Bombshell FDIC report imperils Biden's financial reforms

Catch up fast: The report, by law firm Cleary Gottlieb, came out this week. It details an agency that's been rife with sexual harassment for years, and where employees fear retaliation for speaking up.

• The issues started long before Gruenberg became chair in 2022, the investigation makes clear. However, it devotes about nine pages to Gruenberg's reputation for losing his temper in the workplace. (He previously served as agency chair from 2012-2018.)
• The situation raises uncomfortable questions for the White House and Democrats, typically folks who want leaders held responsible for workplace cultures that allow for sexual harassment and discrimination.

The big picture: If Gruenberg steps down, it would leave the FDIC board deadlocked — with two Democrats and two Republicans. That would make it difficult for the agency to move forward on any kind of controversial rulemaking.

• "If Gruenberg steps down that is a major blow to the Biden administration's financial regulatory policy through the election," says Aaron Klein, a senior fellow at Brookings who focuses on financial regulation.
• "A 2-2 vote would stall and probably doom politically sensitive banking policy," per a note from Renaissance Macro Research.

Zoom in: Atop the doom list is the administration's proposal to beef up capital requirements for banks, which is already facing pushback from the industry and even some Democrats (it's expected to be revised), and a recent interagency proposal to curb bank executives' pay.

• If Gruenberg leaves, the White House won't get to choose an acting chair. Instead, that role would automatically go to Travis Hill, the vice chairman of the FDIC board and a Republican.
• His departure would change the balance of power between the three banking regulators — the FDIC, the OCC and the Fed — and imperil any interagency rulemaking.
• The White House would presumably scramble to find a new leader who could be confirmed by the Senate before the election.

Between the lines: The report doesn't explicitly call for Gruenberg's ouster but the implicit message is there — it questions whether someone with his reputation can set the right tone at the top.

Where he stands: Republicans are calling for his head and a broader leadership change.

• "It's time to throw away the current leadership's keys and permanently change the locks, so we can close the door on this chapter of abuse," Sen. Joni Ernst (R-Iowa) told Axios in a statement. She also said the president should ask the DOJ to investigate the agency.
• Top Democrats on finance committees, including Sen. Sherrod Brown (Ohio), Sen. Elizabeth Warren (Mass.) and Rep. Maxine Waters (California) are all backing Gruenberg, Punchbowl News reported on Wednesday.

• But others including Rep. Bill Foster (D-Ill.), who sits on the House Financial Services Committee, are backing away.

Meanwhile: Advocates for financial reform question the independence of the investigation itself, asking why the FDIC's former chair, Republican Jelena McWilliams, who served from 2018 to 2021, didn't come up for more criticism.

• They point to a 2020 investigation from the FDIC's Office of the Inspector General that highlighted sexual harassment issues and appears to have been largely ignored inside the agency.
• "One would think that any legitimate, independent, unbiased investigation or report of misconduct at the FDIC would have thoroughly examined the role and conduct of the leadership of the FDIC in connection with this critically important IG Report," said Better Markets CEO Dennis Kelleher in a statement.

For the record: "The report makes clear that the workplace culture issues at the FDIC are long-standing," Jonathan McKernan, an FDIC board member and co-chair of the special committee that commissioned the report, told Axios in a statement. "The report does not limit its findings to the current Chair."

The bottom line: Ultimately, Gruenberg's fate is in President Biden's hands. So far, the White House isn't saying much. Earlier this week, spokesperson Karine Jean-Pierre didn't say whether the president had confidence in him, only that the chair "apologized and has committed to the [report's] recommendations"

• A lot is riding on how Gruenberg does on Capitol Hill next week when banking regulators go before House and Senate committees for regularly scheduled oversight hearings.
• "A disastrous performance next week could make it harder for Democrats to defend his staying in the role," the RenMac note says.