Remarks by
John D. Hawke, Jr.
Comptroller of the Currency
Before the
American Bankers Association
Phoenix, Arizona
October 7, 2002

It would be a gross understatement to say that the past year has been a 
trial for our country.  Yet I'm firmly convinced that we're stronger today than 
we were before the terrorists struck on September 11  and before the string of 
corporate collapses that have done such grave damage to public confidence in our 
markets.  Around the world we're confronting our enemies.  At home we're coming 
to terms with abuses of corporate power that have cost many Americans their jobs, 
their pensions, and their investments  and, worst of all, their faith in the 
fairness and rationality of our economic system.

Crisis has always been a powerful catalyst for reform, and that's no 
exception today.  Major companies in every field are cleaning up their balance 
sheets, facing up to previous shortcomings, improving the quantity and quality 
of the information they disclose, and embracing a variety of other measures aimed 
at restoring public trust.

A notable example has been the growing number of corporations that have 
said that they would start accounting for stock options as an expense.  Their 
competitors will almost certainly face pressure -- from the marketplace if not 
eventually from those who enforce the securities laws -- to follow suit.

Sometimes small things can make a difference, and I believe that this issue 
of the proper accounting for options may be one of those cases.  For quite 
a few years I have been encouraging bankers to focus less on short-term 
performance and more on long-term value and the stability of their 
institutions.  Similar concerns have been voiced by many of my colleagues 
throughout the regulatory community.  But it's sometimes difficult to make 
that case when executive compensation is closely tied to current stock prices.  
I recently read of one large institution whose CEO said with some pride that his 
sole compensation came in the form of stock options.  That does not seem to me to 
be a very wise approach.  To be sure, when the market for the company's stock is 
booming, such a CEO may bask in the glow of great wealth, at least wealth  on paper.  
But there may be perverse incentives when the stock price falls  such as the incentive 
to reach further out on the risk spectrum in order to bolster earnings, or to engage 
in questionable accounting practices for the same purpose rather than hunkering down 
and addressing fundamentals, or taking actions that may preserve value for the future 
even at the cost of short-run hits to earnings. 

It's also difficult to take the long-term focus when stock analysts are preoccupied with 
quarterly earnings targets and the market exacts severe penalties when targets are missed 
by a few pennies a share.  But history shows us that those institutions that have taken 
the long view  that have been willing, for example, to accept an impact on current 
earnings in order to build up prudent loan loss reserves  are the ones that come 
through periods of economic stress in the best condition.

	The primary impetus for corporate reform, however, is not coming from individual 
corporations, but from government at various levels, as well as from leading industry 
organizations.  On July 30, as you know, the President signed into law the Sarbanes-Oxley 
Act -perhaps the most important piece of corporate reform legislation since the Depression.  
It amounts to a sweeping new framework for corporate governance: requiring, for example, that 
CEOs and CFOs return incentive-based compensation and trading profits following accounting 
restatements; accelerated reporting of insider transactions, whistleblower protections, better 
disclosure of off-balance sheet transactions, auditor independence and rotation, increased 
frequency of SEC review, and much more.

	Couple that with President Bush's initiative to root out financial crimes and stiffen 
sentences for corporate criminals and the recent actions of the SEC  including the requirement 
that senior officials personally certify the accuracy of financial statements  and I think 
we've sent an unmistakable message that previous standards of corporate conduct need to be 
reexamined.

	It's important to keep in mind, of course, that the objective here is not simply 
corporate morality, in the abstract.  The primary purpose is to preserve the confidence 
of investors and the public generally in the integrity of our markets  markets whose 
depth and transparency have been envied around the world.

	High on the list of current concerns  and properly so  is the role of boards 
of directors in the overall picture of corporate governance.  In many cases there's a 
gap between what the board is supposed to do and the role it actually plays.  In the 
past it was not uncommon for outside directorships to go to people having connections 
that might be useful to the company and who were not likely to rock the boat.  And 
it's just as troublesome when companies appoint competent and experienced people to 
their boards and leave them there to languish  unheeded, unnoticed, and uninvolved.  
"In all the years I've spent on various boards," one frustrated and disillusioned 
corporate veteran has written, "I've never heard a single suggestion from a director 
that produced any result at all."

	But attitudes have clearly been changing and that disillusioned directors' 
experience may not be typical today.  The best corporate managers have come to realize 
how important a conscientious and knowledgeable outside director can be, and particularly 
in today's environment I believe there is a much higher level of awareness in corporate 
America of the significant contributions that first-rate directors can make.  And there 
are heartening signs of responsiveness from standard setters -- once again crisis has 
been the catalyst for action.  One of the key recommendations in the package recently 
released by the New York Stock Exchange calls for listed companies to ensure that a 
majority of board members  instead of at least three, as mandated under present rules  
are independent of the company.  Furthermore, the Exchange recommends that the audit, 
compensation, and nominating committees should consist entirely of independent directors.  
And it calls for independent directors to meet at regularly scheduled executive sessions 
 without the presence of management.

Financial services firms, of course, are just as vulnerable as any to managerial 
misconduct  maybe more so, given the nature of their business.  That's why bankers like you 
operate under the most stringent and comprehensive regulation of any industry in the country.  
That includes a host of very specific provisions defining and restricting the relationship 
between financial institutions and their insiders, including directors.

That's also why some industry leaders  including the leadership of the ABA  have 
argued that some of the initial proposals of the New York Stock Exchange regarding the 
independence of directors should not apply in all cases to banks.  The Exchange has already 
modified its proposed rules to reflect the peculiar circumstances of the banking industry 
and I commend the ABA for continuing its constructive involvement in this process.

The fact that the relationship between bank directors and the financial companies on 
whose boards they sit are already defined and circumscribed by law and regulation is 
not the only salient difference between financial institutions and non-financial 
companies.  For most of corporate America, it generally doesn't matter how the members 
of a corporate family relate to one another  at least where they are wholly owned 
subsidiaries of a publicly owned parent and do not have their own debt obligations held 
by outsiders.  Intercompany transactions wash out in consolidated financial statements, 
and investors in the parent have no reason to be concerned whether transactions wholly 
within the family are on an arm's-length basis or whether one sub is 
being taken advantage of by another.

But, as the ABA noted in its comments to the Stock Exchange, banking organizations are 
different.  Banks are federally insured, they are supported by a federal safety net, 
and they play a critically important role in their communities and in our economy.  That's 
why there is a host of laws and regulations governing such things as how banks may lend 
to, swap assets with or engage in concerted transactions with their affiliates and 
insiders; when they may pay dividends to their owners; and what expectations they 
should have for support from their parent company.

As regulatory rulings and statutory enactments have broadened the range of activities that 
can be conducted in financial conglomerates owning banks, the opportunities for intra-family 
dealings have been significantly increased.  In fact, one of the motivating forces behind the 
Gramm-Leach-Bliley Act was to provide financial companies with greater opportunities to 
realize the "synergies" that might flow from being  financial supermarkets, and to offer "one-
stop shopping" to customers.

Thus, today we see bank securities and insurance affiliates prospecting for new customers 
in the bank's customer lists or seeking to exploit the bank's relationships to market nonbank 
products and services.  Indeed, the bank in a diversified financial holding company is very 
likely to have the most extensive and enduring roster of customer relationships in the 
family, thus making it the major focal point for joint marketing programs.  In the ordinary 
world of nonfinancial corporate enterprise, such prospecting for customers among affiliates 
obviously makes good sense.  But in the world of depository institutions things are different 
 or should be.  There is another set of interests that has to be taken into account: the 
public interest, represented by the interests of the banking supervisors and the FDIC as 
insurer of deposits.  In this context it is important to assure that the interests of the 
bank are being properly regarded when affiliated companies seek to take advantage of their 
relationship with the bank.

This is not at all a new concern, and it arises in a multitude of circumstances.  Let me 
give you a few examples of situations where caution is warranted:

-	An individual controlling a bank causes the bank to maintain correspondent 
balances at another bank that agrees in return to make him a loan.

-	A bank holding company that contributes operating loss deductions to a 
consolidated tax return causes the bank to pay upstream the amount of taxes the 
bank would have paid on a stand-alone return.

-	A bank is charged fees by a holding company or controlling shareholder for 
providing various management services.

-	Bank insiders operate an insurance agency that receives commissions on the sale 
of insurance to bank customers in connection with loans made by the bank.

-	A bank shaves rates on a loan or agrees to less demanding covenants to please a 
customer of the bank's investment banking affiliate, or in the hope of attracting 
new business for an affiliate.

-	A bank relationship manager provides information and customer access to an 
insurance or securities affiliate to promote the sale of the affiliate's products.

-	A bank contracts to buy a product or service from a third-party vendor in which a 
large shareholder or insider of the bank holds an ownership interest.

-	A holding company under financial stress is being pressed by regulators to invest 
capital into a subsidiary bank, while bondholders threaten to sue if the holding 
company dissipates assets by plowing more funds into a bank that might fail 
anyway.

I don't mean to suggest for a moment that all of these situations are examples of 
impropriety.  Indeed, a few of them are very common and, in principle, entirely 
appropriate.  On the other hand, some may skirt the bounds of legality.  But the common 
thread is that they all present an occasion for heightened concern about the interests of 
the bank  heightened because in each case the bank is dealing with a related party under 
circumstances in which the bank's interests could potentially be subordinated to the 
interests of that party.

In some cases the reason for concern may be the failure of insiders to recognize 
that intangible assets of the bank may be at risk of being transferred without appropriate 
compensation to the bank.  A bank's customer relationships are assets of the bank, for 
example, and if the bank is going to give an affiliate a license to mine those assets it 
should be compensated.  Certainly no bank would provide an unrelated third party with 
access to its customers without protecting its own interests  both its financial interest 
and its interest in maintaining a healthy relationship with its customers.

While this concept is occasionally overlooked, it is not rocket science.  The notion 
that a company, and not its insiders, has the right to benefit from a variety of intangible 
assets that come into being simply because of its existence is grounded in a long history 
of legislative and judicial pronouncements.  It underlies the requirement in the Securities 
Exchange Act of 1934 that insiders must turn over to their corporation any profit they 
make on short-swing transactions in the company's stock.  And it underlies court 
decisions holding that corporate opportunities cannot be diverted to insiders and that 
premiums reaped on the sale of corporate control belong to the corporation.
Nonetheless, we are now being treated to a variety of lurid stories recounting, for 
example, how insiders were given lucrative opportunities by investment bankers to invest 
in IPOs in exchange for steering their company's business to that investment bank.  The 
Attorney General of New York has, in my view, very properly asserted that such 
opportunities belong to the company, not to the insiders, and that they must account to 
their company for their unjust enrichment.

As I consider the relevance of today's corporate scandals to the world of insured 
depository institutions, I am reminded of a story I used to read to my kids, "The Lorax," 
by the late Theodore Geisel, better known as Dr. Seuss.  The Lorax was the forest 
creature who defended the trees, the Truffula trees, "the touch of whose tufts was much 
softer than silk."  That made them irresistible to the rapacious Once-ler, who "built a 
small shop and chopped down the Truffula trees with one chop."  At intervals  and as 
the forest and all the creatures that depended on it slowly disappeared under the ax  the 
Lorax would angrily appear "with a sawdust sneeze," saying, "I am the Lorax, I speak for 
the trees."  Alas, too late.  That story probably did more to create a generation of 
environmentalists than anything else I know of.

And so, with apologies to Dr. Seuss, I ask this question:  When an insured 
depository institution engages in transactions involving its parent or affiliate or insiders, 
"who speaks for the bank?"  Who in the corporate family is looking at these situations 
solely from the perspective of the bank, with an independent view and with undivided 
loyalty to the bank?    And how should we as regulators assure ourselves that the interests 
of the bank  and thus ultimately the interests protected by the federal safety net  are 
being properly regarded?

Some have suggested that we adopt a requirement that all insured banks have 
some number of truly independent directors  that is, directors who are not officers or 
employees of the bank and who do not sit on the board of the bank's holding company or 
some affiliate.  This would clearly be a significant change from present practice for many 
banks.  Yet what I perceive to be the currently prevailing patterns  either replicating all 
or part of the holding company board at the bank, or using bank officers, who may also 
be holding company officers, to comprise the bank board  does not assure the kind of 
independent view that I believe is needed.

Another approach might be to require that in situations in which a bank wants to 
enter into transactions with an affiliate, the bank's management engage some completely 
independent party  a special counsel or other outside advisor  to opine, from the bank's 
perspective, on the fairness of the transaction or on a procedure established for a series of 
such transactions.  Still another approach might be to make clear to responsible bank 
officers and directors that in the absence of any independent review sanctions may be 
addressed to them personally if it is later determined that the bank's interests were not 
properly regarded.

I appreciate that any new approaches to corporate governance procedures such as 
these are not likely to be warmly embraced.  Many bankers might  quite understandably 
 feel that they already have their banks' best interest at heart -- and I believe that is most 
frequently the case.  On the other hand, we have over the years seen enough situations in 
which the interest of a bank have been subordinated to other interests in the corporate 
family to give us concerns on this score.  Moreover, the evolution of financial 
conglomerates, offering a variety of nonbanking products for which the bank's customers 
may be viewed as prime prospects causes me to want to be sure that the interests of our 
banks are being properly regarded.

This is another one of those situations  and we have seen many of them over the 
years  that cries out for an industry-generated solution.  Time and time again we have 
seen legislative or regulatory initiatives adopted that might have been avoided or 
mitigated if the industry had had either some credible program of self-regulation or at 
least some standards of conduct expressing an industry consensus as to what is acceptable 
conduct.  One need only recite the list of "compliance" laws enacted in the last 25 years -
- about which many bankers complain bitterly -- to see the force of this point.

But where has the industry been in this time of turmoil in the field of corporate 
governance?  If only out of enlightened self-interest, the industry could provide a useful 
service by expressing its own expectations and values, demonstrating that it recognizes -- 
as I am confident it does -- the importance of basic principles that have not been 
universally observed.  Such an expression could have a material impact on investor 
confidence, among other things.  At best it could have an impact on the need for even 
more legislation and regulation.

Consider this my challenge to you.  But to be credible you've got to move quickly 
and with force.  If you don't, the process of government policymaking will inevitably 
move forward, resulting in new requirements that will add to your costs and compliance 
burdens, and you will have passed up yet another opportunity.  I don't mean to suggest 
that we will be sitting by waiting for you, for we have our own responsibilities to assure 
that the interests of the banks we supervise are properly protected.  But what the industry 
itself can contribute could have a significant influence on what might emerge from the 
agencies or from Congress. 

The kind of self-scrutiny we're going through today in so many areas of our 
economic life is never easy or comfortable.  It exposes fallacies in some of our 
assumptions about the conduct of business and about human nature.  It's teaching us 
things  about associations and about ourselves  many of us, given the choice, might 
prefer not to know.

But I believe there is no choice  not if we're to profit from our mistakes, restore 
confidence in our markets, and rebuild our productive capacity.  Perhaps our greatest 
strength as a nation is the courage to confront our problems bravely and forthrightly and 
see them through to a solution.  You have an enormously important role to play in the 
process.