WASHINGTON - As the Federal Housing Finance Board's supervision director for the past four years, Steve Cross has weathered plenty of turmoil, including financial restatements at several Home Loan banks and a rule requiring them to register their stock.
But as the primary architect of a contentious plan to slash dividends until the banks boost retained earnings, Mr. Cross has come under increasing criticism from the banks and industry officials. All 12 banks and the financial services industry oppose the proposal, which is expected to be the subject of a House hearing next month.
In an interview, Mr. Cross acknowledged playing a major role in developing the March proposal while emphasizing that the agency's board will make the ultimate decision.
"It is a true statement that the proposal the board is considering has not just my fingerprints but my name on it," he said.
His staunch and sometimes combative defense of the retained earnings and other proposals has earned him critics throughout the industry, who describe him as hot-tempered, "thin-skinned," and someone who "has a strong sense of self-righteousness."
Mr. Cross did not display any of those qualities in the interview this month, in which he appeared calm, polite, and earnest. But he is passionate when he talks about regulatory matters, and he says he is unapologetic if previous comments have rubbed some in the industry the wrong way.
For example, Mr. Cross surprised and angered several Home Loan bank directors at a private meeting in May, in which, according to participants, he exchanged harsh words with system executives over guidelines released last year that were designed to restrict banks from purchasing predatory loans.
"That left a bad taste," one source said.
Though Mr. Cross would not say what he discussed in the closed meeting, he said, "I don't like to put off anybody. I really don't."
Despite that sentiment, he said his comments to the executives still stand. "What I said - whatever it was I said - I wouldn't be reluctant to say now."
Mr. Cross does have some supporters in the Federal Home Loan Bank System, including Al DelliBovi, the president of the New York bank. "There are some people who have an agenda with him," Mr. DelliBovi said. "For some people, he's like the dentist, because it hurts when the cavity is being drilled."
Born in Washington into a military family, the 54-year-old Mr. Cross speaks with precision about his background and career. He did graduate work in economics at the University of Virginia before earning a PhD there in 1981.
He initially remained in the academic world, teaching economics, finance, and banking at the College of the Holy Cross in Worcester, Mass. His career in Washington began in 1984, when he took a job at the Office of the Comptroller of the Currency evaluating the effects of tax changes on commercial banks.
In 1991, he took charge of compliance issues at the OCC, and eight years later he moved to the Federal Deposit Insurance Corp. to become head of compliance and consumer affairs.
In early 2002, however, Don Powell, the FDIC's director at the time, merged Mr. Cross' division with the division of supervision. Mr. Cross was no longer a division chief, but he became the senior deputy director of the newly formed department.
He said that he argued with FDIC leaders against the merger, but that once the decision was made, "I believe I was very supportive of it."
It was not long before he left the agency to take the top supervisory spot at the Finance Board in May 2002. Even before accepting the job, Mr. Cross said he knew one of his main tasks would be strengthening the exam process. At the time, the supervision staff has 10 examiners. "In the interview, I said, 'I don't know what the right number of examiners is, but I can tell you 10 is not it. Ten is way too small.' "
Since then the number of examiners has grown to roughly 30, and as the staff has grown, so has the scope of their duties, he said; they have moved from simply ensuring the Home Loan banks comply with various regulations to trying to identify vulnerabilities.
"To me, the critical element of our examinations is where we identify a weakness," he said. "There may not be an explicit rule that they are not following. It's more a reflection of an effective practice we believe can be adopted by a bank to enhance their governance, risk management, or operating performance."
The agency is still working on a plan to develop consistent ratings across the system. In its 2006 annual performance budget, the Finance Board said it was developing a rating system to "quantify an FHLBank's financial condition and risk management."
The plan was tabled without being released at the agency's most recent meeting Aug. 9, but it is expected to be acted on soon.
Many in the industry give Mr. Cross high marks for strengthening Home Loan bank examinations into a more coherent process.
"He was offered the tough task of bringing together a professional process to an examination staff that didn't exist prior to him coming there," said John L. von Seggern, the president of the Council of Federal Home Loan Banks.
"He came in and built something out that didn't exist," said Diane Casey-Landry, the president of America's Community Bankers. "I think it's been very trying for him."
The industry has greeted the retained earnings plan less favorably. The proposal would force the banks to cut dividends in half until their retained earnings reach $50 million plus 1% of their nonadvance business.
The proposal would affect the banks differently. The Seattle bank would have to raise $233.3 million of retained earnings to comply, while the New York bank, with $337 million of retained earnings, already has enough. Several industry representatives have said the plan would require too much too fast and radically alter the nature of capital in the Home Loan Bank System, which is based on redeemable stock and retained earnings.
The Finance Board is expected to finalize the proposal soon, but Mr. Cross said he is open to revisions. His office has pored through 1,066 comment letters on the issue, and he said he is particularly persuaded by arguments that the banks should be allowed more time to build up retained earnings.
"Speaking only for myself," Mr. Cross said, "it's a persuasive argument that if we proceed with a final rule, we need to rethink whether the dividend restriction should be 50%, because that builds the retained earnings up really, really quickly to the detriment of any members that might later leave and to the benefit of those that come in as free riders after the fact."
However, he also said the plan is necessary, noting a nearly $200 million loss at the New York bank in 2003 that nearly exhausted its retained earnings. If its retained earnings could not cover the loss, the bank would have been forced to lower the fixed value of its stock - an unprecedented move that could have had severe repercussions.
"The issue is composition and whether they can … [withstand] a temporary setback by dealing with the problem, putting it behind them, and moving forward," he said. "Retained earnings allows them to do that in a way that redeemable stock does not."
The job of regulators "is not to rely on averages," he said. "It is to understand various scenarios and to prepare not just for the most likely outcomes, but other outcomes that are reasonably possible."
