the bank is large and we need to react quickly our division of supervision and consumer compliance works with us very closely, we can get bank examiners actually to come in and take control while our teams gathers and then gets to the geographic location.

So it's very difficult what we have to do but it's something that we take great pride that if we get notified regardless of where the insured institution is geographically and we're also talking about insured banks in Puerto Rico, and Guam and the Virgin Islands, we handle those as though, you know, they were next door to us.

Mr. Kaizer: So banks through some supervision by one of the regulators ends up on a troubled list, if you will; does getting onto to this list mean that the failure of that institution and subsequent receivership is imminent?

Mr. Glassman: No, far from it. If anything, very few of those banks actually would lead to failure, and historically it's always been less than 10 percent. Being on the list actually means that it's getting more regulatory scrutiny.

I would tell you the majority of those banks that are on the list actually get recapitalized, they get merged, they get handled by the open market where the FDIC does not have to get involved.

But again, we treat any bank that's on this list as ones that we need to pay attention more closely on, but again whether it's on the list or I have to deal with an institution because there was a fraud in the bank, you know, the reaction's the same.

Mr. Kaizer: As I understand it part of the receivership role is to manage and sell the failed institution's assets. Can you tell us a little bit more about what you and your organization does to sell those assets, the strategies you have in place for that, the types of tools you might use?

Mr. Glassman: That is something that -- again, we use our business judgment, but that is something that in order for our insurance fund to stay solvent and also to return money back to the creditors as quickly as possible, we try to market the assets very quickly.

We are a division and an organization that believes in marketing, to try to return the assets, both the good and the problems to the marketplace as quickly as possible. One of the strategies that we use is that lot of times, if a new bank wants to purchase the institution's deposits, we give them options to buy portfolios from the FDIC.

Naturally, those portfolios match up sometimes with the deposits so that they can remain in the community. We also -- if indeed the assuming bank, if we have one, does not want the portfolios that we have, then we very aggressively go out and offer those portfolios to other outside investors.

One of the tools that we've got that I've been very proud of and actually won a presidential award on, was VUC (?) commerce, where very much we practice the idea that placing information on a secured website using the Internet is one of the best ways for us to develop a market and we have been very successful.

We have been doing this since the year 2000, and I always brag to my staff and anybody who'd listen to me, is the fact sometimes I think e-Bay took our idea. I just --

(Laughter)

Mr. Glassman: I was just not able to get it franchised fast enough.

Mr. Morales: That's great. It strikes me today, Mitchell, that as we talk about, you know, banks and these large institutions, I mean, these could be very, very complex organizations and I would imagine that this presents a growing challenge for you as you look to prepare for a potential large-bank insurance determination process.

Could you elaborate on perhaps some of the improvements that you're pursuing in this area and how might these changes enable you to better handle or prepare for one of these types of failures?

Mr. Glassman: You know, Al, you're absolutely right. You know, large institutions are a lot more complex, not only what they do in the capital markets, how they deploy their IT strategies to reach out to their customers, but also in particular on the type of systems that they use that we have to draw upon.

One of the things that we try to do is gather as much of information from that institution and that's very critical for us. We currently have a policy out that we hope to make into a regulation where we're asking the very large banks, particularly you know, the top 160 to provide us with a standard data set so that we can quickly deploy that into our own systems to be able to do that deposit insurance determination.

In addition, the ability to place what we call "provisional holds." This is basically a device where a bank automatically can put holds on those depositors that we know have uninsured dollar amounts, but it does allow us to get the bank reopened very quickly, but at least give the depositors with the insured money access to their money very quickly.

And then also to release those holds that if indeed we find they are insured, you know, that we can do it on an automated basis. So we're trying to use the bank's own way of doing business using what I think is a very innovative approach for us to do these determinations using automation versus a lot of staff, and that allows us to be able to do determination, get the bank reopened, but also that's all part of our safe -- not only our safety and soundness, but our confidence in the banking system.

So whether it's a small community bank or one of the largest banks in the country, the ability to get that bank reopened quickly is one of our main mandates and using and leveraging IT systems and the new regulation is I think one of the ways that I think we're going to able to accomplish that.

Mr. Morales: Now the FDIC has an absolutely crystal-clear reputation, but it strikes me that with some of the complexities that you describe in terms of the types of institutions, the complexity of the process that you manage -- and you talked about this earlier as one of your priorities -- how do you ensure that the FDIC has the right number of people with the right qualifications to manage this process?

Specifically, could you tell us a little bit more about initiatives that I understand you manage, such as the Corporate Employee Program and the Resolutions and Receiverships Commissioning Program that assist you in this area?

Mr. Glassman: Yes. You know, we recognized very early first of all, you know, if you were to look at the FDIC budget like many agencies in other companies, you know, human resources is probably one of the largest single items that you would have.

And we are very fortunate at the FDIC that we have a very highly educated and very motivated staff who are very familiar with bank operations.

When you take a look at what I do, we also are involved in bank operations and bank assets. So the way the FDIC is operating is that if we can train -- cross-train our bank examiners and other like staff into how we handle claims and how we handle receivership matters that help us with the actual closing, what that allows us to do is leverage.

The best -- where -- place to start doing this training is when we have new employees come in through the program, is to educate them not just on their primary duties as bank examiners but also to give them the functional training that maybe necessary for them to help us during those peak times where we made a draw upon those resources.

But I tell you the reverse is also true, because I had employees who are in receiverships and claims, who have gone out on bank exams. So in a way from our FDIC board, and from our chairman, you know, basically everybody at the FDIC is prepared to handle bank failures, but then again where bank examination may need help, we're able to swing those resources elsewhere.

So it's a holistic approach to the management of human resources and one that we've been very beneficial. As far as our commissioning, this is something that I have been desiring for some time.

The -- you know, we have commissioning for our bank examiners, it's a highly regarded commissioning. Bank examiners are very proud of it, but I felt in order for knowledge management and for the ability to pass on the unique knowledge that we have in handling what we do which is unique that we credit our own commissioning for the role of resolutions and/or receiverships.

This is a way for me to pass on my knowledge and my experience to the next generation and to also to have a commissioning where they also would be just as prideful of the work that they do in that area, as much as a bank examiner does with their commissioning.

Mr. Morales: So this is a type of a certification type program?

Mr. Glassman: It -- commissioning is little bit more than a certification. We do have certifications for individual functions like what we call franchise and asset marketing. We have certifications for claims, you know, to handle claims determinations and for asset marketing.

But a commissioning is basically a specialist who can handle all parts of the organization and actually go out and run a receivership -- a small receivership on their own without a lot of supervision.

Mr. Morales: So Mitchell, you clearly have this model where at any point in time you can summon vast parts of the organizations to various crises because you've cross-trained people across a variety of different tasks.

But with so few failures in any given year, how do you actually provide the knowledge and the real-world experience of how to manage this process?

Mr. Glassman: Well, I -- there's multiple things that we're doing. First of all, we've highly documented all of our activities, so we have the typical manuals. But we've gone one step further. We have also have created what I call web-based training, what I would call training that you know, if you get called upon and you were going to a particular failure and you had a particular duty you would be able to pull down a CD-ROM or go to a website and be able to get that just in time training.

We also at the FDIC and particularly in our division, we've done a lot of simulations. The fact is that we put people through what would happen and what you would be doing.

We also have -- whenever we do have failures, we allow people to shadow so they not can witness it, but they can also be participatory. And last but not least, we have a very dedicated program with our corporate university, that is finding all different ways to cross-train through people's career on not only our functions but also the functions that, you know, they would need for, you know, their corporate life to make them successful.

Mr. Morales: That's great. How has the subprime mortgage crisis and the resulting credit crunch impacted the FDIC? We will ask Mitchell Glassman, director of the Division of Resolutions and Receiverships at the FDIC to share with us, when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host Albert Morales, and this morning's conversation is with Mitchell Glassman, director of the Division of Resolutions & Receiverships at the Federal Deposit Insurance Corporation. Also joining us in our conversation from IBM is Dennis Kaizer.

Mitchell, you can't pick up a newspaper today without seeing that the home foreclosure rate has nearly doubled in the past 2 years. I also read that an estimated 1.7 million homeowner-occupied subprime hybrid-adjustable mortgages -- that's sort of a mouthful -- are set to reschedule over the next couple of years. Now, the combination of declining home prices and scarce refinancing options may result in even more foreclosures.

So, how has the subprime mortgage crisis and the resulting credit crunch impacted the FDIC, and what role does the FDIC play in working with the market to develop solutions that might help prevent unnecessary foreclosures and keep homeowners in their home?

Mr. Glassman: Obviously, the FDIC, as we talked about before, has to maintain confidence in the banking system. And one of the things that we have done not only through our chairman but through our board, is to work with the institutions not only for those who have these type of loan products on their books that to be not only cautious, but to be very careful about how they handle them. But also that this is a consumer issue that has, you know, a wide net that it seems to be carrying.

So for the financial institutions that we ensure, you know, we want them to be careful, we want them to do the right thing. But you know, if indeed they need to get more capital, you know, we try to work with them to get more capital to -- also to, you know, handle their servicing in a way that allows borrowers to try to recast their loan so they do not have to go through foreclosure. I would tell you that we're also -- been very proactive in financial literacy and in working with outside groups to try to work with the consumer.

We have a very, very strong belief that foreclosure is not a good option for the banks. We feel working with the borrowers in recasting their loans is the better way to minimize lawsuits and also keep the home prices stable, because foreclosures are not good for the country, they're not going to be good for the banks.

Mr. Morales: So -- we talked earlier about the number of bank failures and enclosures per year. I understand that there were, I think, three FDI-insured banks that failed last year. I'm sure that all three of these pose their unique set of challenges for you. But I understand that one of them was particularly challenging in that it was an Internet bank which did not have any physical branch offices. How do you deal with this, and to what extent did closing such a large Internet bank require you to modify and rethink your receivership processes?

Mr. Glassman: That's a good question. The -- you know, any insured institution we have to be prepared for. And when you speak of an Internet bank, for your listeners who may not know what an Internet bank -- but this is basically an institution where the customer basically deals with that bank either through an Internet portal or through some other means, whether it's an ATM, they do not have a physical branch in many cases, and they do not have a main bank to be able to transact business.

So we're basically dealing with a core base of customers in a virtual world. These type of institutions have a lot of technology that they're deploying sometimes on multiple platforms, sometimes in different locations. And for us to be able to handle that -- and again, this was our preparation, you know, because we had dealt with something similar that we wanted to be certain that we're able to still do our deposit insurance determination, get the money in the hands of depositors.

But we're also very fortunate in the sense that ING Direct, you know, which is also another Internet provider, was able to purchase those particular customers, which then left us with the receivership. But for us to plan such a very difficult type closings, we had to be in the right place with the right people. We had to be certain that a) if you shut down the Internet portal, you know, we had it up and running within 2 hours, and gave access to money to people very, very quickly.

So whether it's a community bank or a virtual bank like this Internet bank, you know, we move very quickly. But you have to plan for it. You cannot just walk in and say, oops, where do I go?

Mr. Kaizer: Mitchell, while the number of bank failures has been quite low in recent years, there's certainly some speculation that the number of failures is going to increase potentially in the relatively near future. Can you tell us what you may be doing to prepare for an increase in bank failures?

Mr. Glassman: Well, Dennis, you know, I have to tell you that, you know, that question comes up quite frequently. But, you know, I sort of ignored, you know, the idea of whether there is one bank or a hundred banks -- it really doesn't matter. You know, the FDIC is going to be ready. It doesn't matter what size, what location. So even though there is a deep concern about the financial health of the industry, I think one thing the consumers and depositors can be reassured they shouldn't worry.

You know, the fact is the FDIC is going to stand by those deposits, they're going to efficiently handle the receiverships, and that we're prepared to go to any lengths to be able to, you know, make sure that we meet our obligations. So, you know, I'm not concerned, and I don't think anybody else should be.

Mr. Kaizer: Great. You know, we've heard you talk about how the FDIC places a high priority rate on getting the deposits back in the consumers' hands in a timely manner. Can you tell us what first are some of the critical reasons that it's so important to get those deposits back into the person's hands so quickly, and then maybe some examples of how by doing that you are supporting that local economy and those depositors and the impact that that has?

Mr. Glassman: The way our financial system works, to be able to have deposits available -- if you think about it, you pay your mortgage, you have to go to the drugstore, you go to the grocery store, you have to pay your doctors, all of this is through the handling of either checks or through cash.

And if you take away the ability of depositors or customers to transact business or to issue checks where they not -- may not be accepted by the merchant or vendor, it starts to create a lack of confidence, because all of a sudden your -- this bank and this community may have failed, but what about my bank down the street?

So our ability to get insured deposits back to consumers is so important, because we want to be able to demonstrate not only to that community, but everybody else that's in that community and throughout the country who have their deposits at banks, that should be the least of their concerns that they're not going to have access. I would tell you that in certain countries, you know, that does not always happen.

I would tell you before the FDIC it took years for people to get their money back. So that is one of the main things that we do is to be able to get money back in their hands so they can be utilized within the local economy.

Mr. Kaizer: So Mitchell, you've talked about how a consumer would get their ensured deposits back in a timely manner. So is there a scenario that you can talk to us about where depositors might not get all of their money back because that's not all an insured deposit?

Mr. Glassman: Unfortunately, that does happen. We do have depositors that have placed money into the institution that was beyond our FDIC insurance limit. You know, currently it's $100,000. There are certain accounts that are, you know, that are retirement accounts that are up to $250,000. But if the customer has excess funds, then what ends up happening they become uninsured depositors, and they would share in the proceeds of any collections that we have out of the receivership.

So we would pay -- later on as we liquidate the assets, we would pay them a dividend for their uninsured portion. For instance, if somebody had $110,000 we would pay them 100,000, we would give them a receiver certificate for 10,000. But because of the efficiency we try to deploy, and you know, the value of the assets, we may be able to return 80 percent of that portion. So we may be able to pay them $8,000 over the time of the receivership. So net net they did lose, but it would be $2,000, not the full 10,000.

Mr. Kaizer: So you're always trying to drive to make people as whole as possible, but folk should realize that there are some limitations.

Mr. Glassman: That's absolutely correct. And that's something that I would encourage, you know, your listeners and anybody else that, you know, that has deposits, that they do check on their insurability. They can check on the FDIC's website -- wwwfdic.gov, and they will be able to get help in getting -- answering their questions on -- about insured deposits.

Mr. Kaizer: Great.

Mr. Morales: Mitchell, in the past few years, we've seen a range of natural disasters within our country. Would you tell us about the role FDIC might play in the response to a natural disaster? What about the regulatory relief that FDIC may provide to insured financial institutions in the event they sustain significant damage as a result of a natural disaster, or that may service those affected areas by such an event?

Mr. Glassman: You know, Al, that's probably one that I'm probably the proudest about even though, you know, it's not involving bank failures or supervision. But the fact is the FDIC, because of its experience -- I will give you an example -- during Hurricane Katrina, you know, the FDIC was one of the first to provide call center support for the people who wanted to know if their banks were opened and where they would be able to find an ATM or able to call, you know, the FDIC and actually get people to answer, and to actually direct them to where they can get help.

I would tell you there are supervision people. We're also very much in there. They basically make sure banks were able to reopen, that they had their backup systems, make sure that they had the help. They actually help the banks partner with other banks that had to share lobbies. But also that if there was some kind of relief that needed to be made for the borrowers, you know, we also send out, you know, notices to say, you know, if indeed a borrower has been harmed, that there are certain things that the banks would be allowed to do to work with those borrowers.

So we have a multiple approach, but I think when it comes to disaster, the FDIC has a very good track record of consumer protection, but also being very sensitive to the needs of the bank to get open as quickly as possible. Again, it all stems from our confidence in the banking system that we feel that we are very major players in that.

Mr. Morales: That's great. That's a very significant issue here in our country. So we spent a fair amount of time talking about the financial system here within the U.S. Could you elaborate on perhaps an increasing leadership role that the FDIC is playing on a global scale? To what extent are foreign governments looking to the FDIC as a model for either establishing or strengthening their own system of a deposit insurance and bank supervision?

Mr. Glassman: The FDIC has taken a very, very strong leadership role -- the foreign countries are trying to get their own banking system up and running, because they know that's very much intricately part of their own economic wellbeing. And they look to the FDIC not only to develop their own deposit insurance system, but also our way of regulation but also the way we handle bank failures. We have been very much active in the International Association of Deposit Insurers -- we call it IADI.

Matter of fact, our vice chairman, Marty Gruenberg, is the chairman of this committee. So we do training, we provide folks to help them with -- write -- drafting their own legislation. We help -- actually teach them some of the functions that go along with this activity, and have a lot of what I call "open communication" that goes on constantly. So we're very proud of the fact that we feel that also helping these countries develop their banking system is also good for United States and also for the global economy.

Mr. Morales: That's fantastic. What does the future hold for the FDIC's Division of Resolutions & Receiverships? We will ask Mitchell Glassman, director of the Division of Resolutions and Receiverships at the FDIC to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to our final segment of The Business of Government Hour. I am your host Albert Morales and this morning's conversation is with Mitchell Glassman, director of the Division of Resolutions & Receiverships at the Federal Deposit Insurance Corporation. Also joining us in our conversation from IBM is Dennis Kaizer.

Mitchell, given the interconnected and interdependent nature of the financial systems as we've discussed, could you tell us about the kinds of partnerships you are developing to improve operations or outcomes to sustain the system and how might these partnership change over time?

Mr. Glassman: Well, partnership is very important. Not only do we form partnerships with the other regulatory communities, but also with the banks themselves. You know, we need to stay in-tune with what the banks are doing and how they are operating. I would say that we actually have partnerships with the consumers themselves, you know, reaching out and listening to what's on their minds in some of their issues with local, state, and federal governments are also part of our partnerships.

And then in particular with major companies and contractors, who have inside knowledge and expertise that we may not have, we call them partners. Anything that helps us do our jobs and to do it better, we will enter into the partnership. But also being a partner means also we share, and that we also provide insight.

So we kind of feel like this is a good way of doing business. It's one that keeps us abreast of the issues, but also gets us prepared that if we need to change the way, our thinking, or the way we operate, or possibly to help mitigate risk, this is a good way for us to practice what we do, and partnership, I think, is a good business practice.

Mr. Morales: So it sounds like you also try to operate as open a system as you can?

Mr. Glassman: I firmly believe that that's the way we need to operate. You know, that's one thing, I think, that the FDIC prides is that we have the ability to reach out and touch, but we also want people to reach out and touch us. We have a very active call center.

You know, our website is something that people can derive a lot of information on, whether it's about their FDIC insurance, whether they, you know, through a program we call, "ED." If they want knowledge about how can I better educate myself, my kids, or myself through adult literacy, we have this money smart program that you can download, and look at. We actually have our FDIC employees go out and actually teach it.

Then also the fact is that we are going to let people know who we are. You know, we are going to have our 75-year celebration, where we are going to go out into the communities, and let people know just how important their FDIC insurance is. But in particularly what the role of banking as in our economy, and why they should look to their banks is a place to, you know, conduct their financial affairs.

Mr. Morales: It's perfect timing for that.

Mr. Kaizer: Mitchell, you've mentioned, you know, the Internet and some of the things that you have under, a couple of times now. I believe a Brown University research study released in 2007 ranked the FDIC's website 8th in the federal government, which is just great. Can you tell us a little bit more about how maybe your division actually uses that website or that Internet in an actual bank closing?

Mr. Glassman: Yes, we use it for multiple purposes, you know, one not only to provide information to all of our constituencies to who may have to deal with this. We may have buyers that come looking for real estate or looking for information on how they would be able to connect with us. We also after receivership, after bank failures we post everything that we know about that transaction, but also what is going on in that receivership.

So if you are a creditor, you would have the information readily available to you. One of the things we practice is that if we can answer as many of people's concerns or questions, or provide documents, that's -- and saves them from having to call us, or to write a letter, then we want to do it. So we are always constantly keeping it updated. We are constantly always looking for different kinds of technology to be able to help the customer, but the use of the Internet, I think, is probably one of the best vehicles for communicating with the public.

But also that as things change we can also make sure that information gets there very quickly so that the customer themselves would be able to react to it quickly.

Mr. Kaizer: Speaking of change, I'd like to transition now to talking about the future. You know, as financial institutions grow in both size and complexity, the FDIC is likely to face, you know, some challenges, if one or more might fail simultaneously. Can you give us a sense of maybe some of the key issues that will affect the FDIC, and in particular your division, maybe, over the next few years and how you envision your office might need to evolve in light of these challenges.

Mr. Glassman: It is always something that we constantly keep in our radar. You know, you are correct, the institutions are getting large. They are always merging, they are acquiring, even at the community bank level there's a lot of changes. One thing we try to do is look ahead, where is the industry going, and whether or not our current processes and procedures really match up to what we are going to be doing.

I'll give you a case in point, you know, when we come into a large institution or any institution, they now have the ability of customers to pay bills online. It is very important, so when we come into an institution, we might want to make sure we maintain that type of relationship. We also are very interested in making sure we maintain the core value of the franchise, whether it's the core deposits, the type of loans, the type of technology platforms.

As banks become much larger they also get involved in capital markets-type approaches. Where they get their funding becomes a little bit more diverse. So our ability to understand how the banks operate, and how they are dealing with their customers because what we are trying to do is capture that value, and actually through a merger-acquisition process be able to move it to a new institution, so that the same continuity of services that the customers expect will just flow to the new customer.

So in a way, we have to be prepared to move quickly to understand what's on the balance sheet of the bank, but how does it relates to the FDIC on a least cost manner, but also ultimately to the consumer. And in order to do that you will always have to look ahead. You always have to see what's out there. You have to kind of figure out, a) How am I going to deal with this particular situation?

Example is a lot of the institutions are now getting involved with what they call reverse mortgages. Well, that is something that is very important to the consumer. And we are, you know, working very hard to say, what if we were to receive a portfolio like this, how would we react, or if there is multiple platforms that the bank is working on, for instance, they may have offshore platforms, how would we handle that.

What if certain things weren't to happen, how would we deal with it? So the banks become large, they also become complex and we try to foreshadow what we need to do, and be certain that we are operating in a way that gets us the best results. The least cost result.

Mr. Morales: So this is actually a very critical point here. So it's really more than just insuring the deposits. It's also about preserving the services, that that institution was providing within that community, so that, the consumers to a certain extent will see sort of a seamless transition, should one of these events takes place.

Mr. Glassman: That is very critical for us. But I would also tell you that I am in the business of selling banks. You know, if I can obtain a premium for that franchised value that is in the best interest, not only the FDIC, but all the creditors that may be involved. So by understanding the nature of the bank, its customer base, how it was operating, allows me to be able to transfer that value, and hopefully through an auction process, through a bidding process, we are able to get more value from it, and actually receive more dollars for the benefit of everybody.

That's one thing, that we do have, is we have $52 billion in our insurance fund, and it is not taxpayer driven. Our funds come from the industry, so we have a very strong desire to be certain that we try to minimize the cost not only to the consumers, but ultimately to protect our taxpayers.

Mr. Morales: That's great. We talk a lot to our guests about the pending government retirement wave, which is a big issue for many organizations here in the federal government. How are you handling this issue within your organization, and what are you doing to ensure that you have the right staff mix to meet any of these future challenges?

Mr. Glassman: That is something that we at the FDIC are also facing, we have this bell curve where we've got a lot of new folks that we are bringing in, we've got a lot of people who have the ability to leave under voluntary retirement, and that's like a big bubble right in the middle. So we have got different strategies, as we discussed earlier, we have our Corporate Employee Program, where a lot of the newer folks who are coming in, getting across, you know, understanding of the organization.

But we also have brought back what I consider mid-career hire employees, people who have experience to be able to fill the gap, who in their careers are able to join us. We brought back retirees in certain cases to help, you know, meet the bubble. And last but not least, we are always looking that if indeed we loose certain knowledge, certain key people, who would be in our succession.

So we've developed a program through our corporate university where we identify who are high potentials. We have got a very aggressive leadership program, and I might want to add that I am also dean of the College of Leadership Development, so I am very much into what we are doing organizationally, you know, to provide succession. But what really counts is that it's the knowledge that the folks retained, and you'll be able to pass it on, so that the next generation not only has the ability to provide management and leadership, but also has the technical skill sets that do it successfully.

Mr. Morales: So let's talk about this future generation. As you reflect on your 35 years of experience in the industry and in public service, what advice might you perhaps give a person, who is out there considering a career in the public sector?

Mr. Glassman: Well, I would tell you it wasn't my plan to stay in the public sector more than 5 years, but I have to tell you when you are in the role of helping people, making a difference, and being part of something bigger than you are, it is very easy to catch some passion for it. And I do have a passion for what I do, because I have been in West Kansas, and parts of Iowa, and parts of Texas, where I have met people, who depended upon the FDIC, depended upon their government, to step up and do the right thing.

And I think that gives you a certain amount of satisfaction, so I would encourage anybody, who is seeking a career in the federal sector, in the federal space that is a good career, it is something they can get a lot of satisfaction, and whether they stay one year, or they stay like me 35 years, they are going to gain. It's going to be value added to not only to their own career, but I would also tell something that in lot of families they'll take pride in the fact that they are out helping the public in a service that's desperately needed.

Mr. Morales: That's a great perspective. Thank you. Unfortunately, we have come to the end of our time, so I want to thank you for fitting us into your busy schedule. But importantly, Dennis and I would like to thank you, for your dedicated service to our country across the various roles that you have held at the FDIC.

Mr. Glassman: Well, I'd like to thank you for being invited and sharing. One thing, the FDIC is going to be here for 75 years, it's going to be here for a long time, but I think that's one thing that's consistent that, you know, that we will always try to do the best we can, and frankly take leadership role in all of the federal services, and again we thank you for inviting us to share.

Mr. Morales: Great, thank you.

This has been The Business of Government Hour, featuring a conversation with Mitchell Glassman, director of the Division of Resolutions & Receiverships at the Federal Deposit Insurance Corporation. My co-host has been Dennis Kaizer, partner in IBM's federal civilian practice.

As you enjoy the rest of your day please take time to remember the men and women of our armed and civil services abroad who may not be able to hear this morning show on how we are improving their government, and who deserve our unconditional respect and support.

For The Business of Government Hour, I'm Albert Morales. Thank you for listening.

Speaker: This has been The Business of Government Hour. Be sure to join us every Saturday at 9:00 a.m. and visit us on the web at businessofgovernment.org. There you can learn more about our programs and get a transcript of today's conversation. Until next week, it's businessofgovernment.org.