As any schoolyard veteran can attest, there are worse names to be called than "tertiary," stronger epithets to hurl than "asinine," and more effective ways of goading someone than to question the depth of his commercial banking experience.
But for banks and regulators, these are unusually barbed words, made all the more rare by the fact that they were either exchanged in the public sphere, or ended up there.
Having survived the initial shock of the credit crunch and the apparent strong-arming that came with the first disbursement of taxpayer funds, the diplomatic protocol long followed by the industry has been tested on several fronts in recent months. And relations between banks and regulators are likely to remain strained as frustrations escalate on both sides, not only for the duration of the financial crisis but also beyond it, as the government's expected push for reforms forces banks to balance their interest in political pragmatism with their interest in growth and profits.
One of the first signs the gloves had come off appeared in February, with reports that federal officials may have threatened the jobs of Bank of America Corp. executives to keep the company's purchase of Merrill Lynch & Co. on track. In March came the "asinine" comment, made by Wells Fargo & Co. chairman Richard Kovacevich in a speech at Stanford University as he assessed the government's planned stress testing of the 19 largest banks.
More recently came the tussle between the Federal Deposit Insurance Corp. and Citigroup Inc., with the agency questioning whether the company needs more commercial banking veterans in top management and Citi's chief financial officer, Edward "Ned" Kelly, telling The Wall Street Journal that the FDIC is the company's "tertiary regulator" behind the Federal Reserve and the Office of the Comptroller of the Currency.
"For a senior executive of Citi to make that comment is either very aggressive of very indicative of why they have so many problems," said Robert Schwartz, a banking lawyer at Smith, Gambrell & Russell LLP in Atlanta.
Either way, he said, it exemplifies an environment that the anecdotal evidence suggests has seen "a significant deterioration in the relationship between bank managers and their regulators."
And the tension is only likely to grow as the government responds to the financial crisis with new rules and a new regulatory structure designed to keep banks reined in, Schwartz added.
Perhaps sensing that the bonds of decorum have become too frayed, players on both sides appeared to be working last week to restore order.
Bank of America chief executive Kenneth Lewis, testifying to Congress, played down speculation that he had been bullied into completing the Merrill deal by Fed Chairman Ben Bernanke and former Treasury Secretary Hank Paulson. Meanwhile, after press reports speculated that the FDIC was behind the delay of Citi's long-awaited exchange offer, Citi executives absolved the agency of any specific blame for the hold-up, and FDIC Chairman Sheila Bair reportedly made a direct appeal to Citi's board in an attempt to smooth relations between the agency and company.
All Citi will say about the matter now is that the firm "maintains a close and cooperative relationship with all of our regulators."
Of course, tension between bankers and regulators is natural, and has long existed.
Chuck Muckenfuss, a partner in Gibson, Dunn & Crutcher LLP, recalled watching an executive at a regional bank he represented in the early 1990s eject a bank examiner from his board room amid a heated dispute about the bank's viability. "I generally would consider behavior like that to be not only rare but exceptional, and suicidal," Muckenfuss said, though he noted that his client stayed in business and went on to win a top regulatory rating.
But the incident occurred behind closed doors. Airing grievances in public can be much riskier.
"The prospect of adverse effect is so much greater than the potential upside," said Muckenfuss, a former OCC official. "The over-under is not very good."
Most of the push-and-pull between banks and regulators traditionally is resolved through compromise and handled in private, said William Isaac, a former FDIC chairman. But in today's economic and political climate, banks with grievances against regulators walk a fine line between keeping their behavior in check and jeopardizing their own interests.
"Because the process has become so politicized, I think it's important that they become vocal," Isaac said. "There's a difference between vocal and disrespectful. But they really shouldn't be accepting all of this passively."
So what is an aggrieved bank to do?
The multitiered regulatory structure lets banks that cannot make their case with one regulator try another, said Wayne Abernathy, the executive vice president for policy and regulatory affairs at the American Bankers Association. Banks also can try talking to the Treasury Department, which "can be a good sounding board, and also someone who might be able to bring peace," he said.
But when banks go public, Abernathy said, "usually it's because you've been caught off guard or are just angry." As an example of the latter, he cited the industry's recent venting about mark-to-market accounting rules. "That came after trying a lot of quiet representation," he said. Accounting standard-setters eventually adopted reforms.
Of course, given the severity of the financial crisis and the explosive political issues underscoring it, perhaps it is a wonder that diplomatic relations have been preserved at all.
"It's a real credit to bankers and their regulators that there has been a consistently civilized tone to their interactions throughout this difficult cycle," said Eugene Ludwig, a former comptroller of the currency who now heads up the consulting firm Promontory Financial Group LLC.
After all, though turmoil may cloud the markets and make the industry's future look murky, it remains very clear that bankers and regulators must co-exist.