Left to right: Harry Markopolos and Jeffrey M. Cunningham

How did you end up going after Bernie Madoff?
I was chief investment manager of a multi-billion dollar firm in Boston and Bernie Madoff was stealing my clients. I also happen to be Greek. You don’t steal from a Greek without us coming after you. And then my bosses said, “We want you to figure out what Bernie is doing, so we can duplicate it.” I looked at the results and said, “This is a fraud.” And they said, “Oh no, he’s a better mathematician than you.” And that got me on his trail.

But as your book, No One Would Listen, details, you did not catch Madoff.
My team and I did not succeed in taking down Bernie Madoff, but we did succeed in taking down the SEC. This led to regime change, with Mary Schapiro the most visible part of that, who I predict will go down as the best chair in SEC history. Today, it’s a totally different agency than it was 23 months ago. The SEC has made a conscious decision—if it’s between your company’s reputation and theirs, theirs is going to survive. They will come after you.

If the SEC missed frauds, can boards find public company frauds that occur in the C-suite?
Be aware of the potential for fraud. I do billion dollar and up fraud cases that involve the C-level suite. They’re big, they’re unbelievable, but that’s what I do for a living. If I get involved in a case against a target company, it’s going to be publicly held, it’s going to have a board that’s unaware that their CEO, CFO, general counsel or chief compliance officer are totally co-opted, engaged in a collusive scheme, committing criminal acts and defrauding not only the shareholders, but probably the United States government.

What can boards do to make sure they ask the right questions?
The nominating committee has to own the process and take it away from management. The board needs to be completely independent of management in nominating board members. As far as the compensation committee, make sure you go to the outside experts to ensure you have the right compensation scheme in place. Don’t take the numbers from management. You owe it to your shareholders and your stakeholders to seek expert advice.

Where should the board begin?
Compliance. Too many compliance officers are compliant officers. They’re chosen for their lack of aggression; their passivity is considered a plus. What boards need to do is take control of the compliance function and hire—and have the ability to fire. Don’t let management do it. And if a compliance officer in your organization is about to get fired, make sure that the board speaks with him or her before they get fired.

What will Dodd-Frank do that SOX did not?
That’s a great question. Sarbanes-Oxley was supposed to have a great whistleblower program. Yet only 2 to 3 percent of the Sarbanes-Oxley whistleblowers were successful, because the law was improperly written. And so they came out with Dodd-Frank, specifically Section 922. It gives whistleblowers a lot more protection as well as incentives. The government doesn’t want to create a disincentive, or perverse incentives, and so, what they’ve done is, if you reported up through compliance and you gave the company first shot, you will get paid a higher reward.

How should boards think about compliance?
You have to go back and make sure you have robust compliance programs, robust ethics programs, that your compliance function has not been co-opted by management, that these whistleblowers are heard.

And, if they don’t?
The disincentive is that if boards do not do their jobs, the government is going to come in, and you know what it’s like dealing with a government investigation.

You’re saying a culture of integrity is the best guard against fraud. But we all know companies that have such a culture, yet fraud existed.
It’s going to exist in every company. Roughly five percent of revenues in the United States are affected by fraud. Usually, it’s where employees are stealing from the company, but it’s not at the boardroom level. It’s not often in the C-suite. It’s low level. It’s your first-line supervisor, your mid-level executive, or maybe a regional CEO stealing a few million dollars.

Are there any telltale signs that a board director should look for?
When you see another company in your sector with ethical violations, especially if they’re criminal, take a look at the government’s charging documents and ask, “Could this also be happening here?”

Where is the investigative media?
Unfortunately, what’s happened with the Internet, print media does not have a business model, so you basically have a profession—journalism—without an industry. Investigative journalism is a casualty, because it’s the most expensive type of journalism. Too many of them are trained as journalists. Madoff was a finance case, involving structured products, a derivatives hedge fund, if you will. How many journalists are trained in that?

Don’t investors look carefully enough at companies to detect financial fraud?
Too often, investors are sheep. Too many mutual funds have the attitude, “If I don’t like the company or the board, I sell.” You don’t have that choice at CalSTRS or Fidelity, because you own every company. And let’s take a look at whom the shareholders are, because I have some beefs with them, too. The average shareholding in America now is about seven months and many could care less about ownership rights.

What’s the bottom line?
Boards are guardians not just of the shareholders’ assets, but also of the very culture of integrity that drives a company to do the right thing. Making sure that each decision is held up to that lens and passes the test is not only critical, but also basic to board leadership.

Although state and local governments face significant fiscal challenges, my primary focus today will be the federal budget situation and its economic implications. I will describe the factors underlying current and projected budget deficits and explain why it is crucially important that we put U.S. fiscal policy on a sustainable path. I will also offer some thoughts on whether new fiscal rules or institutions might help promote a successful transition to fiscal sustainability in the United States.

Fiscal Challenges

The budgetary position of the federal government has deteriorated substantially during the past two fiscal years, with the budget deficit averaging 9-1/2 percent of national income during that time. For comparison, the deficit averaged 2 percent of national income for the fiscal years 2005 to 2007, prior to the onset of the recession and financial crisis. The recent deterioration was largely the result of a sharp decline in tax revenues brought about by the recession and the subsequent slow recovery, as well as by increases in federal spending needed to alleviate the recession and stabilize the financial system. As a result of these deficits, the accumulated federal debt measured relative to national income has increased to a level not seen since the aftermath of World War II.

This speech was given by Federal Reserve Chairman Ben S. Bernanke on Oct. 4 at the annual meeting of the Rhode Island Public Expenditure Council.

For now, the budget deficit has stabilized and, so long as the economy and financial markets continue to recover, it should narrow relative to national income over the next few years. Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk. Over the medium- and long-term, however, the story is quite different. If current policy settings are maintained, and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years, with the ratio of federal debt held by the public to national income rising at an increasing pace. Moreover, as the national debt grows, so will the associated interest payments, which in turn will lead to further increases in projected deficits. Expectations of large and increasing deficits in the future could inhibit current household and business spending–for example, by reducing confidence in the longer-term prospects for the economy or by increasing uncertainty about future tax burdens and government spending–and thus restrain the recovery. Concerns about the government’s long-run fiscal position may also constrain the flexibility of fiscal policy to respond to current economic conditions. Accordingly, steps taken today to improve the country’s longer-term fiscal position would not only help secure longer-term economic and financial stability, they could also improve the near-term economic outlook.

Our fiscal challenges are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs. As the health-care needs of the aging population increase, federal health-care programs are on track to be by far the biggest single source of fiscal imbalances over the longer term. Indeed, the Congressional Budget Office (CBO) projects that the ratio of federal spending for health-care programs (principally Medicare and Medicaid) to national income will double over the next 25 years, and continue to rise significantly further after that. The ability to control health-care costs as our population gets older, while still providing high-quality care to those who need it, will be critical not only for budgetary reasons but for maintaining the dynamism of the broader economy as well.

The aging of the U.S. population will also strain Social Security, as the number of workers paying taxes into the system rises more slowly than the number of people receiving benefits. This year, there are about five individuals between the ages of 20 and 64 for each person aged 65 and older. By 2030, when most of the baby boomers will have retired, this ratio is projected to decline to around 3, and it may subsequently fall yet further as life expectancies continue to increase. Overall, the projected fiscal pressures associated with Social Security are considerably smaller than the pressures associated with federal health programs, but they still present a significant challenge to policymakers.

The same underlying trends affecting federal finances will also put substantial pressures on state and local budgets, as organizations like yours have helped to highlight. In Rhode Island, as in other states, the retirement of state employees, together with continuing increases in health-care costs, will cause public pension and retiree health-care obligations to become increasingly difficult to meet. Estimates of unfunded pension liabilities for the states as whole span a wide range, but some researchers put the figure as high as $2 trillion at the end of 2009.5 Estimates of states’ liabilities for retiree health benefits are even more uncertain because of the difficulty of projecting medical costs decades into the future. However, one recent estimate suggests that state governments have a collective liability of almost $600 billion for retiree health benefits. These health benefits have usually been handled on a pay-as-you-go basis and therefore could impose a substantial fiscal burden in coming years as large numbers of state workers retire.

It may be scant comfort, but the United States is not alone in facing fiscal challenges. The global recession has dealt a blow to the fiscal positions of most other advanced economies, and, as in the United States, their expenditures for public health care and pensions are expected to rise substantially in the coming decades as their populations age. Indeed, the population of the United States overall is younger than those of a number of European countries as well as Japan.

The Need for Fiscal Sustainability

Let me return to the issue of longer-term fiscal sustainability. As I have discussed, projections by the CBO and others show future budget deficits and debts rising indefinitely, and at increasing rates. To be sure, projections are to some degree only hypothetical exercises. Almost by definition, unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit. Herbert Stein, a wise economist, once said, “If something cannot go on forever, it will stop.” One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis. Although the choices and tradeoffs necessary to achieve fiscal sustainability are difficult indeed, surely it is better to make these choices deliberatively and thoughtfully.

Arguably, the imperative to achieve long-term fiscal sustainability is an opportunity as well as a challenge. Opportunities for both taxing and spending reforms are ample. For example, most people agree that the U.S. tax code is less efficient and less equitable than it might be; moreover, the code is excessively complex and imposes heavy administrative and compliance costs. Collecting revenues through a more efficient, better-designed tax system could improve economic growth and make achieving sustainable fiscal policies at least somewhat easier. Likewise, many federal spending programs doubtless could be reformed to achieve their stated objectives more effectively and at lower cost. Certainly, continued efforts to reduce health-care costs and government health spending, while continuing to ensure appropriate care for those who need it, should be a top priority.

Failing to address our unsustainable fiscal situation exposes our country to serious economic costs and risks. In the short run, as I have noted, concerns and uncertainty about exploding future deficits could make households, businesses, and investors more cautious about spending, capital investment, and hiring. In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth. Larger government deficits increase our reliance on foreign lenders, all else being equal, implying that the share of U.S. national income devoted to paying interest to foreign investors will increase over time. Income paid to foreign investors is not available for domestic consumption or investment. And an increasingly large cost of servicing a growing national debt means that the adjustments, when they come, could be sharp and disruptive. For example, large tax increases that might be imposed to cover the rising interest on the debt would slow potential growth by reducing incentives to work, save, hire, and invest. Finally, a large federal debt decreases the flexibility of policymakers to temporarily increase spending as needed to address future emergencies, such as recessions, wars, or natural disasters.

It would be difficult to identify a specific threshold at which federal debt begins to pose more substantial costs and risks to the nation’s economy. Perhaps no bright line exists; the costs and risks may grow more or less continuously as the federal debt rises. What we do know, however, is that the threat to our economy is real and growing, which should be sufficient reason for fiscal policymakers to put in place a credible plan for bringing deficits down to sustainable levels over the medium term. The sooner a plan is established, the longer affected individuals will have to prepare for the necessary changes. Indeed, in the past, long lead times have helped make necessary adjustments less painful and thus politically feasible. For example, the gradual step-up in the full retirement age for Social Security was enacted in 1983, but it did not begin to take effect until 2003 and will not be completed until 2027, thus giving future retirees ample time to adjust their plans for work, saving, and retirement.

Fiscal Rules

Amid all of the uncertainty surrounding the long-term economic and budgetary outlook, one certainty is that both current and future Congresses and Presidents will have to make some very tough decisions to put the budget back on a sustainable trajectory.

Can these tough decisions be made easier for our elected leaders? At various times, some U.S. Congresses and foreign governments have adopted fiscal rules to help structure the budget process. Fiscal rules are legislative agreements intended to promote fiscal responsibility by constraining decisions about spending and taxes. For example, fiscal rules may impose constraints on key budget aggregates, such as total government expenditures, deficits, or debt. In the remainder of my remarks I will discuss the use of fiscal rules to address longer-term budget problems, beginning with a review of the U.S. and foreign experience.

The United States has seen several attempts to apply fiscal rules, with mixed results. In 1985, the Congress enacted the Gramm-Rudman-Hollings law which, among other things, specified a target path for the federal deficit, including the elimination of the deficit by 1991. However, the target path proved to be unattainable, and eventually the entire structure was abandoned. One problem with this approach was that its primary focus and measure of success was the current budget deficit. Although the emphasis on the current deficit was understandable, the approach ran aground of the fact that the budget deficit is driven not only by the choices of the Congress, but also by the performance of the economy. If the economy is strong, for example, the deficit is almost bound to improve, as tax revenues increase and spending on the social safety net decreases; conversely, if the economy weakens, the deficit is likely to rise, notwithstanding prior efforts by the Congress to better manage government spending and taxes.

With fiscal concerns still prominent, in 1990 the Congress and the President adopted a new approach, with two key elements. First, this alternative approach capped the level of discretionary federal spending–that is, the spending subject to annual appropriations, including defense and nondefense purchases of goods and services. Second, it imposed a pay-as-you-go (PAYGO) rule on tax revenues and mandatory spending, which is spending that continues automatically without an annual reauthorization; entitlement spending such as Medicare, Medicaid, and Social Security makes up most of this category. The PAYGO rule required that any tax reduction or mandatory spending increase be “paid for” with offsetting tax hikes or spending cuts, so that projected deficits over the 5- and 10-year horizons would not be worsened. Supported importantly by the strong economic growth of the 1990s, these rules are seen by many observers as having helped put the deficit on a declining path; indeed, the federal government generated a few annual surpluses. The discretionary spending caps and the PAYGO rule were allowed to expire after the 2001 fiscal year, in part because concerns about deficits were waning at the time.

Currently, the Congress operates under more-limited PAYGO rules. The rules require that offsets for spending increases or tax cuts must be found within a 10-year budget horizon, but they also exempt a number of significant tax and spending programs. Putting aside these details of implementation, given current budgetary challenges, the key question is whether the traditional PAYGO approach is sufficiently ambitious. At its best, PAYGO prevents new tax cuts and mandatory spending increases from making projected budget deficits worse; by construction, PAYGO does not require the Congress to reduce the ever-increasing deficits that are already built into current law.

Many other countries have experience with fiscal rules. The European Union, by treaty, established fiscal rules in the early 1990s, with the goal of ensuring that all members would maintain sustainable fiscal policies. The rules specified that countries should keep their government deficits at or below 3 percent of their gross domestic products (GDP), and that government debt should not exceed 60 percent of GDP. Even before the recent financial crisis and recession, however, the enforcement mechanisms for these rules did not prevent these targets from being breached, and fiscal problems in several euro-area countries have recently been a source of financial and economic stress. European leaders are working to strengthen their tools for enforcing fiscal discipline.

Although fiscal rules have not been panaceas in the United States or the euro area as a whole, a number of other economies, in Europe and elsewhere, seemed to have found fiscal rules to be helpful in achieving greater budget discipline. For example, Switzerland, Sweden, Finland, and the Netherlands all realized improvements in their fiscal situations after adopting rules that limit spending. Canada saw improvement in its deficit after it implemented spending limits in the early 1990s, and its ratio of public debt to national income fell substantially after 1998 when it put in place a “balanced budget or better” rule. A number of emerging market nations, such as Chile, have also applied fiscal rules with some success. According to the International Monetary Fund, about 80 countries currently are subject to national or supranational fiscal rules.

Clearly, a fiscal rule does not guarantee improved budget outcomes; after all, any rule imposed by a legislature can be revoked or circumvented by the same legislature. However, although not all countries with fiscal rules have achieved lower deficits and debt, the weight of the evidence suggests that well-designed rules can help promote improved fiscal performance. I will discuss four factors that seem likely to increase their effectiveness.

First, effective rules must be transparent. By shining a light on the problem and the range of feasible solutions, transparent policy rules clarify the budget choices that must be made, help the public understand those choices, and encourage policymakers to recognize the broader fiscal consequences of their decisions on individual programs. In particular, transparent fiscal rules may help solve what economists refer to as a collective action problem. When faced with spending decisions, most elected representatives want to be seen as garnering the greatest possible benefit for their constituents. But if a prior agreement limits the size of the available pie, it may be easier to negotiate outcomes in which everyone accepts a little bit less. Of course, transparency is enhanced by good watchdogs. In the United States, the nonpartisan CBO has ably served that role since 1974. Nongovernmental organizations that focus on budget issues, such as nonprofit think tanks, can also promote transparency.

Second, an effective rule must be sufficiently ambitious to address the underlying problem. As I mentioned, PAYGO rules, even when effective, were designed only to avoid making the fiscal situation worse; they did not attack large and growing structural deficits. In the current U.S. context, we should consider adopting a rule, or at least a clearly articulated plan, consistent with achieving long-term fiscal sustainability. Admittedly, an important difficulty with developing rules for long-term fiscal sustainability in the United States is that, given the importance of health-care spending in the federal budget, the CBO would need to forecast health-care costs and the potential effects of alternative policy measures on those costs well into the future. Such forecasting is very difficult. However, any plan to address long-term U.S. fiscal issues, whether or not in the context of a fiscal rule, would have to contend with forecast uncertainties.

Third, rules seem to be more effective when they focus on variables that the legislature can control directly, as opposed to factors that are largely beyond its control. For example, as I noted, actual budget deficits depend on spending and taxation decisions but also on the state of the economy. As a result, when a target for the deficit or the debt is missed, ascribing responsibility may be difficult. Current congressional procedures generally require the CBO to “score” proposed spending and tax programs for their budget effects over a specified, longer-term horizon; this approach, although not without its problems, has the advantage of linking budget targets directly to legislative decisions.

Fourth, and perhaps most fundamentally, fiscal rules cannot substitute for political will, which means that public understanding of and support for the rules are critical. For example, the fiscal rules that Switzerland adopted in 2001 had overwhelming popular support; the widespread support no doubt contributed to their success in helping to reduce that country’s ratio of public debt to national income. Conversely, in the absence of public support and commitment from elected leaders, fiscal rules may ultimately have little effect on budget outcomes. Educating the public about the consequences of unsustainable fiscal policies may be one way to help build that support.

Conclusion

Today I have highlighted our nation’s fiscal challenges. In the past few years, the recession and the financial crisis, along with the policy actions taken to buffer their effects, have eroded our fiscal situation. An improving economy should reduce near-term deficits, but our public finances are nevertheless on an unsustainable path in the longer term, reflecting in large part our aging population and the continual rise in health-care costs. We should not underestimate these fiscal challenges; failing to respond to them would endanger our economic future.

Well-designed fiscal rules cannot substitute for the political will to take difficult decisions, but U.S. and international experience suggests that they can be helpful to legislators in certain circumstances. Indeed, installing a fiscal rule could provide an important signal to the public that the Congress is serious about achieving long-term fiscal sustainability, which itself would be good for confidence. A fiscal rule could also focus and institutionalize political support for fiscal responsibility. Given the importance of achieving long-term fiscal stability, further discussion of fiscal rules and frameworks seems well warranted.

Remarks by Federal Reserve Chairman Ben S. Bernanke at the 43rd Annual Alexander Hamilton Awards Dinner in Washington, D.C.

The first lesson–economic prosperity depends on financial stability–seems obvious, but this connection was not always well understood. After the stock market crash of 1929, many thought a financial and economic crisis was necessary–even desirable–to wring out speculative excesses that had built up in the 1920s. Remarkably, despite the fact that the Federal Reserve had been founded to mitigate financial panics, the central bank made essentially no effort to prevent the wave of bank failures that paralyzed the financial system at the start of 1930s. Indeed, the Treasury Secretary at the time, Andrew Mellon, believed in the tonic effects of weeding out weak banks and famously advised President Herbert Hoover, “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … It will purge the rottenness out of the system.”

Economists themselves have not always fully appreciated the importance of a healthy financial system for economic growth or the role of financial conditions in short-term economic dynamics. Even after the Depression, some economists found it useful to think of the financial system as a “veil,” which helped allocate the returns to physical assets but did little to affect so-called real economic outcomes. In contrast, more recent work on the subject, to which I contributed, showed that the health of the financial system and the performance of the broader economy are closely interrelated, both in the short run and in the long run. Indeed, in a historical context, some of my own research on the Great Depression showed that countries such as the United States that, for institutional or other reasons, suffered severe banking problems, had significantly worse depressions than countries in which the banking system was more stable, such as Great Britain.

The lesson has been learned. In the current episode, in contrast to the 1930s, policymakers around the world worked assiduously to stabilize the financial system. As a result, although the economic consequences of the financial crisis have been painfully severe, the world was spared an even worse cataclysm that could have rivaled or surpassed the Great Depression.

That lesson brings me to the second one–policymakers must respond forcefully, creatively, and decisively to severe financial crises. Early in the Depression, policymakers’ responses ran the gamut from passivity to timidity. They were insufficiently willing to challenge the orthodoxies of their day–such as the liquidationist doctrine of Mellon and others, or the rigid adherence to the variant of the gold standard adopted after World War I. A key turning point, in the United States, came with Franklin Roosevelt’s commitment to bold experimentation after his inauguration in 1933. Some of his experiments failed or were counterproductive, but his decisions to declare a bank holiday upon taking office in March 1933 and to sever the link between the dollar and gold helped arrest the descent of the U.S. financial system and set off a strong, albeit incomplete, recovery.

In the Depression, effective policy responses came only after three to four years of financial crisis and economic contraction. In our own time, policymakers acted sooner and with greater force than in the 1930s. For example, in October 2008, just weeks after the sharp intensification of the crisis, the Congress authorized the Troubled Asset Relief Program (TARP) to support stabilization of the financial system. It was far from perfect legislation, but it was essential for preventing an imminent financial collapse. For its part, the Federal Open Market Committee, the monetary policy-making arm of the Federal Reserve, sharply and proactively cut its target for short-term interest rates from the fall of 2007 through 2008. After the target could go no lower, the Committee embarked on an unprecedented (for the United States) program of long-term securities purchases, recently completed, to support private credit markets, including the mortgage market.

Also, in the spring of 2009, the Federal Reserve led the Supervisory Capital Assessment Program, known as the bank stress test. In some ways, its effect was similar to Roosevelt’s national bank holiday. During the holiday in 1933, banks temporarily shut their doors. Examiners were dispatched to evaluate them, and banks that were declared sound reopened to renewed depositor confidence. In the 2009 stress tests, multidisciplinary teams of examiners, economists, financial experts, and other specialists calculated how much capital 19 of the nation’s largest bank holding companies would need to remain healthy and continue lending during a hypothetical worse-than-expected economic scenario. The Treasury Department committed to supplying additional capital as necessary from the TARP. Critics had warned that the stress test could backfire, but as it turned out, the release of the results last May helped restore confidence in banks, and many institutions have since been able to raise capital from investors and repay the capital the government had injected.

Then as now, the financial and economic crisis was global, underscoring the third lesson: International crises require an international response. Contemporary Americans’ impressions of the Depression have been shaped by iconic photos of bread lines, hungry Dust Bowl migrants, and the milling crowds on Wall Street on Black Monday. We think of it as an American episode. We forget it was a truly global event. But the depth of the Depression in Germany exceeded that even of the United States, and the failure in 1931 of a large Austrian bank, Credit Anstalt, was an important trigger of a wave of bank failures that affected many countries, including the United States. Unfortunately, authorities then were ill-positioned to coordinate an effective international response, as years of bitter wrangling over World War I international debts and reparations had all but destroyed the mutual trust upon which coordination depends.

In the recent episode, policymakers, bankers, and business people recognized that the world’s economies and financial systems would sink or swim together. I recall talking with bankers and business people while attending an international meeting in Brazil. They told me that, in September 2008, what had been a healthy pace of business activity and lending in Brazil suddenly plummeted. They described the impact of the crisis as being like that of a “cold wind” that appeared out of nowhere. Similar stories, I am sure, can be told in many other countries. Because the world’s policymakers understood the potentially devastating effect of the financial crisis for the global economy, they and we worked urgently to stabilize the situation. In October 2008, in an unprecedented display of coordination, six central banks–the Federal Reserve, European Central Bank, Bank of England, Swiss National Bank, Bank of Canada, and the central bank of Sweden–acted together to cut short-term interest rates. A few days later, after watershed meetings in Washington of finance ministers and central bank governors, many countries, including the United States, announced comprehensive plans to stabilize their banking systems. And at the Federal Reserve, because we were well aware that turmoil in dollar funding markets overseas hurts our own financial markets, we also established temporary liquidity swap lines that enabled 14 central banks around the world to calm their markets by lending dollars in their jurisdictions.

I’ll conclude with the cautionary fourth lesson–history is never a perfect guide. It is a principle acknowledged by the words etched on the wall of the Center’s conference room, attributed to Mark Twain, “History does not repeat itself, but it can rhyme.” As an example, bank runs in many countries, including the United States, were common in the Depression. In the most recent crisis, retail runs–depositors lining up in the streets–were thankfully rare because of deposit insurance and other changes in our financial system. Although ordinary small depositors by and large did not run, we nevertheless experienced the equivalent of runs on the network of nonbank financial institutions that has come to be called the shadow banking system. In the shadow banking system, loans, instead of being held on the books of banks as was virtually always the case in the 1930s, were packaged together in complex ways and sold to investors. Many of these complex securities were held in off-balance-sheet vehicles financed by short-term funding. When the housing slump shook investors’ faith in the values of the loans underlying the securities, short-term funding dried up quickly, threatening the banks and other financial institutions that explicitly or implicitly stood behind the off-balance-sheet vehicles. This was a new type of run, analogous in many ways to the bank runs of the 1930s, but in a form which was not well anticipated by financial institutions or regulators. In an additional variation on the theme of the bank run, in September 2008 money market mutual funds saw massive outflows after one prominent fund suffered losses related to the failure of Lehman Brothers.

The Federal Reserve, with its discount window, was well positioned to provide liquidity to banks by making short-term, collateralized loans. (The discount window was the tool the Federal Reserve could have used, had it chosen, to stem the banking panics of the 1930s.) However, our traditional tools, developed in an earlier era, were of little use in addressing panic in the shadow banking system or in the money market mutual fund industry. So, we engaged in what I call “blue sky thinking”–generating many ideas. Most were discarded, but, crucially, some led to the development of new ways for the Federal Reserve to fulfill the traditional stabilization function of central banks. Using emergency authority last employed during the Depression, we created an array of new facilities to provide backstop liquidity to the financial system (and, as a byproduct, coined many new acronyms). Thus, we were able to help restore the flow of credit to American families and businesses by shoring up important financial markets, such as those for commercial paper and securities backed by consumer loans.

Undoubtedly, researchers and scholars will devote considerable energy in the years ahead to expanding and refining the lessons this most recent crisis has provided us. I hope that some of you might contribute to that endeavor. I congratulate the Center fellows whose work is also being recognized this evening and thank you, once again, for honoring me with the Hamilton Award.

–From Ben Bernanke in testimony to the House Financial Services Committee.

What we also discovered in putting the list together was that in some instances, it became impossible to separate the captain from the team. This year’s D100 is a case in point: Our editors and board of advisors were nearly unanimous in our selection of President Barack Obama as this year’s most powerful corporate governance influence. And yet, to do justice to the seismic shift his policies have brought about in the boardroom, we also had to recognize the many other  “New Voices” in the Administration who are now leading the greatest financial reform of American business since the 1930s.

So, we ask that in the pages ahead you pay more attention to who counts, and less to how we count, in arriving at our final selection of individuals and institutions that have met the requirement to be “most influential.” We think you’ll agree it’s an intricate and impressive mosaic where the whole equals much more than the sum of its parts, which may or may not be greater than 100.

Regulators & Rulemakers

Team Obama
It is often written that reasonable people may disagree, and with Americans and their Presidents, it is practically a way of life. But even an unreasonable person could only conclude that this President and his Administration are having a profound and lasting influence over the boardroom. President Barack Obama has demonstrated an enormous capacity for calm in uncertain times. His relative youth leads to frequent comparisons to John F. Kennedy and his communications skills to those of Ronald Reagan. But it is his aggressive response to the unparalleled economic challenges that greeted him at the dawn of his young presidency that harkens back to an earlier figure of towering influence,  Franklin D. Roosevelt.

FDR’s massive social and financial reform programs—the creation of Social Security as part of the New Deal, the establishment of the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Company (FDIC)—helped restore confidence in the nation’s banking system coming out of the Great Depression. One could plausibly take major portions of FDR’s New Deal and substitute his name with President Obama’s.  The implementation of the $787-billion American Economic Recovery Act one month after Obama took office, coupled with his handling of the Troubled Asset Relief Program (TARP), which sought to strengthen the financial sector by buying up the assets and equity from troubled banks, has clearly helped the nation avoid further financial disaster and put the economy on the path to recovery.

And finally, turning again to the FDR playbook, Obama assembled a team of wise men and women, formidable economic and business minds, whose decisions are having a lasting effect on the role of the corporate director. Preeminent among them was the choice of Rahm Emanuel as chief of staff. Described as a veritable “influence machine,” within the Administration and Congress, the former Congressman from Obama’s home state of Illinois is known as a hard-charging, brutally candid, sometimes combative, acutely intelligent man who can get things done and knows the ways of the Capitol and the boardroom.

The Enforcers
Perhaps second only to Obama in terms of her influence on boards and corporate governance, career regulator Mary Schapiro heads up the 75-year-old SEC. Before the crisis, the agency’s very existence was in question: “Obsolete,” “out of touch,” and “behind the times” were just some of the many terms uttered by detractors. The Commission, under former chairman Christopher Cox, was pilloried for missing the Madoff scandal.

As former SEC chairman and Directorship 100 Hall of Famer, Arthur Levitt described her: “She has the skills, the intellect, and the character to be a superb SEC chair.” But Schapiro will face a new kind of challenge in the role, not just that of proving her own qualifications, but also instituting a significant remodeling of the SEC itself, as she works to bring it into the new regulatory era.

Moving swiftly to address regulatory concerns in the wake of the financial crisis, the SEC has rolled out a series of proposals that could embody the biggest change to the rules of the game for directors in some time. Schapiro, who is no stranger to the boardroom, having served on the boards of Duke Energy and Kraft Foods, has overseen proposed rule changes on proxy access, broker voting, say on pay, and new requirements for disclosure on executive compensation and director qualifications. It’s now up to her and fellow commissioners Kathleen Casey, Elisse Walter, Luis Aguilar, and Troy Paredes to determine the final regulations that emerge from the proposals.

Other key players Schapiro has brought into the SEC include Senior Advisor Kayla Gillan, Chief Accountant James Kroeker, and Director of Enforcement Robert Khuzami. Gillan was a founding board member of the Public Company Accounting Oversight Board (PCAOB) and former general counsel to CalPERS. Kroeker joined the SEC as deputy chief accountant in 2007 from Deloitte and Touche where he had been a partner in the firm’s national accounting services group. Kroeker recently said that the proposed road map for the convergence of International Financial Reporting Standards,pushed to the back burner amid the larger issues of market reform, would be restored as another top priority. Khuzami is a former federal prosecutor, has pledged to improve the SEC’s enforcement performance by creating specialized units to provide “structure and resources for staff to ‘get smart’ about certain products, markets, regulatory regimes, practices and transactions.”

TARP Overseers
Another example of Obama’s preference for brains over politics was his reappointment of Sheila Bair to chair the FDIC. Another fiscally conservative Republican, on Bair’s watch alone this year, 94 banks have failed, creating a new challenge:  how to replenish the fund. Bair has also been an integral part of the team overseeing TARP. Neil Barofsky is a former New York assistant attorney general confirmed by the Senate in December as special inspector general. Dubbed the “TARP Cop,” his job is to figure out how and where the $700-billion TARP funds are spent, reporting directly to the President and providing updates to the Congressional Oversight Panel chaired by bankruptcy expert and Harvard Law School professor, Elizabeth Warren. COP’s first report, released in February, casti-  gated then-Treasury Secretary Henry Paulson for his performance and lack of transparency, reporting that the Treasury Department  had overpaid by $78 billion for the assets it bought from banks.

Interestingly, while Obama sponsored and was a strong proponent of  “say on pay” legislation while a senator, since appointing Kenneth Feinberg special master of compensation, he has appeared unwilling to make the issue a top priority. Feinberg, who has immersed himself in some of the country’s most troublesome and high-profile cases, is considered a superb choice, both in terms of skill and temperament, by Capitol Hill insiders. His most noteworthy case was the 33 months of pro-bono work he did following the 2001 terrorist attacks to determine how much each victim would receive from the federal government’s September 11th Victim Compensation Fund.

Feinberg may in fact be perfectly suited for a job that most compensation specialists see as thankless, and possibly as a “no win” situation. As the Obama Administration’s comp expert, Feinberg was called on to monitor the compensation of executives in what were once some of America’s most prestigious corporations, now TARP recipients, including American International Group (AIG), Bank of America, Citibank, Chrysler, GMAC, and General Motors.

Fed to the Rescue
To prevent American capitalism from spiraling deeper into the abyss, nine months after President Obama made his first Cabinet announcement, he re-nominated Ben Bernanke as Federal Reserve chairman. The former Princeton economics professor was selected by Bush in 2005 to succeed Alan Greenspan. In 2008 after the market crashed, Bernanke invoked emergency powers, slashed interest rates, and spent trillions of dollars to right the financial system. Just last month, he declared the recession “likely over.” Though he seldom gives interviews, Bernanke is never far from the public eye and has been a stalwart in the transition between presidential administrations and in the effort to stem the economic slide.

When then President-elect Obama named his economics team, it included players who, like Bernanke, were already steeped in the crisis details, demonstrated a studied understanding of Depression-era economics, or some combination of both. Enter Treasury Secretary Timothy Geithner and Chief White House Economic Advisor Lawrence H. Summers. Geithner, who is currently pushing legislation to provide more systematic regulation of financial institutions, including new limits on executive compensation, recently told one interviewer that he is optimistic major reforms will be passed.

Prior to his appointment replacing Henry Paulson, Geithner was president of the Federal Reserve Bank of New York and part of the team central to the critical negotiations that resulted in Bear Stearns being tucked into JPMorgan Chase, Merrill Lynch going to Bank of America, Lehman Bros. disappearing, and Citigroup and other struggling banks getting a lifeline.

Summers, the former Harvard University economist who became its president following his tenure as Treasury Secretary to President Clinton, is director of the Cabinet’s National Economic Council. The group was established in 1993 to coordinate and ensure that the President’s economic policy agenda is carried out.

Rounding out the team, Paul Volcker, the former Fed chief under Clinton, was selected to chair the president’s economic recovery advisory board. And Christina Romer, a former UC Berkeley economist, who administration sources suggest is well- regarded by both parties, chairs the Council of Economic Advisers. Her appointment was seen as a further triumph of brain over politics in Obama’s approach to talent recruitment.

Bernanke “has led the Fed through one of the worst financial crises that this nation and the world have ever faced,” Obama said during a press conference on the Vineyard along with Bernanke. “As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another, but because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

Bernanke’s nomination for a second four-year term starting January 31 requires Senate approval and was endorsed by Christopher Dodd, the head of the Banking Committee. The Fed chief will still face tough questioning from lawmakers who say he was slow to recognize the severity of the financial crisis.

Obama decided to reappoint Bernanke because he wanted to keep together the team that had weathered the crisis, an administration official said. The official said Treasury Secretary Timothy Geithner, Chief of Staff Rahm Emanuel and National Economic Council Chairman Larry Summers all recommended Bernanke be reappointed.

“From the beginning of the crisis the Fed (like other central banks) has provided large amounts of short-term liquidity to financial institutions. As I have discussed, it also provided backstop liquidity support for money market mutual funds and the commercial paper market and added significant liquidity to the system through purchases of longer-term securities. To be sure, the provision of liquidity alone can by no means solve the problems of credit risk and credit losses; but it can reduce liquidity premiums, help restore the confidence of investors, and thus promote stability. It is noteworthy that the use of Fed liquidity facilities has declined sharply since the beginning of the year–a clear market signal that liquidity pressures are easing and market conditions are normalizing.”

For the complete text of Bernanke’s remarks, click here.