The Wonk Room

Warner Concerned Consumer Protection Agency Will Be ‘Divorced From The Reality Of The Market’

Sen. Mark Warner (D-VA)

“Is this going to be some kind of poor cousin, located across town, that will always be struggling to have the resources, personnel and expertise?” Warner, a Democrat on the Senate Banking Committee, said…Another concern is that the agency, “divorced from the reality of the market and the reality of the financial institution, becomes so focused on a gotcha mentality that it overdoes,” Warner said. He said he may be “convinced” to back the agency.

Warner’s concern about the agency being a “poor cousin” is incredibly valid, and highlights one of the problems inherent in our current regulatory system. At the moment, many regulatory agencies are tasked with policing both the safety and soundness of financial institutions and consumer protection. But as Adam Levitan pointed out, “a bank cannot be safe and sound without being profitable, and abusive and exploitative lending practices are frequently quite profitable (there’s no other reason to engage in them). If a regulator cracks down on an abusive lending practice, it might endanger its regulatory charge’s safety and soundness.”

Thus, consumer protection becomes a secondary thought, if it’s considered at all. If the new agency does not have the resources or clout to be anything more than the bank regulators’ annoying little brother, it simply won’t be effective.

The second part of Warner’s concern holds less water. The “reality of the market” is that predatory lending can be a highly profitable business, especially when its encouraged and abetted by Wall Street investment banks. For instance, originating subprime mortgages was a $600 billion business in 2005. No one is balancing the concerns of the consumer against the banks’ charge for profits.

The new agency will have to be intimately familiar with the various markets for financial products, but from a consumer perspective, with consumer protection the foremost objective. It’s purpose is to write rules and issue guidelines ensuring that the “reality” that banks and mortgage lenders have crafted doesn’t consistently put consumers on the short end of the stick. I hope Warner doesn’t find that too objectionable.

Is Wall Street Compensation Already Headed Back To Pre-Crisis Levels?

According to analyst estimates that the Wall Street Journal has been examining, Wall Street bankers may be getting ready to party like it’s 2007 when it comes to compensation:

Based on analysts’ earnings forecasts for 2009, Goldman Sachs Group Inc. is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm’s $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007…Morgan Stanley, the only other huge U.S. securities firm left as an independent company, will likely pay out $11 billion to $14 billion in compensation and benefits this year. [...] [T]he comeback in compensation so far this year shows how hard it is for Wall Street to break its old habits.

Meanwhile, over at Tech Ticker, House of Cards author and former investment banker William Cohan said “there’s been a lot of talk” from the Obama administration about compensation, “but little or no action.” “There’s a lot of nice words in the 85-page re-regulation proposal…[about] making sure compensation is tied to behavior and accountability,” he said. “But there’s not much action going on.”

There may not have been much action yet, but the administration has taken some steps toward altering compensation practices. Yesterday, the Securities and Exchange Commission proposed rule changes that would “require companies to disclose more about their use of compensation consultants and bolster reporting of stock and option awards.” And ultimately, I think the real problem is not with the administration’s lack of action, but with Congress’.

The administration has explicitly called for legislation that would enact “say on pay,” giving shareholders the ability to vote on their company’s compensation packages. The SEC is already putting this in place for companies receiving TARP money, but it would take an act of Congress to make it the law of the land.

Say on pay would not be a panacea for all that is wrong with Wall Street’s compensation practices, but it seems to have had a positive effect on CEO pay in both Great Britain and Australia. And as Cohan and Nouriel Roubini have suggested, more needs to be done to align compensation with long-term corporate outcomes. But if Congress isn’t willing to move — and most signs point to financial regulation taking a back seat to other legislative matters — there’s little that the administration can do.

Is Treasury Favoring Banks By Undervaluing TARP Warrants?

Earlier this month, the Treasury Department allowed ten of the nation’s largest banks to repay their TARP funds, bringing up the question of what to do with the warrants that the government received in exchange for TARP money. According to an analysis by University of Louisiana professor Linus Wilson, the plan that Treasury announced last Friday to sell those ten banks their warrants — which are options to buy stock sometime in the future — will shortchange taxpayers by a cool half billion:

The anticipated value of warrants for 10 of the largest banks that repaid their Troubled Asset Relief Plan funds is $3.3 billion using the Treasury’s valuation process, compared with $3.82 billion with a more conventional method, Linus Wilson, a finance professor in Lafayette, Louisiana, said in an interview. Investors are debating whether taxpayers will be fairly compensated for the risk they took by providing rescue funds for the banking industry.

Treasury’s approach to offloading the warrants is to have each individual bank suggest a price for its warrants. Treasury can accept the bank’s offer, or reject it and propose its own price. If the bank then rejects Treasury’s proposal, three arbitrators decide the final price “based on an average of the appraisers.”

But since Treasury is using a lowball determination of the warrants’ value, and the banks “have a solid incentive to bid extremely low,” it’s almost certain that the average will favor the banks, at taxpayer expense. At DealBook, Steve Davidoff made some suggestions for how Treasury can fix this:

First, make the banks’ initial repurchase offer public. They should be subject to public inspection — and shaming — if they try and take advantage of the government. Second, the government should toll the strict time limitations on the proceedings to allow time for it to respond adequately. Finally, to avoid this issue altogether the government should sell as many of the warrants it can now on the open market, before a repurchase request is submitted.

Davidoff’s first point about transparency is important. This is a transaction with taxpayers that we are talking about here, not a private business deal. The more we know about how the banks are conducting themselves in this regard, the better. Hopefully, transparent offers will also keep Treasury honest, as the public will know if Treasury accepts too low a price.

In the end, I think Simon Johnson is correct in that “the only sensible way to dispose of these options is for Treasury to set a floor price, and then hold an auction that permits anyone to buy any part – e.g., people could submit sealed bids and the highest price wins.” (Felix Salmon suggested then giving the banks “the right to match the winning price, if they’re so inclined.”) This approach would both produce a fairer result and ensure that the banks don’t get one final shot in at taxpayers as they wriggle free from TARP.

Philadelphia Mandatory Mediation Program Keeps 60 Percent Of Borrowers Out Of Foreclosure

Reuters has some new data today on a foreclosure prevention initiative that Philadelphia has implemented. Under the city’s mandatory mediation program, before a homeowner can be foreclosed upon, the lender and borrower must meet with judges, housing advocates and attorneys “in the hope that a resolution can be found under which owners will resume payments they can afford and lenders will no longer need to dispose of distressed property.”

The lender is in no way forced to find a workable solution with the borrower, but the simple act of putting all the parties together in a room has produced some encouraging results:

A program to avert residential mortgage foreclosures has saved almost 60 percent of its participants from losing their homes in a sheriff’s sale, officials said on Tuesday. Philadelphia’s Mortgage Foreclosure Diversion Pilot Program…resulted in 2,776 properties permanently or temporarily saved from sale between its inception in June 2008 and May 31 this year out of 4,690 that were referred to the program.

A statewide program in Connecticut has produced similar numbers, with 57 percent of borrowers able to stay in their homes. But despite the effectiveness of mediation meetings, as of the end of last year, about 80 percent of homeowners at risk of losing their homes had not engaged in any efforts to make a deal with their lender.

Sen. Arlen Specter (D-PA) is reportedly putting together legislation to replicate the Philadelphia program at the national level. Conveniently, CAP’s Andrew Jakabovics and Alon Cohen have some suggestions for the sort of steps that the federal government can take to promote such an effort:

– Congress should fund state and local mandatory mediation programs just as it provides neighborhood stabilization funds to alleviate the housing crisis.

– The Department of Housing and Urban Development should issue guidance that explicitly permits community development block grants to be used to fund mandatory mediation programs.

– The government should require mediation for all federally insured home mortgages.

Bloomberg reported yesterday that delinquencies on prime mortgages more than doubled in the first quarter of 2009, compared to a year earlier, “as U.S. efforts to help homeowners failed to keep pace with job losses.” The foreclosure problem is simply not going to abate any time soon, so any reasonable steps that can keep borrowers in their homes — including mandatory mediation — can, and should, be taken.

Alleged Exploitation Of Immigrants And Seniors Underscores Need For Consumer Protection Agency

Since the Obama administration announced its plan to create a new regulatory agency solely tasked with protecting consumers, there has been a steady drumbeat of opposition from the banking and business lobbies, Republican lawmakers, and the talking heads at CNBC. But today, there are a couple of reports highlighting why a consumer protection agency is so necessary.

First, the LA Times is reporting the story of former Bank of America teller Gabby Ornelas, who is accusing the bank of exploiting Latino immigrant consumers:

Ornelas was instructed to use her Spanish language skills and Latina heritage to sign up customers for as many kinds of banking services as possible, she said — services that led to lucrative fees for the bank and financial entanglement for many customers.

And then there’s McClatchy noting that “an influx of shady loan professionals have made lawmakers uneasy about the safety and soundness of the popular government-backed reverse-mortgage program”:

As the popularity of reverse mortgages grows, however, complaints are mounting that unsavory loan professionals who fled the troubled sub-prime mortgage industry now are plying their craft on unsuspecting seniors seeking the loans. Some agents, seeking higher fees, are steering loan applicants into costly long-term annuities, which almost always are inappropriate for seniors because they can tie up retirement savings for many years.

AARP also claims that predatory lenders are attempting “to get seniors to use proceeds of their reverse mortgage to buy expensive long-term-care insurance,” even though it often “makes more sense for seniors to use the payout for actual long-term care, not a hard-to-use insurance policy.” Earlier this month, Comptroller of the Currency John Dugan warned “that reverse mortgages pose significant compliance risks and said regulators should get out in front of this issue.”

Today, the Treasury Department delivered legislative language for the creation of the new agency to Capitol Hill. One of the agency’s main responsibilities, according to the draft language, will be prescribing rules “identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service.” The agency will also have the power to issue subpoenas and seek court orders to halt abusive practices for both banks and non-banks.

Currently, the regulatory system treats consumer protection “as secondary or even in direct conflict with ensuring the soundness of financial institutions,” but these two functions of the agency — creating rules to protect consumers and the use of enforcement mechanisms — will hopefully address that imbalance. As long as the new agency is adequately funded and given as much clout as the banking regulators, it can rein in those hawking abusive financial products to vulnerable populations.

Supreme Court: States Have The Right To Investigate National Banks For Lending Discrimination

New York Attorney General Andrew Cuomo

The Clearing House argument was that only the federal government (in this case, the Office of the Comptroller of the Currency) has the ability to investigate national banks. Justice Antonin Scalia joined the four liberal justices in disagreeing with this argument:

The foregoing cases all involve enforcement of state law. But if the Comptroller’s exclusive exercise of visitorial powers precluded law enforcement by the States, it would also preclude law enforcement by federal agencies. Of course it does not…In sum, the unmistakable and utterly consistent teaching of our jurisprudence, both before and after enactment of the National Bank Act, is that a sovereign’s “visitorial powers” and its power to enforce the law are two different things. There is not a credible argument to the contrary.

This case began when Eliot Spitzer, then New York’s attorney general, wanted to discover “whether minorities were being charged higher interest rates on home mortgage loans.” But at the time, the courts ruled that Spitzer was barred from investigating whether national banks were engaging in such practices, leaving the job to ineffectual federal regulators. Current New York AG Andrew Cuomo called the Supreme Court’s reversal of this decision “a huge win for consumers across the nation.”

As Adam Levitan added at Credit Slips, “hopefully this opinion, combined with the emphasis in the Obama financial restructuring plan on ending federal preemption of state consumer protection laws (federal law will be a floor, not a ceiling), marks a turning point in the long march of federal preemption of state consumer protection laws in financial services.” Indeed, Obama has taken positive steps to ensure that states can enforce consumer protections within their own borders, despite pressure from the mortgage and insurance industries.

In the grander scheme of things, this was an attempt by the banking and mortgage industries to grab a piece of the immunity from state law already enjoyed by the health insurance and medical device industries (as outlined by Ian Milhiser here). Hopefully this case will blunt the charge by others, including the restaurant industry, to avoid state law.

Report: ‘Lack Of Progress’ On Toxic Assets ‘Threatens To Prolong The Crisis And Delay The Recovery’

Today, the Wall Street Journal provided a good dissection of how efforts to rid banks of the toxic assets clogging their balance sheets have “sputtered repeatedly“:

[T]hat initiative — called the Public-Private Investment Program, or PPIP — has lost momentum. Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits. The program’s problems threaten to stymie efforts by struggling smaller banks, in particular, to clean up their balance sheets.

The PPIP, much discussed and debated upon its release, has definitely faded from view. But just because we’re successfully ignoring the toxic assets doesn’t mean that the problem has gone away.

In fact, today, the Bank for International Settlements (BIS) — which The Guardian calls “one of the few bodies consistently sounding the alarm about the build-up of risky financial assets and under-capitalised banks in the run-up to the credit crisis” — warned that “taxpayers around the world still face potentially large losses because governments have failed to act quickly enough to remove toxic assets from the balance sheets of key banks.” And the BIS’ prime example is the U.S.:

Progress on problem assets has been slowed by the complexity of the securities affected, legal constraints and, above all, the limited political will to commit public funds to the clean-up effort. The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy. The lack of progress on removing troubled assets from the banks’ balance sheets and recognising the associated losses is illustrated by the US experience.

Federal officials reportedly told the Journal that the “because a dozen or so big banks recently succeeded in raising capital,” there is less pressure to get the PPIP off the ground. But even if those few banks are healthy (and that’s a big if), what of every other institution, particularly small and mid-sized, grappling with toxic portfolios? The financial system is not repaired simply because Bank of America can raise capital.

For all the talk of “green shoots,” toxic assets and housing still seem to have bedeviled the administration, and unfortunately, those are two areas (along with rising gas prices) that can stop an economic recovery right in its tracks.

Moderate Democrats Pledge To Reform Teacher Compensation

Sen. Evan Bayh (D-IN)

We commend you for the emphasis you have placed on teacher quality…The research confirms what our intuition tells us: nothing has a greater impact on outcomes in the classroom than the quality of our teachers. We must do more to recruit, prepare, and reward outstanding teachers and part of that means overhauling the way we compensate them…We look forward to working collaboratively with teachers to develop these new compensation systems — a critical ingredient to their success.

There is an undeniable need for teacher compensation practices to be overhauled. But before that can happen, the system for evaluating teachers needs to get a lot better.

Currently, in school districts that use binary evaluation ratings (satisfactory or unsatisfactory), “more than 99 percent of teachers receive the satisfactory rating.” In districts that have a wider array of rating options, “94 percent of teachers receive one of the top two ratings and less than 1 percent are rated unsatisfactory.” If we’re telling almost every single teacher in the country that he or she is doing just fine, we’re never going to be able to link compensation to effectiveness.

CAP released a report yesterday by Morgaen Donaldson that lays out some ways in which teacher evaluation systems could be altered so that they actually provide some actionable information. There’s lots of good stuff in there about how to design fair and reliable evaluations, but I also like this bit, about giving principals incentives to use due diligence when evaluating teachers:

When principals dismiss teachers, the district should not undermine principals by failing to follow through on their decision or by forcing them to take a sub-par replacement. They should also provide administrators incentives for thorough evaluation by offering them rewards for detailed feedback. Lastly, they should pressure administrators to evaluate accurately by reviewing evaluation reports and by incorporating an analysis of principals’ evaluations of teachers into district-level evaluations of principals.

This makes sense, because better evaluations won’t be very useful if principals don’t actually put any effort into them. And any overhaul of teacher compensation has to start with a better system for deciding which teachers are the most effective and innovative.

GAO Recommends Raising Gas Tax, Starting Congestion And Pollution Pricing

Today, Transportation Secretary Ray LaHood officially revealed how much money the administration thinks it needs to infuse into the Highway Trust Fund (HTF). Over the next 18 months, the Fund will run about $20 billion short, with $5-7 billion of that needed before October 1. “There are a lot of people putting their heads together right now on how to get $20 billion and how to pay for it,” LaHood said.

It’s great that the administration is trying to come up with a creative solution to the immediate problem. Letting projects funded by the Trust (which are separate from those funded by the economic recovery package) would be a blast of anti-stimulus right when we don’t need one. But as I’ve noted before, we’re going to have to keep coming up with creative ways to keep the fund solvent unless we change the way in which it raises revenue. But don’t just take my word for it. Here’s the Government Accountability Office (GAO), in a report sent to Congress today:

While infusing more money into the HTF would help keep the Highway Account solvent, such action would not ensure the long-term sustainability of the HTF nor address the need for improved performance of our nation’s surface transportation programs. We have previously reported that current surface transportation programs—authorized in SAFETEA-LU—do not effectively address the transportation challenges the nation faces. As a result, we have called for a fundamental reexamination of the nation’s surface transportation programs

The problem here is that the HTF is overwhelmingly funded by gas taxes, of which we keep collecting less and less.

The GAO endorses a few solutions which make complete sense to me. First, raise the gas tax and index it to inflation (the tax hasn’t moved since 1993, despite inflation and an effort to fund more transport projects). Second, finding new sources of revenue through congestion and pollution pricing. Of course, the administration seems adamantly opposed to raising the gas tax — and Congress can’t even stomach someone bringing up the idea — but until some serious steps are taken we’re going to be right back here, with an insolvent Trust Fund, time and time again.

The Investment Cost Of Our Energy Price Roller Coaster

Today, the Associated Press’ Chris Kahn reported that “oil prices rose above $69 a barrel Thursday after the government said that the economy may be faring better than previously thought.” Nineteen hours before that article, Kahn penned a piece reporting that “energy prices fell Wednesday after the government reported that unused gasoline in storage grew for the third-straight week, another signal that consumer demand for energy is waning.”

This one day up and down illustrates a bigger problem: the economic uncertainty created by energy price volatility. We just had a streak of fifty straight days of rising gas prices, which is just one in a long series of energy price spikes that have afflicted the country.

I noted earlier in the month that rising gas prices could threaten billions in worldwide stimulus, effectively snuffing out any economic recovery that’s occurring. And as CAP’s Amanda Logan and Christian Weller point out, the energy price volatility that we’re subjected to prevents all sorts of personal and business investments that could help speed recovery:

– There is an 83.3 percent chance that consumers will spend a smaller share of their disposable income on vehicles after they have just gone through a period of high price volatility. In fact, consumers buy about 1.6 percent fewer cars one year after experiencing a year-long episode of large energy price swings.

– Investment in residential structures — new home purchases and upgrades — dropped by 0.5 percentage points relative to gross domestic product on average after energy prices swung wildly for 12 months.

– There is a 91.7 percent chance that business investment in transportation equipment — such as trucks and tractors — as a share of gross domestic product will decline after extraordinary energy price volatility, largely because businesses will buy 11.0 percent fewer vehicles.

Logan and Weller do point out though, that “not everything declines after high energy price volatility. The profit rate — profits to assets — of the oil and gas industry tends to surge during periods of high energy price volatility.”

Something should really be done to prevent this “roller coaster ride of large energy price swings.” Logan and Weller suggest that a renewable energy standard could help. I’m still in favor of using the gas tax to smooth out the boom and bust cycle of prices, which, as Jason E. Bordoff and Gilbert E. Metcalf at the Brookings Institution write, would “provide a strong, stable price signal to encourage both conservation and alternatives to oil.”

Chamber Of Commerce: We Only Like Voting When It Suits Our Purposes

Last week, the Chamber of Commerce announced that it will “vigorously oppose” a new consumer protection agency proposed as part of the Obama administration’s regulatory reform package. But that’s evidently not the only way in which the Chamber is out to influence the debate over the changes facing Wall Street.

Yesterday, the Chamber laid out its opposition to a change — backed by the administration and House Financial Services Chairman Barney Frank (D-MA) — that would allow shareholders to vote on their company’s executive compensation practices, so called “say on pay”:

Opponents of an effort to give shareholders greater rights are centering their attacks on organized labor, arguing that unions are pushing such proposals to bolster their ranks and boost their declining pension funds.

“Big labor unions are trying to achieve at the board table what they cannot achieve at the negotiating table, under the guise of shareholder protection,” said David Hirchsmann, president of the Chamber’s Center for Capital Markets Competitiveness.

So the Chamber opposes the Employee Free Choice Act because it wants to “save the secret ballot,” while also opposing “say on pay,” which would guarantee that shareholders can hold a non-binding vote on their company’s executive pay packages. Isn’t it convenient that the Chamber only thinks voting is important when Big Business can set the rules?

But “say on pay” is really about injecting some sanity back into corporate governance. As Treasury Secretary Tim Geithner said, “[say on pay] has already become the norm for several of our major trading partners.” In two of those countries — Great Britain and Australia — CEO pay “grew 2.4 percent and 25.3 percent, respectively, from 2002 through 2006, while pay in the United States soared 59.9 percent in the same period.”

Some companies in the U.S., including Aflac Co., voluntarily undertake such votes already. “We want people to look at us and say, ‘Here’s a company that will even let you vote!’” said Aflac CEO Daniel Amos. “It’s symbolic, but it’s an important symbol.”

And that’s just the thing: the vote is non-binding, leading some to say that it doesn’t go far enough toward reining in Wall Street excess. As Dean Baker explained:

The current rules allow management insiders to make out like bandits at the expense of shareholders and other stakeholders. This is why clowns get paid tens of millions to run their companies into the ground in the US…Obama’s proposals do not go nearly far enough in taking back power from the insiders. We should have binding shareholder votes on compensation in which unreturned proxies don’t count.

So in the end, “say on pay” is simply an attempt to get some sense of balance back into corporate governance, and to start holding executives accountable to someone other than themselves.

House GOP Follows Banking Industry’s Lead: Consumer Protection Will Make Us ‘Yield Our Freedom’

Today, the House Financial Services committee held the first in a series of hearings regarding financial regulatory reform and restructuring. Today’s topic was the new consumer protection agency that the Obama administration has proposed. During the hearing, House Republicans were adamant about their belief that the agency is intended to make us “yield our freedom” to “philosopher kings” who will dictate what consumers can and cannot buy, while forcing banks to lend to poor people. Some examples:

Rep. Jeb Hensarling (R-TX): An unelected bureaucrat will now decide for us what mortgages we can have. They will decide what bank accounts we can open. They may even decide whether or not we can be trusted with a credit card.

Rep. Scott Garrett (R-NJ): I don’t believe that creating more government agencies, perhaps those even with an Orwellian, heavy handed, government bureaucrat knows best mentality…is an appropriate solution.

Watch a compilation:

Incidentally, this is exactly how the mortgage and banking industries want the new agency to be characterized. When the administration’s plan was first released, the American Bankers Association (ABA) immediately claimed that it “needlessly rips apart all the existing regulatory agencies, eliminates charter choices and creates a new agency with powers to mandate loans and services that go well beyond consumer protection.” And today, ABA President and CEO Edward Yingling was on Capitol Hill, singing the same song:

[The agency] imposes government designed one-size-fits-all products – so-called plain vanilla products – over services that are designed for an increasingly diverse customer base…ABA believes the answer is not to have the government design products, mandate that they be offered, and give them an advantage over private sector products.

As it was put at Oxdown Gazette, “I hope all of you will provide examples of the way all that lovely financial innovation has helped you. Extra points for the people who were helped by credit default swaps.”

The new agency is actually meant to ensure that financial disclosure forms are clear and fair, that there are no gaps in the regulatory framework when it comes to existing consumer protections, and most importantly, to have an agency that is solely focused on consumer protection, instead of making it something that a bunch of agencies devote some of their time to. With their stance, House Republicans are endorsing the view of the banking and mortgage lobbyists, who want to maintain the same haphazard, almost non-existent regulation that led us down the subprime road the first time.

As Financial Industry Gears Up, Report Shows Lobbying Led To Shoddier Loan Standards And More Losses

There are an array of reports today outlining the steps that the banking and financial services industries are taking to gum up various aspects of the plan to beef up Wall Street regulation.

There’s a new industry group — the Financial Instruments Reporting and Convergence Alliance (FIRCA) — fighting an accounting rule change meant “to end a practice that contributed to the risky lending that set off the financial crisis.” Hedge funds, organized into the Managed Funds Association, are mobilizing “money and power to fend off tougher oversight, higher taxes and much greater transparency.”

And of course, banks are continuing to raise a stink about the Obama administration’s plan to create a new consumer protection agency. All of which makes this report from the Research Department at the International Monetary Fund (IMF) (via The Stash) extremely timely.

The paper shows that the financial firms that did the most lobbying from 1998 to 2006 also had lower lending standards, a greater tendency to securitize, a larger presence in areas that are suffering the most from loan delinquencies, and ultimately lost the most money during the financial implosion. The researchers concluded that financial sector lobbying of this sort poses a threat to economic stability and increases systemic risk:

[The results] tend to support a theory of “moral hazard” whereby financial intermediaries lobby to obtain private benefits, making loans under less stringent terms not because they have better capacity to evaluate risks associated with the loans, but because they expect short term gains from these loans during the boom phase, and to be bailed out when losses amount during a financial crisis. These results…provide indirect evidence that lobbying might have the potential to threaten financial stability and contribute to systemic risk.

In those same years, financial firms increased their lobbying by 25 percent, while the average increase in other industries was 10 percent. Meanwhile, in the last two years, hedge funds have quadrupled the amount that they spend on lobbying (see graph at right).

So the moral of the story is that financial firms lobby to make the rules fit the tactics that they want to use, and lawmakers respond accordingly, instead of creating a system that forces firms to use more due diligence and employ more caution. This is worth knowing, since the Obama administration’s financial regulation plan likely won’t start moving until the fall, giving the financial industry lots of time to work its magic.

Note To Roll Call Editors: Insurers Don’t Believe Obama’s Plan Does Enough…To Circumvent Regulations

Roll Call headlined this story “Greater Insurance Regulation Sought: Some Say Obama’s Plan Doesn’t Do Enough.” It seemed fishy though, that the groups ostensibly looking for more regulation are the insurance and banking industries’ lobbying arms, including the American Insurance Association and the Financial Services Roundtable.

And sure enough, if you get down a few paragraphs in the story, what the groups are actually seeking is not more regulation, but the ability to avoid state regulations that they don’t like:

Groups like the American Insurance Association, the Financial Services Roundtable, and the American Council of Life Insurers support the White House’s efforts to create a national insurance infrastructure but are also pushing for the creation of an optional federal charter that would allow insurance companies to choose whether to follow state or federal rules.

Just like the Mortgage Bankers Association wants to avoid regulation of mortgage lending at the state level, insurance companies want to avoid state regulations when it suits their interest. Allowing insurance companies to opt out of state regulation — which is what an optional federal charter would do — would enable them to “shop for the lightest regulation,” which could be worth billions of dollars to the insurance industry.

Thus far, the Obama administration has been very conscious of ensuring that federal regulation doesn’t preempt state law, and acknowledging that states have a good grasp on what their regulatory needs are. Allowing an optional federal charter would fly in the face of that approach. As Charles Symington of the Independent Insurance Agents & Brokers of America’s said, “in many respects the battle over the optional federal charter has been between Main Street and Wall Street. The administration appears to have initially decided that the arguments are on the side of Main Street America, small business and consumers.”

Someone should tell Roll Call that looking for different regulation is not the same as looking for more regulation.

Sen. Bond: Banks Provide ‘Too Much Information,’ So We Don’t Need Consumer Protection

Today, Sen. Kit Bond (R-MO) appeared on CNBC to provide his thoughts on, among other things, the consumer protection agency that the Obama administration wants to create as part of its financial regulation package. Like the banking lobby, the Chamber of Commerce, and some conservatives in Congress, Bond is opposed to creating the agency. However, his reasoning seems to be that, in his personal experience, banks actually provide “too much information” to consumers:

I think, really, the idea to have a consumer protection regulator, in addition to a banking regulator, is a bad idea…We bought a bunch of houses in recent years. My wife likes to move. And each year, each time we go through this, you get these stacks of paper. You get too much information. It is not consumer information, and that is part of the problem.

Watch it:

So, Sen. Bond, how many houses do you own? But more importantly, isn’t the fact that mortgage contracts are getting larger and more complex an argument for the creation of a consumer protection agency? It would seem that the overabundance of material would make it more likely that a consumer gets unwittingly ripped off.

As David Lazarus wrote in the Los Angeles Times, the real problem here is that banks “have consistently proved themselves unworthy of customers’ trust“:

From runaway credit card interest rates to mortgages that turn into one-way trips to foreclosure, lenders have repeatedly demonstrated their inability to deal with customers fairly and responsibly. Instead, they place their own interests ahead of all other considerations, and in so doing expose frequently unsophisticated consumers to enormous risk and financial ruin.

There are a lot of ways to get lost in the forest of subprime mortgages, reverse mortgages, and other complex financial instruments, even without taking into account the banks’ active predatory actions. Bond wants to have bank regulators also regulate products on the ground level, but those regulators have already demonstrated that they operate at 30,000 feet, watching over the soundness of an institution overall (and not even doing a good job with that), but not the financial safety of consumers. I think it’s asking too much to have them policing both an institution’s health and the way in which that institution interacts with consumers.

But at least Bond didn’t join the rest of the CNBC crew in claiming that only “suckers” and “idiots” are victims of predatory lending.

Mortgage Bankers Association Wants To Revive Failed Bush Preemption Policy

One of the planks in the Obama administration’s plan for financial regulation is ensuring that states are allowed to strengthen mortgage standards if they feel that the federal standards are not tough enough or if they notice a problem unique to their state that needs addressing. Yesterday, the Mortgage Bankers Association (MBA) wrote a letter to Treasury Secretary Tim Geithner and National Economic Council Director Lawrence Summers to complain about this idea:

The Mortgage Bankers Association has weighed in against an Obama White House proposal to allow states to write tougher lending rules than the federal government. “Anything short of federal preemption risks perpetuating one of the problems of today’s regulatory structure for mortgages and would seem to be inconsistent with key objectives of the administration’s plan,” MBA Chief Executive John A. Courson wrote Thursday.

But we’ve been down that road before, and it’s one of the reasons that we’ve wound up with the mortgage mess that we have on our hands today.

In 2002 and 2003, various states, including Georgia, New York, New Jersey, and New Mexico, proposed laws aimed at cutting down on predatory lending and subprime mortgages, which were becoming increasingly large problems. But then, citing the “increased costs and an undue regulatory burden” on banks, both the Office of Thrift Supervision and the Office of the Comptroller of the Currency swooped in to exempt national banks from state standards, preempting anything that the states might do.

At the time, Diana Taylor, the New York superintendent of banks, said “I am concerned because this is an unelected official in Washington who is overruling state legislators by regulatory fiat. The state legislature has a better idea of the consumer situation in the state than an unelected official in Washington.” Of course, we now know the havoc that subprime lending wreaked on the economy.

Obama has already directed executive branch officials “to review every regulation adopted in the past ten years to scrub them of inappropriate preemption language.” His goal of not preempting state lending regulations is simply consistent with this approach. But the MBA would rather the banks stay under the same sort of regulatory regime that missed the subprime mess in the first place.

Making The Case For Mandatory Foreclosure Mediation

The Obama administration’s housing plan centers on the idea that, given enough in the way of incentives, lenders will modify loans for troubled homeowners, which enables both the homeowner to keep their home and the lender to keep receiving payments. However, the program is having some difficulty getting off the ground:

The Obama administration’s $75 billion program to reduce foreclosures has been beset by backlogs and delays, leading many overstretched homeowners to complain about unreturned phone calls and inaccurate information from lenders, while others say they were denied help for reasons that weren’t clear.

“The loan-modification program is suffering. What we’re doing right now isn’t working as expected,” says Richard Smith, CEO of Realogy. “Banks, unfortunately, just weren’t geared up for this.” This is troubling, especially since housing experts are warning that “a new wave” of foreclosures may be on its way — as borrowers with adjustable rate mortgages that were a step above subprime start to see their rates rise — which could cause as many problems, if not more, as subprime defaults did.

Fortunately, the good people at CAP have been thinking about this. In a paper coming out on Monday, Andrew Jakabovics and Alon Cohen recommend that the federal government do everything it can to ramp up mandatory mediation between borrowers and lenders as a way of nipping preventable foreclosures in the bud. The idea is that, before putting a homeowner into foreclosure, a lender would have to sit down with the borrower to see if they can work out an acceptable deal that will enable the borrower to avoid foreclosure.

The reason for this is that mandatory mediation — the simple act of forcing lenders to meet with borrowers — has already proven quite successful at the city and state level. Consider the example set by Philadelphia:

By requiring lenders seeking a foreclosure to sit down with the distressed homeowner and mediate a resolution, the Philadelphia Foreclosure Diversion Program has succeeded in keeping 78% of families in their homes. If those families had been in other jurisdictions they would have lost their homes to foreclosure.

A program in Connecticut has also seen some success, with 57 percent of borrowers who complete the program remaining in their homes. Connecticut also provides a template for how such a program can be designed at the state level.

While getting to more people than previous efforts (like Hope for Homeowners, which prevented a grand total of one foreclosure), the administration’s housing plan just don’t seem like it can keep up with the rapid rate of foreclosures. It’s worth giving mediation a shot, as foreclosures are proving to be a constant thorn in the side of economic recovery.

New Ranking Member On Ed And Labor Committee Continually Acts Against Workers And Students

Rep. John Kline (R-MN)

According to the Duluth News-Tribune, “issues in front of the [Ed and Labor] committee are not those Kline ran on when he got into politics…But he said that in his four two-year terms he has gained education and labor experience.” Well, here’s some of what that experience had led him to do:

– He voted against a minimum wage increase three different times in 2007.

– He voted against lowering interest rates for student borrowers enrolled in the Federal Family Education Loan and Direct Loan programs.

– He voted against the Ensuring Continued Access to Student Loans Act.

– He introduced the Secret Ballot Protection Act, which would “prohibit a union from being recognized” through a majority sign-up process.

– He supported “some system of personal accounts” as “a central component” of Social Security reform.

The National Education Association actually gave Kline an F grade for both 2007 and 2008.

According to the St. Paul-Minneapolis Star Tribune, “in his new role, Kline will be expected to be a leading GOP combatant” against the Employee Free Choice Act. But with his Secret Ballot Protection Act, Kline revealed that he has no idea how union drives even work. He advocated taking the majority sign-up option away from workers, even though, since 2003, half a million workers have organized in this fashion, including employees at AT&T, UPS and Pacific Gas and Electric.

Kline, as he laid out in this Washington Times op-ed, is very concerned with the “coercion, intimidation and bullying” of union organizers (even though there is no evidence that this occurs in states that allow majority sign-up), but he doesn’t spare a word for the coercive and punitive tactics that employers use to prevent employees from unionizing. Instead of leveling the playing field for workers, Kline would simply prefer preserving the anti-worker status quo.

CNBC Talking Heads: Only ‘Naive,’ ‘Stupid’ ‘Suckers’ And ‘Idiots’ Were Victims Of Predatory Lending

Yesterday, the Obama administration announced that, as part of its regulatory reform package, it wants to create a new consumer protection agency, charged with overseeing financial products on the ground level. The banking lobby and the Chamber of Commerce both made their opposition to the new agency known, and in the last day have found another strong ally in CNBC.

A host of CNBC talking heads — from Dennis Kneale and Joe Watkins to Larry Kudlow — said that the new agency is actually meant to advance an insidious liberal plot to force banks into making loans to poor people that can’t pay them back. And anyway, the very notion of consumer protection is unnecessary because only “stupid,” “naive,” “suckers” and “idiots” wound up with a subprime mortgage or unfair credit card contract. Watch a compilation:

Nevermind that this whole premise of CNBC’s attack is based on the crackpot conservative theory that forced lending to the poor and minorities, mandated by the Community Reinvestment Act (CRA), caused the economic crisis. This response shows, yet again, how out of touch CNBC is with the real world.

Just this month, Wells Fargo was accused of spending a decade “systematically singling out blacks in Baltimore and suburban Maryland for high-interest subprime mortgages.” Loan officers actually pushed customers who would have qualified for a prime loan into a subprime. Employees reportedly referred to blacks as “mud people” and to the loans they were offering as “ghetto loans.” As Professor Elizabeth Warren said, “all these lousy mortgages got sold, one family at a time. These were crummy mortgages, like selling plastic spoons that have carcinogens in them or toys that put out little children’s eyes.”

And it wasn’t just in mortgages that predatory lending occurred. Credit cards, particularly those marketed to young people, had all sorts of hidden fees, with rates that could be raised at any time, for any reason, causing boatloads of debt.

The point of the new agency is to keep an eye on financial products on the ground, which is an area traditional regulators have ignored, with severe implications. And yes, the new agency will be responsible for enforcing fair lending laws and the CRA, which as Federal Reserve Board Governor Randall S. Kroszner said, have “been helpful in alleviating the financial isolation of many areas of concentrated poverty.” CNBC’s wholesale dismissal of all of this is a pretty blatant example of what the network really cares about.