Former Senator and TARP overseer John Sununu on crisis and catharsis.
 
By Dirk Olin
 
 
It was an early Friday morning in September, and former New Hampshire Senator John Sununu had just heard that the Federal Reserve intended to create an unprecedented regime to regulate the pay of bank executives. The Senator had set aside an hour to ruminate on the anniversary of the financial meltdown—and the various Herculean efforts to stabilize markets, mitigate an already-devastating recession, and recalibrate America’s economic regulatory structure. Now on the board of CovergysEx Holdings, LLC—an affiliate of the Bank of New York Mellon Corporation—Sununu might have been expected to offer fierce resistance to governmental oversight of private sector pay.
 
A cursory look at his record in Congress would bolster this view. Sununu served in the U.S. Senate for six years before being voted out by an increasingly blue Granite State electorate. (For six years before that, he served in the U.S. House of Representatives.) On Capitol Hill, he often invoked the importance of unfettered market forces as the presumptively wisest instrument of social order. A rock-ribbed conservative, he was staunchly anti-tax and a budget hawk. The freest of free traders, he voted against the repeal of tax subsidies for companies moving American jobs offshore. His biggest single donor during his last campaign, reportedly to the tune of $314,118, came from employees at the Club for Growth. And he received a rating of 83 percent from the U.S. Chamber of Commerce, indicating a decidedly pro-business overall voting record.
 
Yet he was no GOP martinet. Yes, on many cultural issues—abortion rights, affirmative action, flag burning, drugs, juvenile crime prosecution—he was a dependable rightist. But he voted against a proposed constitutional ban of same-sex marriage and earned a mixed rating of 33 percent from the pro-gay Human Rights Campaign. Ditto the environment. Although all in favor of drilling for oil in the Arctic National Wildlife Refuge, he promoted a raft of proposals for mercury clean-up and wilderness preservation, earning another ambiguous rating: 42 percent from the League of Conservation Voters. He also joined Democrats in filibustering the USA Patriot Act.
Okay, okay—a right-winger with a bold streak of Yankee independence. What about regulating banker pay?
 
“I haven’t read the proposal yet,” he began in a New England staccato, “but to the extent that that administration wants to set boundaries on executive pay, it should try to avoid writing whole new pieces of legislation. So often, new legislation brings unintended consequences. Statutory language is a very blunt instrument. So stay with existing regulatory channels. As a regulator, the Fed has typically been cautious. I might not always agree with the rules they promulgate, but historically they’ve done a pretty thoughtful job of crafting regulations that make sense, that don’t cost too much to implement, and that avoid unintended consequences.”
 
The Fed proposal, as it turned out, contemplated regulatory, not statutory reform. And in the ensuing days it received checkered feedback, with some in the financial industry unalloyed support and others pounding the table. But the measured and contemplative expanse of Sununu’s answer was more interesting than the position itself.
 
A Regulator Guy?
He gained broad issue exposure while in the Senate. During his term, he was a member of the Finance Committee, the Commerce Committee, the Homeland Security and Governmental Affairs Committee, the Joint Economic Committee, the Banking Committee, and Foreign Relations Committee. Again, his record clearly indicated someone who had not been voting via ideological software. And his service for the better part of the past year on the Congressional Oversight Panel for the Trouble Asset Relief Program (TARP)—a seat he held out of office until only just recently—must have been a sobering experience. Asked about that tenure, Sununu was quick to explain precisely what his vantage point had been, after which he mused on the meltdown’s lessons.
 
“Our oversight panel did not set the rules or structure of the program or distribute funds. We were independent eyes and ears for Congress and the administration and Treasury—looking at the eight or nine programs that fell under TARP. We made recommendations on operations and structure and for improving the way TARP was administered. That included foreclosure mitigation, the capital program, assessing the value of warrants that were granted to Treasury by these financial institutions in exchange for capital injection, a look at the overall strategy of Treasury’s PPIP (the Public Private Investment Program) that’s just being instituted now to purchase distressed assets. And we were also required by statute to put forward a proposal for regulatory reform, and, so, yes when it comes to all this I’ve thought about the drivers.
 
“There clearly were regulatory failures, a failure to set stronger capital standards at huge financial institutions like Fannie Mae and Freddie Mac, there was a lowering of cap standards for investment banks and oversight of the credit rating agencies.
 
“In addition, there were big drivers of public policy—promotion of home ownership, pushed by administrations and members of Congress of both parties. We were giving financing to people who previously were not deemed credit-worthy. Conditions lowered the requirement for down payment. And I think that that very aggressive public policy over a 12- or 14-year period, beginning in the mid- to late-90’s, drove this unprecedented escalation of real estate prices.
 
“And the third piece. With asset bubbles there is an element of community or cultural acceptance of behavior that accepts the unprecedented escalation. We saw it in the dot com bubble and then in the housing bubble that just burst.”
 
Well, as long as we’re ascribing cultural drivers to the multi-car pileup on our economic interstate, what about the board members who were supposed to monitor speed and direction?
 
“That’s a good question,” replied Sununu. “We have to remember that much of this took place at a time when Congress had already passed in 2000 the most sweeping legislation in history to address perceived failures in corporate accountability and board of director leadership. Sarbanes-Oxley enacted more and  stronger regulations in those areas than ever before. That doesn’t mean there were no recent failures at board level, but it means the failures may well have been more personal and cultural than legal or regulatory. But obviously the price of that failure was that Lehman and Fannie and Freddie shareholders were wiped out. That’s a stark reminder how important it is for management and boards to get their hands around issues of risk management, diversification, and balancing the objective of creating returns for shareholders with prudence and responsibility.”
 
 
To the Manner Born
That Sununu speaks in paragraphs is unsurprising after a glance at his biography. His father (John H.), once chief of staff to the elder President George Bush, holds a doctorate in mechanical engineering from MIT. The former governor of New Hampshire, he is now chairman of the state’s GOP. John E., one of eight children, went partway down his father’s path, securing a master’s degree in the same field from the same school, before taking a fork in the road to get an M.B.A. at Harvard. He spent a number of years in high-tech management consulting before running for public office. Since leaving the Senate, and in addition to his seat on the (private) ConvergEx board, Sununu now sits on the boards of Time Warner Cable and Boston Scientific—both publicly traded.
 
All of which made his opinion about what the last year had wrought on the issue of corporate responsibility—including risk management and compliance—of more than passing interest.
 
“I find the term Corporate Responsibility very vague—almost like something that would have been invented by Congress,” he said. “And when you have a concept that is so vague, you can actually create opportunities for people to avoid accountability. But I think that a specific role that needs to be vested under that phrase includes the risk management role. Senior managers and boards have to get their hands around this. And not just financial firms. Any larger or multinational corporation has exposure to different risks, financial and operational, around the world. And creating practices is one thing, but it’s equally important to incorporate and ingrain the ideas behind it in the culture of the company. The second area you mention, compliance, requires developing strong systems of tracking compliance and ensuring regulatory compliance across all functions. Those are responsibilities that have to be embraced by senior managers and more than ever by boards.”
 
Asked whether such functions would necessarily be unified under a single officer, Sununu demurred. “I don’t know,” he said. “I think that’s a good question. Again, there are different things that people might be talking about when they talk about corporate responsibility, but those two elements—compliance and risk management—those are large tasks and functions. And it’s hard for me to say, whether in Congress or out of Congress, that those should be put under a single executive. Prior to the current crisis, when you said corporate social responsibility, the public and even those in business might have viewed it more as in terms of your commitment to environmental sustainability or community initiatives and community quality of life. And those are all important, but it’s really important to focus on specific needs and objectives in implementing and overseeing the functions.”
 
Waxing more philosophical, Sununu suggested that the proper reinvigoration of risk management and compliance might have actually required the catastrophic corrective. (The image of a drunk hitting bottom comes to mind.)
 
“One of the benefits of the marketplace,” he said, “is that you have such stark and dramatic—and tragic, of course—examples of firms that failed in those two areas. There are financial and human consequences, and so that, in and of itself, is starting to drive changes in human behavior and practices across business, not just in the financial sector.”
 
Such as?
 
“The proposed modifications in rules and regulations involving credit rating agencies, the creation of clearinghouses for derivative trading, reviewing capital requirements for large non-depository financial institutions, and regulatory oversight of Fannie Mae and Freddie Mac.”
 
Sounding Board Boards
For a few moments, the pol reemerged.
 
“I wrote legislation back in 2003 to strengthen the oversight and regulation of Fannie and Freddie—to create better capital standards and limit their business practices,” Sununu recalled. “It passed the Senate Banking Committee, and it finally passed in 2008. Of course, that was pretty much after all the horses had left barn.”
 
And now?
 
“I think executive teams and public directors recognize the critical nature of compliance and risk management in the wake of the current crisis. After Sarbanes-Oxley passed, I think there was a much greater emphasis on finding board members who could provide real insight and leadership in these areas, members who would bring stronger independent voices and act as stronger more effective sounding boards for management. Enron and Worldcomm underscored for public board members across the country how important it is to take their responsibilities seriously.”
 
Perhaps. But to the outside observer, many of the miscreant players from that era seemed to have avoided consequence of the financial or penal variety.
 
“I really don’t know all the legal outcomes and settlements,” responded Sununu. “There are tons of lawsuits still out there. But quite frankly, I would imagine that the damage done to reputations was very significant, and frankly at that level, those board members probably value their reputations more than anything else besides their family. Their reputation was probably one of the most valuable things they owned. Whether an individual board member was in the wrong or not, if you served on one of those boards you suffered significantly.”
 
The time seemed right to return to a variation on that day’s headlined issue: compensation. Asked whether shareholders should have a greater say in executive pay, Sununu struck a slightly ambivalent tone.
 
“If shareholders had the power to vote every single day on executive’s performance, that would almost certainly promote the shortest possible view of behavior, because they would be responding every day to what the stock was valued at. Executives would only worry about short-term stock price and quarterly earnings. I’m a very strong proponent of shareholder rights, because that’s who the board and management team are working for, but you want to make sure that with any of these proposals you avoid unintended consequences.”
 
A parallel area of discussion emerged, as to how social externalities mattered. Did Sununu think that corporations have a substantive obligation to the community that extends beyond the bottom line?
 
“There are legal obligations and then there are moral or civic obligations,” he said, without a pause. “Do you have a legal obligation to contribute to the United Way or help your neighbor or run for school board? No. But we all hope that our friends and neighbors and peers will find a way to make a difference in their communities and help their neighbors. In the same way, once you legislate such an activity, it’s no longer a contribution to the community. It’s effectively a tax, a legal requirement. We have legal requirements for companies and corporations—to obey the law by sharing information with their employees and customers, by operating under antitrust statutes and the like, but when it comes to a civic role that’s a question for every business large and small to consider on their own—what charitable efforts do they wish to support, what additional employee programs do they want to sponsor.”
 
 
Does Something Wicked This Way Come?
In trying to assess the totality of it all—the existential threat to the financial system and the social contract, as well as where this might all end up in a few years, Sununu looked back again before turning to the horizon.
 
“On the oversight panel, last May or June, we put together a report that tried to value the securities that Treasury had purchased and estimate or anticipate the potential return on that investment. And subsequent to that, a number of the largest and many of the smaller recipients have repaid what they received under the program. And that return has been positive. I think it’s averaged around 10 or 12 percent. Goldman and JP Morgan, their stocks performed even better, and the rate of return was in the high teens. And that’s good news for the taxpayer.
 
“But remember that capital was provided across a very broad swath of financial institutions. You didn’t, and you don’t, want the government trying to pick winners and losers to manipulate the market. The goal of TARP was financial stabilization. Well over 600 banks received capital, and today I think over $70 billion of the $215 billion has been repaid. Now the institutions that are less likely to provide those kinds of returns to the taxpayer are the automotive manufacturers and, say, AIG. I think it will be very challenging to recoup all the funds lent to them and have them ultimately returned to the taxpayer.
 
“Going forward, there are proponents of new systemic risk regulation, but I don’t always know what they mean or what powers they’d give to a new regulatory body. Some talk about naming the firms that are too big to fail. Well, that act in and of itself creates enormous moral hazard in our economy, because they become firms perceived by the marketplace as prequalified to receive bailout during time of crisis. They receive subsidized finance, and that creates the danger of dozens of firms like Fannie and Freddie, with an implied guarantee that gives them an advantage. Some respond to that by saying they’d impose higher capital standards and other regulations on them, but that puts them at a disadvantage and therefore more likely to fail. This is the very serious paradox of moral hazard that is posed by naming firms too big to fail. The other problem with creating a single global systemic risk regulator is that if you think about what systemic risk really is, you realize that it can be found in many areas of our economy—state regulations that might be weak, in fed regulations that might be problematic, in laws passed at the state and federal level. No single entity should have far-reaching power to change rules and regulations at every one of those levels. It would be unwise to vest that kind of supreme power in any single regulator.”
 
Now there’s where the Club for Growth meets New Hampshire.