Chair, Financial Services Regulatory Practice, DLA Piper


My career has been a bit of a winding path, and my path to the Fed was not the most traditional. I started flying for the Navy – I was a Naval Academy graduate. I did have to privilege to go into Top Gun. It turns out that, to a degree I would never have expected, my naval career and, in particular, the flying was very helpful to me during my Fed career because it did two things. First, it taught me about leadership. It taught me about how to build employee morale and involvement, especially in situations where you do not necessarily have direct authority over them. And two, it helped me with risk-management skills. Flying is all about risk management, and being a central banker is often about making risk-management judgements. I seem to be more comfortable making those judgements than might be typical for a central banker.

It has been 10 years since the financial crisis and I think we have learned a number of lessons. There have been a number of conferences about those that talk about myriad. I tend to boil them down to two lessons. Frankly first, I say, ‘Beware of the shadows’, by which I mean the shadow-banking system. There continues to be a tremendous amount of financial activity – especially lending – that occurs in the shadow-banking system, which is not prudentially regulated in any way. That is where the 2008 financial crisis emanated from. It continues to be the case that more lending occurs there than in the regulated sphere. This may be post-traumatic stress syndrome but I think we still need to be more involved in regulated large asset managers and anything big in the shadows.

The second lesson – and I say this with great respect – is, ‘Beware of the experts.’ There are a lot of very talented PhD economists at the Fed, including long-term bank supervisors and market-group experts. Frankly, on some important occasions, we just got it wrong. We had never anticipated subprime would become the problem that it did. We had never anticipated that people would panic to the degree they did during the crisis. I think that, a lot of times, a big lesson learned that I took away is that common sense and going with your gut is an important thing.

So, I often get asked, ‘How likely are we to face a crisis in the next 10 years?’ and I say it is 100% certain that we will have a crisis. As long as we have a financial system, we will have financial crises. I think the next one is not likely to be anywhere near as severe as the 2008 one for the banking system itself. The banking system itself is, indeed, much stronger, so I do not think you are going to have a situation where you have large banks like Citigroup teetering and tottering. However, the aftermath of that crisis, which, in this case, was a severe recession, could be even worse next time. That is what worries me. The business cycle is not dead and we will have another recession at some point. There are a lot of potential crisis triggers floating around right now and, at some point – and certainly within 10 years or probably sooner than that – those factors will come together and we will, once again, find ourselves needing to deal with a severe situation of some kind.