WASHINGTON — Even Comptroller of the Currency John Dugan, finds it hard to say whether the government's latest actions to backstop the financial sector will be enough.
In an interview Wednesday, he acknowledged that each time regulators have crafted a solution, it has appeared sufficient only to be outdated within days. Mr. Dugan said he hopes this time will be different.
"There's too many times where I thought this is the inflection point that would really calm things down," Mr. Dugan said. "This one does feel like that to me."
In a sit-down interview, he opined at length on the government's actions to date, his role behind the scenes, and the future of the financial regulatory system.
Though he has been at the epicenter of some of the most sweeping moves — including the seizure of Fannie Mae and Freddie Mac, JPMorgan Chase & Co.'s acquisition of Washington Mutual Inc., the creation of a $700 billion asset-purchase facility, and the program for equity investments in banks — Mr. Dugan has largely avoided the spotlight.
He said that though regulators like Federal Reserve Board Chairman Ben Bernanke have a very public role, he prefers to work behind the scenes.
"It is appropriate for the secretary of the Treasury and the chairman of the Federal Reserve to take a leading role when these things affect monetary policy, systemic risk," he said. "I think that is a time when you don't necessarily need many different voices, many different plans that are thrown out on the table, and I think it's better to work to get to a common solution."
Last weekend, he worked with Treasury Secretary Henry Paulson, Mr. Bernanke, and Federal Deposit Insurance Corp. Chairman Sheila Bair on the capital injection plan.
Mr. Dugan said last week's decline in the stock market, where the Dow Jones Industrial Average dropped below 9,000 for the first time in five years, forced the government's hand (His comments came before the market again plunged below that level). It no longer had the option to wait while the Treasury set up a facility to buy troubled assets, he said.
"The markets went into a tailspin, and what we had was a steady drumbeat every day with such heat and intensity that it began focusing policymakers both here and abroad on the need to do something very fast to arrest the financial panic," he said. "It was clear that TARP [the Troubled Asset Relief Program], which is still viewed as a valuable part of the program, was going to take more time and there had to be some limit."
The capital injection plan "didn't foreclose the asset kind of programs TARP is still planning on doing. It was something to do sooner, bigger-scale, faster, [and a] stronger signal."
The work came to a head with a Monday afternoon meeting at the Treasury with the chief executives of the top bank holding companies. Though several CEOs were resistant to government stakes in their institutions, Mr. Dugan said, they signed off quicker than he had expected.
"I thought the bankers were far more receptive to this and more quickly than I would have thought walking into that room," Mr. Dugan said. "They hit agreement much faster than I personally anticipated and which I was pleased to see."
Ultimately, the banks agreed to accept the Treasury's buying $125 billion of preferred shares in Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp., and State Street Corp. The government is to invest another $125 billion in other banks by yearend.
The banks that initially received the capital from the government are considered well capitalized and did not need the money right now, Mr. Dugan said, but their participation was essential.
"The general picture for the banks that was painted [in Monday's meeting] was [that] this was a good thing for the banks to have extra capital in a very uncertain world," he said. "Secondly, it was most important that all banks, if they felt they needed the capital or not, that they do something strong to make a powerful statement to the markets and to the world."
The equity investments, he said, showed that the "U.S. government stands behind U.S. banks, that U.S. banks are safe, and it's not a measure of just trying to [do] it with weaker banks."
He also said the capital purchase plan could complement the asset plan enacted by Congress a little more than a week earlier. Asset purchases can remove bad assets from banks' balance sheets, he said, and the added capital will let banks more easily absorb losses.
Still, he acknowledged that banks' problems are far from over for this year, warning that asset quality remains an issue.
"The thing we've been focused on for some time is, the asset quality has been declining and it has different effects," he said. "By providing more capital into the system, you are providing a greater capital cushion, and you are addressing liquidity."
With Congress poised to begin a massive overhaul of the regulatory structure next year — an agenda both presidential candidates have embraced — Mr. Dugan is well positioned to offer advice.
In 1991, he oversaw a study of the regulatory structure while working at the Treasury Department under the first President Bush. He found himself on the receiving end of a similar study undertaken by the second President Bush this spring, when the Treasury Department recommended merging the OCC and Office of Thrift Supervision as an intermediate goal. For the long term, the study backed creating a single bank regulatory agency.
Mr. Dugan said the marketplace has already answered restructuring issues such as the regulation of investment banks (the largest have either been bought, failed, or converted into bank holding companies), but other issues remain. These include questions about the thrift charter and the OTS, the role of the Fed as a systemic risk regulator, and how to oversee state-regulated mortgage companies.
"There will be concerns about: Can [the Fed] see into other institutions, like AIG [the giant insurer], which they have no way to look at in advance," Mr. Dugan said, "and I think that will be a focus of 'do they have enough access to authority with respect to other kinds of nonbank, important, financial system players.' I still think there's an issue out there about the lack of regulation of state-regulated mortgage brokers and mortgage bankers."
Mr. Dugan's agency is still being criticized for enforcing national bank preemption. Critics, such as state attorneys general, have charged that preemption undermines state consumer protection law and helped cause the housing crisis. Mr. Dugan called preemption a scapegoat issue.
"When I hear state attorneys general try to blame all of this on the OCC and federal preemption, to me it is a smokescreen for states' failure to regulate the institutions that had the worst loans, caused the biggest problems, and were totally unaffected by OCC preemption," he said.
He does not let banks completely off the hook. Securitizations of senior super assets along with subprime loans and credit default swaps contributed to banks' bad portfolios, he said.
"With things like credit default swaps … the infrastructure hasn't kept up with it," he said.
"There will be continued moves toward centralized ways to mitigate risk with respect to instruments like that that fuel one-off problems, and that will be a place that will be the focus of attention next year."