The Wonk Room

Bank Of America Failing To Comply With Treasury’s Mortgage Modification Program

This post was co-written by Andrew Jakabovics, Associate Director for for Housing and Economics at the Center for American Progress Action Fund, and Pat Garofalo.

Seemingly deliberate noncompliance with the Home Affordable Modification Program (HAMP) may explain why Bank of America has consistently lagged behind the other large servicers in the share of delinquent loans that have been modified under the program. Ever since the Treasury Department began releasing data on the performance of servicers participating in HAMP, Bank of America has always been dead last of the four large servicers.

BofA has been participating in HAMP since its inception in mid-April. As of the end of October, it had active trial modifications on 14 percent of its estimated 991,000 eligible mortgages. This rate is less than half that of Wells Fargo (29 percent), which is third among the big servicers. Even US Bank, which has a much smaller portfolio but only signed up for the program on September 9, has been able to get 15 percent of its borrowers into trial modifications.

The reported percentage of modifications for each servicer is calculated based on the number of active modifications divided by the number of loans that are at least 60 days late and otherwise meet eligibility criteria. But as this recent letter demonstrates (which is available here, courtesy of the Coalition for Mortgage Industry Solutions), BofA is actively soliciting borrowers to participate in its own private mortgage modification program, without first verifying whether or not the borrower is eligible for HAMP. (In the full document, the borrower’s personal information has been blacked out.)

The letter clearly indicates that BofA has no idea whether or not the borrower qualifies for HAMP, yet they are still offering an alternative program. This diversion is an apparent violation of the contract signed with Treasury. The Servicer Participation Agreement stipulates:

Servicer shall perform the Services for all mortgage loans it services, whether it services such mortgage loans for its own account or for the account of another party, including any holders of mortgage-backed securities (each such other party, an “Investor”).

The “Services” referred to in this section are elsewhere in the contract defined as “All services required to be performed by a participating servicer…including, but not limited to, obligations relating to the modification of first lien mortgage loans and the provision of loan modification and foreclosure prevention services relating thereto.”

The program guidelines released in March by Treasury quite plainly state that “participating servicers are required to consider all eligible loans under the program guidelines unless prohibited by the rules of the applicable PSA and/or other investor servicing agreements. Participating servicers are required to use reasonable efforts to remove any prohibitions and obtain waivers or approvals from all necessary parties.”

In case there remains any ambiguity as to whether a servicer can pull borrowers out of the pool to offer them a non-HAMP-compliant modification before determining their status under HAMP, Treasury official Herbert Allison recently testified, “under HAMP’s loan modification guidelines, mortgage servicers are prevented from ‘cherry-picking’ which loans to modify in a manner that might deny assistance to borrowers at greatest risk of foreclosure.”

So BofA can’t simply suggest an alternative program to this homeowner without determining eligibility for HAMP, and by doing so, it is potentially lowering the number of successful HAMP modifications it completes. Given the size of BofA’s portfolio, its compliance with program rules — particularly as it pertains to getting eligible borrowers into the program — directly impacts the public’s perception of the success of HAMP. If BofA were performing as well as CitiMortgage, Treasury would have reported an additional quarter million mortgages in its HAMP totals.

Diverting eligible borrowers from HAMP threatens to undermine support for the program. Treasury should not allow any contractual breaches to continue.

Wall Street Enlists Murdoch’s News Corp. In Fight Against ‘Frightening’ Bank-Busting Bills

Yesterday, Bloomberg News reported that seven Wall Street lobbyists “trooped to Capitol Hill,” in an attempt to talk Rep. Paul Kanjorski (D-PA) out of proposing legislation that would allow the government to break up any financial firm deemed systemically risky. According to Bloomberg, the lobbyists left with the “sobering conclusion” that Kanjorski isn’t backing down.

Of course, that setback won’t end the banks’ effort to stop such legislation from going forward. In fact, next week they will be calling on some of their friends from around the business world to try to convince New York’s congressional delegation that such legislation “would undermine the Big Apple’s economy and its reputation as a world financial hub”:

Among roughly 20 business leaders slated to come to a meeting called by Rep. Charles Rangel (D-N.Y.) are: Rupert Murdoch, CEO of News Corp.; Lloyd Blankfein, CEO of Goldman Sachs; Larry Fink, CEO of BlackRock; and William Lauder, CEO of The Estee Lauder Companies Inc.…“If the U.S. dismantles our leading institutions, then it will destroy the American financial center, which is largely anchored in New York,” said Kathryn Wylde, president and CEO of the [Partnership for New York City]. “It’s just frightening.”

Of course, the UK has already begun breaking up firms that were deemed “too big to fail,” and the financial sector is arguably more important to London than it is to New York.

This isn’t the first time that large corporations have gone to bat for the banks when it comes to regulatory reform. When the House Financial Services Committee was working on a bill reforming the derivatives market, a coalition of business groups came in to pressure lawmakers, despite the fact that 97 percent of derivatives are held by just five large financial firms.

The details of these provisions — particularly what constitutes an undue amount of risk and who gets to ultimately pull the trigger to break up a firm — have yet to be ironed out, and I would hope that Rupert Murdoch and William Lauder don’t have enough sway over regulatory policy to make much of a difference. (Since they’re joining with Goldman Sachs CEO Lloyd Blankfein, are they also doing “god’s work”?)

As Kanjorski said, this could be “one of our potentially last chances to get control, particularly of financial institutions in their mega-forms, before they take over the world.” It’d be a shame if News Corp. took that chance away.

Is Senator Shelby A Bank-Buster?

Sen. Richard Shelby (R-AL)

Under Kanjorski’s proposal, “the power to restructure a company could go to the systemic-risk council and involve the Treasury secretary, with a final decision made by the president.” This goes much further than the legislation proposed by either the administration or House Financial Services Chairman Barney Frank (D-MA).

The bill has already “set off alarms across K Street.” “That was a little unexpected,” one bank lobbyist told The New Republic’s Noam Scheiber. “It sort of…threw people for a loop.” However, Kanjorski has at least piqued the interest of one prominent player in the regulatory reform debate: Senate Banking Committee ranking member Richard Shelby (R-AL):

Senator Richard Shelby, the top Republican on the Senate Banking Committee, said today he liked the idea. “I don’t think anything is too-big-to-fail,” said Shelby, of Alabama. “We ought to be looking at legislation to deal with a bank beforehand if we can, or an institution that would cause systemic risk, to make it stronger, or make it smaller.”

Now, Shelby has already toyed with the Democrats, saying that he might be able to support creating a Consumer Financial Protection Agency (CFPA), only to characterize such a move as “folly and dangerous” when legislation started to move.

However, back in 1999, Shelby was the only Republican who voted against the repeal of the Glass-Steagall Act, which separated investment banking from traditional banking. And with the UK beginning to break up large, bailed-out financial institutions and more and more people talking about enacting some sort of wall between depository and investment banking, this seems like an issue that is not going to go away. For his part, Kanjorski said that he’s “getting some good feedback” on his measure. “Most people are coming up to me and saying we should have done this originally, why didn’t we?” he said.

It’s too soon to tell how this will all shake out, especially since Senate Banking Chairman Chris Dodd (D-CT) has yet to release his version of regulatory reform legislation. But Dodd is already planning to deviate from the House and the administration’s reform vision in significant ways. Will Shelby’s willingness to at least talk about breaking up the big banks push Dodd to go even further? And if he does, will Shelby be able to bring any other Republicans along?

The British Go Bank-Busting — Is There A Lesson For The U.S.?

Much like the U.S., the United Kingdom has been grappling with what to do about its bailed out, “too big to fail” banks. But unlike the U.S., the British are now telling the banks that are “too big to fail” that they are also too big to exist:

The British government — spurred on by European regulators — is forcing Royal Bank of Scotland, Lloyds Banking Group and Northern Rock to sell off parts of their operations. The Europeans are calling for more and smaller banks to increase competition and eliminate the threat posed by banks so large that they must be rescued by taxpayers, no matter how they conducted their business, in order to avoid damaging the global financial system.

The two banks are being forced to sell of hundreds of branches, credit card payment businesses, and online financial service companies. The mortgage giant Northern Rock, meanwhile, is being cleaved in two. According to Britain’s Treasury the forced divestments “together represent almost 10 percent of the UK retail banking market.”

One particularly interesting aspect of the British bank-busting is that the banks’ assets will be sold “only to new entrants to the British banking market to ensure more competition.” The American response to the financial crisis was to push failing institutions into the arms of other firms (like Merrill Lynch going to Bank of America), which has resulted in more consolidation, with previously “too big to fail” firms getting even bigger.

But as British Chancellor of the Exchequer Alistair Darling said, selling only to new entrants is the best way to ensure “proper competition and choice.” Having just “half a dozen big providers was not acceptable,” he added. The sales will take place over an extended period of time — at least three to four years — “so that the assets are not dumped at fire sale prices.”

Since RBS and Lloyds were 70 percent and 43 percent owned by the British government, respectively, the most direct comparisons for U.S. purposes are Citigroup and Bank of America, the two banking behemoths in which the U.S. taxpayer has a stake. So is it time to use that stake to forcibly unwind them as well?

“We still need to see exactly which parts the [British] banks will need to sell off to judge whether the goal of having smaller banks is really achieved,” said Richard Portes, an economics professor at the London Business School. “But there are lessons here for the United States. The supposed economies of scale of massive financial institutions are outweighed by the difficulties in controlling risk inside them.”

Indeed, as Felix Salmon put it, for these companies to be successful, they need to be boring — “the kind of companies that Warren Buffett has made his fortune by buying-and-holding.” But instead, we have let our perpetually bailed out banks (particularly Citigroup) go right back into the betting business, this time with taxpayer money. Breaking up three of its behemoths will not fix all that ails the super-concentrated British banking system. But at least for the U.S. banks which are still “too big to fail” and too weak to survive without government support, it may be time to follow the British model and force them to unwind.

Bank Lobbyists: Overdraft Fees Are ‘A Courtesy,’ ‘Very Popular,’ Keep Customers ‘Happy’

Today, the House Financial Services Committee held a hearing to examine Rep. Carolyn Maloney’s (D-NY) Overdraft Protection Act of 2009, which would amend the Truth in Lending Act to address a spate of problems with overdraft protection programs.

Overdraft fees — which are incurred when a consumer overdraws a checking account — may climb to $38.5 billion this year, up from $10.3 billion just five years ago. According to the Center for Responsible Lending (CRL), at least 50 million Americans overdraw their accounts over the course of a twelve month period, and 27 million of those will incur five or more fees. The standard fee across the banking industry is currently $34.

But you wouldn’t know that there were any problems with overdraft fees if you listened to the representatives of the American Bankers Association, the Consumer Bankers Association and the Independent Community Bankers Association, who were singing the praises of such fees during the hearing. They said that overdraft fees are actually “a courtesy,” “very popular,” and ultimately keep customers “happy.” Watch a compilation:

Actually, 80 percent of consumers say that they would rather have their debit card rejected for a $5 purchase than be charged an overdraft fee, which only falls to 77 percent when the price of the purchase is increased to $40. And the fees tend to hit those who can least afford them, as CRL’s Eric Halperin told the committee:

The FDIC’s recent study of overdraft programs, consistent with CRL’s previous research, found that account holders who overdrew their accounts five or more times per year paid 93 percent of all overdraft fees. It also found that consumers living in lower-income areas bear the brunt of these fees. Seniors, young adults, military families, and the unemployed are also hit hard. Americans aged 55 and over pay $6.2 billion in total overdraft fees annually — $2.5 billion for debit card/ATM transactions alone — and those heavily dependent on Social Security pay $1.4 billion annually.

Confounding this problem is the fact that 75.1 percent of banks with overdraft programs automatically enroll consumers, according to the FDIC. In fact, Maloney’s legislation would mandate that overdraft protection be opt in instead of automatic. As Rep. Barney Frank (D-MA), a co-sponsor of Maloney’s bill, said, “We wouldn’t be in a situation where we’re considering legislation if you would have had an opt-in regime from the beginning…Don’t do people favors without asking them.”

Of course, there is serious merit to the point that consumers should take some personal responsibility and not overdraw their account. But, until fairly recently, banks were willing to discipline poor accounting by simply rejecting a debit card purchase at the point of sale. In fact, in 2004, 80 percent of institutions had a policy of rejecting a purchase if it would overdraw the account. Today, the percentage is exactly the opposite, with 80 percent permitting the purchase and charging an overdraft fee. Banks saw that overdraft fees were a significant profit center, and have now taken such fees to absurd heights.

Gutierrez Pushes For Bank Failure Fund: Banks Don’t Race Toward Destruction Because The FDIC Exists

Today, the House Financial Services Committee began discussing how to create a resolution authority for dismantling large, complex financial institutions. Emerging as the most contentious aspect of the legislation — which was unveiled by Rep. Barney Frank (D-MA) this week — is how the money for dismantling these firms should be raised.

Frank and the administration have designed a plan under which the government loans money to a failing company to help it unwind, and then recovers that money by hitting up shareholders and then assessing a fee on other large banks. But some in Congress feel that the largest financial institutions should have to pre-pay into an insurance fund, which will then be accessed when a firm goes into a tailspin.

The administration prefers the post-failure assessment because it believes that the mere existence of a fund would create moral hazard, as large firms would take the knowledge of the fund as permission to excessively gamble. During the hearing, Rep. Luis Gutierrez (D-IL) let Treasury Secretary Tim Geithner know that he disagrees:

Let’s create the fund, just like the FDIC, so when we need to resolve [a financial institution], it stands. Your argument is, ‘oh, but Luis, moral hazard’…I don’t see banks racing to the precipice of destruction and bankruptcy because the FDIC exists. Nor do I go to an insurance company and take out a life insurance policy on myself, and the next day decide, wow, maybe I’ll just start smoking. Maybe I’ll start drinking, maybe I’ll start driving my car in a crazy manner. Maybe I really don’t care whether I live or die. I’ve got life insurance, what the hell if I die, everything is taken care of. No, that’s not the way it works.

Watch it:

I agree with Gutierrez that a fund should be built up, over time, to be used in the event that a large financial institution hits the skids. And FDIC Chairman Sheila Bair, who knows a thing or two about insurance funds, agrees as well, telling the committee that “Congress should establish a Financial Company Resolution Fund (FCRF) that is pre-funded by levies on larger financial firms — those with assets of at least $10 billion…We believe that a pre-funded FCRF has significant advantages over an ex post funded system.”

There are two reasons for this. The first is that, as Simon Johnson pointed out, “you should be paying in the good times –- not right after the crisis.” If one investment bank goes under, chances are that some others are in bad shape as well. Asking them to cough up money to facilitate their competitor’s failure could be dangerously pro-cyclical.

The second reason is political. Though it isn’t, the administration’s plan looks needlessly like the much reviled Troubled Asset Relief Program (TARP), because of the upfront loan by the government. And though the plan calls for all of the money to be recovered in 60 months, as Mike Lillis pointed out, “the provision also allows the government to extend that 60-month recovery window indefinitely.” “It could be 60 years,” said Rep. Brad Sherman (D-CA). Having a pre-paid fund would prevent any outlays on the part of the government.

As far the moral hazard argument, I think it is rendered moot so long as the legislation makes it clear that under no circumstances will a failing financial firm be saved. As Frank put it, the resolution authority has to be a “death panel” for banks. If use of the resolution authority always results in a firm ceasing to exist, that should eliminate any notion that the government will facilitate a bailout.

Banking Industry Pans Resolution Authority: It Makes Business ‘Unnecessarily More Expensive’

Rep. Barney Frank (D-MA), after consulting with the Treasury Department, plans to introduce legislation this week that would create a resolution authority for liquidating large, complex financial firms. It’s widely acknowledged (though not universally) that one of the problems facing the government during the economic crisis was that it had no authority to unwind the likes of AIG or Citigroup. Thus, propping them up was the only alternative to the widespread economic pain that would have been caused by their collapse.

As federal Reserve Chairman Ben Bernanke said, taking AIG into some sort of receivership “would have been far preferable” to the recurring AIG bailout. To that end, resolution authority will legalize a systematic process “for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.”

According to the New York Times, the bill will also require corporations to set up “the equivalent of living wills” — their own procedure for being disentangled — which the administration says “ought to be made public in advance.” But like so many of the recent regulatory reform efforts, the banking industry is coming out hard against resolution authority, this time without even seeing the bill:

Even before Mr. Frank unveils his latest proposals, industry executives and lawyers say its approach could make it unnecessarily more expensive for them to do business during less turbulent times. “Of course you want to set up a system where an institution dreads the day it happens because management gets whacked, shareholders get whacked and the board gets whacked,” said Edward L. Yingling, president of the American Bankers Association. “But you don’t want to create a system that raises great uncertainty and changes what institutions, risk management executives and lawyers are used to.”

For the record, as Shahien Nasiripour pointed out, Yingling has been spectacularly wrong about, well, everything, when it comes to the effects of regulations. And it’s really not surprising that the banking industry wants to enshrine “too big to fail,” as the alternative is unappealing from a business point of view.

But resolution authority is arguably the most important part of regulatory reform, as it should seriously mitigate the “too big to fail” problem. If there is a mechanism for taking apart a firm, no matter how large, an implicit government guarantee goes by the wayside. Bernanke is even advocating some sort of assessment on financial institutions, to build up a fund that will be used when resolution authority is invoked, moving the taxpayer a step further away from funding an institution’s failure.

Of course, problems could still occur if regulators — for whatever reason — are hesitant to pull the trigger and take a firm into receivership. That’s why even the most robust resolution authority needs to be pared with much stronger capital requirements and leverage limits for the banks, which will disincentivize and discourage excessive size or risk-taking. That way, a bank failure will really constitute a management failure, as it occurred despite all the safeguards.

And as for “unnecessary” expenditures, I’d like to ask Yingling what he thinks of the $700 billion spent to pull the banking system back from the brink. I bet he thinks that was a very necessary expense.

GOP Warns Of 1970s Style ‘Gas Lines’ For Financial Products If CFPA Can Regulate Fees

Can't find a checking account?

After yesterday’s attempt to give all of the federal bank regulators complete veto power over the CFPA, the GOP today offered an amendment that would prevent regulators at the CFPA from imposing restrictions on bank fees or rates.

The justification was that such restrictions amount to “price controls,” which Rep. Jeb Hensarling (R-TX) said would result in rationing and lead to 1970s style gas lines for financial products. Instead, the GOP wants to leave responsibilities for regulating fees with the same banking regulators that didn’t (and still haven’t) reined them in. Watch it:

First, to think that fee restrictions would result in people lining up because they can’t find financial products strikes me as silly, since they’re not something with a finite supply. How would capping overdraft fees cut down on the number of checking accounts that exist, or could potentially exist in the future?

And it’s precisely because banks abuse things like overdraft fees that the CFPA needs to have power to impose and enforce restrictions. Banks are set to make $38.5 billion in overdraft fees this year, and as USA Today pointed out, overdraft fees are fine in theory, but banks have taken them to an extreme:

Bank of America, which announced changes in its program last week, has been charging up to 10 fees of $35 each in a single day. A majority of large banks — 54%, according to a government survey — reserve the right to process large transactions first, which empties accounts faster, squeezing more overdraft fees from customers.

Americans actually spend more on overdraft fees annually than they do on fresh vegetables. But it’s not just overdraft fees that the banks have abused. According to BankRate.com, this year “ATM fees and monthly service charges on interest-bearing checking accounts climbed to new highs, while bounced-check fees hovered near a high after adjusting for inflation.”

Some banks have even decided that they will charge customers fees for paying off their credit card on time or for not using their credit card enough. “You heard that right: You could be spanked for staying out of debt,” wrote Sandra Block. There are innumerable little ways in which the banks can unfairly take advantage of consumers, which makes it imperative that the banks be able to enforce restrictions. The committee will vote on the amendment when markup resumes tomorrow.

Goldman Sachs Analyst: Income ‘Inequality’ Will Lead To ‘Prosperity And Opportunity For All’

Last week, the Wall Street Journal reported that Wall Street banks are on pace to pay out a record $140 billion in compensation this year. “Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did the peak year of 2007,” the Journal found.

The New York-based investment bank Goldman Sachs has “set aside $16.7 billion for compensation and benefits in the first nine months of 2009,” which is a 46 percent increase from last year. But according to a Goldman adviser, Wall Street’s record pay is necessary “to achieve greater prosperity and opportunity for all”:

A Goldman Sachs International adviser defended compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy. “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,” Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday at a panel discussion hosted by St. Paul’s Cathedral in London.

At the same time that Wall Street’s pay has skyrocketed, pay cuts in other sectors “are occurring more frequently than at any time since the Great Depression.”

While record bonuses may indeed spur spending on million dollar apartments in New York City, the growth in Wall Street pay — and the growing share of national income that is going to the richest Americans — has not translated into shared prosperity. Consider, “back in 1985, the average annual salary for all workers across the country was actually a bit higher than the average [Wall Street] bonus ($19,000 to $13,970),” but “while the average bonus soared almost 14 times higher (by 2006), the average salary has essentially been stagnant sine the mid-1980s.”

Plus, Goldman Sachs is only able to make its current profits ($3.19 billion last quarter) — and thus pay huge bonuses — because of government programs aimed at reviving the economy, which allow the company to make “big bets using cheap dollars.” As Simon Nixon wrote, the profits “aren’t the due rewards for exceptional skill but gifts from taxpayers.”

Rep. Hensarling: Banks ‘Ought To Trump’ Consumers

Today, during markup of legislation before the House Financial Services Committee that would create a Consumer Financial Protection Agency (CFPA), Republicans proposed an amendment that would give all of the other federal bank regulators — including the Federal Reserve or the Comptroller of the Currency — the ability to veto CFPA rules that threatened the “safety and soundness” of financial institutions.

Rep. Jeb Hensarling (R-TX) explained that he supported the amendment because the health of a financial institution “ought to trump” concerns regarding consumers, all of the time:

The safety and soundness of the system, taxpayer protection, ought to trump the ability to ban financial products. And let’s face it, I understand the chairman said that this new CFPA would not have the ability to set goals, but if you control the product mix, if you can ban products, if you can modify their terms, of what some have estimated could be as much as 10 to 15 percent of our economy, then yes, I conclude you can adversely impact the safety and soundness of these institutions.

Watch it:

So if it can’t outright prevent the CFPA from being created, the GOP would like to ensure that it’s a toothless agency that can’t stand up to the bank regulators. (Hensarling presents this as “taxpayer protection,” ostensibly suggesting that, if the banks can make money however they see fit, they’ll never need another taxpayer funded bailout.) But the CFPA will only work if it is on equal footing with the bank regulators, with adequate abilities to write and enforce regulations.

This is because many of the products that led to the economic crisis were premised on obfuscation and taking advantage of consumers — credit cards with retroactive rate hikes, mortgages with payments that exploded after a set number of years, or overdraft fees to which consumers are automatically subjected. As Adam Levitan pointed out at Credit Slips, “the market drives the introduction of bad consumer credit products.” “Some of this obfuscation is through fine-print. Some is through product design, as complexity and exploitation of consumers’ cognitive biases can mask pricing,” he wrote.

And these actions are often very profitable, which is why the bank regulators didn’t want to stop the banks from using them. Overdraft fees, for instance, could rake in $38.5 billion for the banks this year. Those billions render the banks incredibly safe and sound, but they come at the expense of consumers. And under the Republican proposal — which will come up for a vote tomorrow — the same exact practices would be allowed to continue, and regulators at the CFPA could do nothing but scream from the sidelines.

Federal Regulatory Preemption Stopped In The House, Bank Lobbyists Turn To The Senate

Rep. Melissa Bean (D-IL)

In a piece of political theater, Bean now plans to introduce the amendment and then to withdraw it, according to people familiar with the matter. She then plans to engage in a scripted conversation with [Committee Chairman Barney] Frank, in which both are to affirm the importance of further discussions about the issue. Bean can then reintroduce the amendment once the bill comes before the full House, but lobbyists on both sides say they regard the battle as over.

But is anything really “over” when it has yet to come before the Senate? Indeed, while the bill without federal preemption for national banks is “likely to pass the House,” the Washington Post reported that “it faces an uncertain future in the Senate, where financial lobbyists regard some moderate Democrats as more sympathetic to their concerns.”

There is also a second preemption amendment that is alive and well in the Financial Services committee, which would allow federal preemption “when a state law has a ‘discriminatory effect’ on national banks.” The amendment would also “allow the Office of the Comptroller of the Currency (OCC) to determine if a state law prevents or interferes with a national bank’s business.”

This is a terrible idea, as the OCC has repeatedly issued specific exemptions for national banks. In 1999, the OCC “said national banks did not need to comply with a California law limiting the fees banks could charge for ATM withdrawals.” And then, in 2000, “it lifted a Rhode Island law limiting changes in the interest rates on credit cards.” Finally, in 2002, the OCC “overrode a Texas law that barred banks from charging check-cashing fees.” Meanwhile, the current OCC head, John Dugan, has a very dim view of states that want to rein in national banks, saying that “we have a system that works fine in terms of examination and enforcement of consumer protection.”

And while Bean has shelved her amendment for the time being, I wouldn’t be as quick as the Post to declare that the big banks are “losing power on Capitol Hill.” After all, mortgage cram-downs — which the banks bitterly opposed — passed the House, only to be ultimately defeated by a furious lobbying campaign in the Senate. Bean backing down is a good thing, but it’s by no means the end of the preemption debate.

Goldman’s Boom And Citigroup’s Bust Underscore How Much Main Street Is Still Hurting

Goldman Sachs CEO Lloyd Blankfein

On the one hand, Goldman Sachs made $3.19 billion in the last three months. On the other, Citigroup lost $3.2 billion and Bank of America lost $1 billion. And the difference is, while Citi and BofA are still getting clobbered by losses on consumer items like mortgages and credit cards (to the tune of $8 billion and $9.6 billion, respectively), Goldman is reaping the benefits of its trading business:

Bumper third quarter profits at Goldman Sachs and another loss for Citigroup on Thursday highlighted the gap between the financial resilience of Wall Street and the woes of Main Street, fresh evidence that two Americas are emerging from the crisis. The diverging performance of investment banks such as Goldman and the retail banking operations of the banks such as Citi is problematic for an Obama administration that wants a strong Wall Street but is also under pressure to tackle the plight of ordinary people.

As Kevin Drum noted, “[Goldman] made better bets than the other guys, but the kind of business that would indicate a recovering economy is still very much in the tank.”

But the problem is not simply that Goldman is making money trading currencies, commodities, and risky over the counter derivatives. It’s that Goldman is doing it thanks to significant government support. As National Economic Council Director Larry Summers explained, “there is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support.” And indeed, Goldman “has had a lot of help”:

Critics charge that the lion’s share of Goldman’s profits comes from making big bets using cheap dollars printed by a Fed…It received $13 billion in the costly, widely questioned September 2008 rescue of insurer AIG. It has sold $22 billion in federally guaranteed debt under a plan the feds started to restore capital markets activity.

Perhaps most troubling is the fact that, in order to gain access to much of the government’s financial rescue effort, Goldman converted from an investment bank to a bank holding company (essentially an institution that, at least in part, takes deposits and lends). But its business activities “haven’t changed at all.” In fact, Goldman’s earnings report shows no sign of any lending activity whatsoever.

As Alan Schram, the Managing Partner of the Los Angeles based investment firm Wellcap Partners, wrote, “now that they are a regular commercial bank they actually trade more, which makes sense: if the US Treasury covered my losses, I would also be happy to take major risks.” And in the meantime, Citi and BofA’s mounting losses reveal that consumers aren’t any better off.

Bank Regulator ‘Relishes The Chance’ To Defend His Failed Agency: ‘It’s A Lot Of Fun’ »

Last week, Sen. Bob Corker (R-TN) explained that he doesn’t want to consolidate bank regulators as part of a regulatory reform effort, because he enjoys watching them blame each other for regulatory failures. And Corker is evidently not the only one who’s enjoying the drive to prevent meaningful regulatory reform.

John Bowman, who is the acting director of the Office of Thrift Supervision (OTS), told the Boston Globe that he “relishes the chance to defend the Office of Thrift Supervision against efforts by President Obama and Congress to shut it down”:

“It’s a lot of fun,’’ said Bowman…Bowman and the other regulators insist that they have a legitimate case, saying they have been unfairly blamed for the economic crisis. “We have very real concerns. To dismiss it as simply being turf is selling us short.’’

Bowman is just the latest in a parade of regulators marching out to claim that the regulatory status quo is fine. But he may have the most chutzpah of all, because the OTS was by far the worst of the regulatory agencies, when it came to enforcing consumer protection or bank safety and soundness.

Even the Obama administration’s proposed regulatory reform plan — which is far less ambitious than the one Sen. Chris Dodd (D-CT) is proposing in the Senate — merges the OTS with the Office of the Comptroller of the Currency. And for good reason. Consider these great moments in OTS history:

– The OTS was in charge of regulating American International Group (AIG), which required a taxpayer-funded bailout of $180 billion after it was unable to honor $45 billion in credit default swaps. Treasury Secretary Tim Geithner has said that AIG was “allowed to build up without any adult supervision,” and indeed, in the eight months prior to AIG’s collapse, the OTS held just one 45 minute meeting regarding the company’s soundness.

– The OTS was in charge of regulating IndyMac, which had to be taken into FDIC receivership, at a cost of $10.7 billion to taxpayers. The Inspector General of the Treasury Department found that the OTS “repeatedly ignored warnings…about the dangerous excesses” at IndyMac, and viewed “growth and profitability as evidence that IndyMac management was capable.” The OTS knew IndyMac was having trouble with its cash-flow in 2005, but took no formal action until 2008.

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Bank Of America’s Sallie Krawcheck: It Would Be ‘Stupid’ To Change Merrill Lynch’s Pay Practices

In the wake of Bank of America CEO Ken Lewis’ sudden retirement last week — effective at the end of the year — there is a lot of speculation about who the next CEO will be, particularly since he or she will likely inherit a firm that still owes the government $45 billion from the Troubled Asset Relief Program (TARP).

One of the candidates being mentioned as a possible successor to Lewis is Sallie Krawcheck, the head of Bank of America’s wealth-management unit. That position, which Krawcheck moved into two months ago, now comes complete with the honor of overseeing Merrill Lynch, the troubled investment broker that BofA bought in the midst of the economic crisis.

In an appearance yesterday on CNBC, Krawcheck was asked whether she intends to change compensation practices at Merrill Lynch, an idea which she derided as “stupid,” because she wants to “honor the culture” at Merrill:

The first line of being a successful manager is don’t do stupid things. And so, trying to go and change the compensation — I’ve heard we’re going to try and smash U.S. Trust and Merrill together — we’re not doing any of that stuff. What we want to do is bring these great capabilities that we have to clients, [and] honor the culture…The industry always tinkers with compensation on the edge. For the industry, it’s sort of an annual ritual.

Watch it:

But maybe Krawcheck should take a closer look at what went on at Merrill, before its implosion, because the culture regarding pay doesn’t seem like something worth holding onto. As New York Attorney General Andrew Cuomo’s office pointed out, “large payouts became a cultural expectation” at Merrill Lynch, even when the company tanked:

[A]s Merrill Lynch’s performance plummeted, Merrill severed the tie between paying based on performance and set its bonus pool based on what it expected its competitors would do. Accordingly, Merrill paid out close to $16 billion in 2007 while losing more than $7 billion and paid close to $15 billion in 2008 while facing near collapse. Moreover, Merrill’s losses in 2007 and 2008 more than erased Merrill’s earnings between 2003 and 2006. Clearly, the compensation structures in the boom years did not account for long-term risk, and huge paydays continued while the firm faced extinction.

700 Merrill employees received bonuses of $1 million or more in 2008. The Wall Street Journal also pointed out that “the second largest Wall Street bonus of 2008…was the $39.4 million paid out to Thomas Montag,” Merrill’s head of global sales and trading. Montag’s unit “piled up the brunt of the company’s $15.31 billion net loss in the fourth quarter of 2008,” which “forced taxpayers to shell out an additional $20 billion to Bank of America to make sure its $50 billion acquisition of Merrill closed in January 2009.”

Of course, BofA is one of the companies whose pay packages are subject to review by the Obama administration’s “compensation czar,” Kenneth Feinberg, who may have a different feeling regarding whether Merrill’s compensation culture is worth preserving.

Bankers Association Claims Customers Are ‘Glad’ To Pay Exorbitant Overdraft Fees

One of the nastier bank practices that has arisen in recent years is banks automatically enrolling consumers in accounts with expensive overdraft protection, and then charging exorbitant overdraft fees without ever letting people know that their account is overdrawn.

In theory, overdraft protection is meant to prevent a small check from bouncing — as the bank would cover the amount of the check and collect from the consumer later — but with the rise of debit cards, overdraft fees have become an easy way for banks to raise lots of cash from unwitting consumers. The standard overdraft fee now stands at $34, and banks re-order purchases — “debiting large transactions before small ones” — in order to charge multiple fees.

This is an awful mess, and according to a report released today by the Center for Responsible Lending, at least 50 million Americans overdraw their accounts over the course of a twelve month period, 27 million of which incur five or more fees. Banks and credit unions collected $24 billion in overdraft fees in 2008, a whopping 69 percent of total bank fees. Shockingly, the Center noted that Americans spend more on overdraft fees annually than they do on fresh vegetables.

You’d think these numbers might give the banks at least a moment’s pause. But the American Bankers Association (ABA) — the banking industry’s largest trade group — shrugged them off, saying that consumers are actually “glad” about being hit with overdraft fees, because they are then saved the embarrassment of having their debit card rejected:

“Clearly, consumers who pay overdraft fees are the minority, and that number is shrinking,” Nessa Feddis, ABA senior federal counsel, said in a statement in response to the study. “More importantly, most consumers want banks to pay their overdrafts so they can avoid the inconvenience, embarrassment and potential costs of having a payment or transaction rejected.”

So in the ABA’s world, consumers are actually thrilled about paying a bunch of $34 fees, because it saves them some face at the checkout counter. Not only is that a sorry justification, but it isn’t even true. 80 percent of consumers actually say that they would rather have their debit card rejected for a $5 purchase than be charged an overdraft fee, which only falls to 77 percent when the price of the purchase is increased to $40.

Data from the research company Moebs Service shows that banks are expected to collect $38.5 billion in overdraft fees in 2009, but as Mike Lillis noted at the Washington Independent, the banks’ behavior has “caught the eye of some powerful lawmakers.” Rep. Carolyn Maloney (D-NY) has crafted a bill that would “prohibit banks from charging the fees unless consumers sign up for the overdraft protection service,” and would also “prevent banks from reordering purchases” in order to maximize fees.

Sen. Chris Dodd (D-CT) is reportedly working on similar legislation, while Rep. Barney Frank (D-MA) has said that the Consumer Financial Protection Agency (CFPA) that has been proposed will be responsible for policing overdraft fees.

Corker: We Shouldn’t Consolidate Bank Regulators, Because ‘I Have Enjoyed’ Watching Them Argue

Sen. Chris Dodd (D-CT) has ruffled some feathers in both the GOP and the banking industry by suggesting a regulatory reform package that consolidates all of the existing banking regulators into one super-regulator. The financial services industry roundly panned the idea, claiming that “the checks and balances under the current system are pretty good.” “The dual banking system has served this country exceedingly well for 150 years or more,” said Wells Fargo CEO John Stumpf

During a Senate Banking Committee hearing today, Sen. Bob Corker (R-TN) agreed, and added that the regulators shouldn’t be consolidated because it brings him great personal enjoyment to watch them blame each other for regulatory failures:

You mentioned having an alphabet soup of [regulators] coming to talk to us, and it’s not unlike witnesses coming before our committee with differing points of view in many ways. I have to tell you, I have enjoyed that. Each of the regulators — sometimes gleefully, sometimes not — points out the deficiencies of the other regulators. And I have to tell you, there’s some merit in that, just for what it’s worth. To have a captive regulator, much like we had with the GSE’s, which would be the case with all banks, to me, could be very problematic.

Watch it:

Contrary to Corker, warring regulators is absolutely unlike witnesses coming before a committee, because the regulators are also responsible for, well, ensuring the safety of the banking system. It’s not purely academic, and having regulators snipe at each other undermines faith in the regulatory system and prevents a proper level of accountability when that system fails.

As Felix Salmon has opined, “we need a powerful single regulator with teeth, not a council of bickering sub-regulators.” Indeed, a patchwork of regulators — particularly in a system in which the agencies are funded by fees paid by the very banks they regulate — encourages a race-to-the-bottom and regulator shopping. And that’s assuming an institution doesn’t simply slip through the cracks, with no one paying it enough attention.

Having one super-regulator would bring its own set of challenges and doesn’t ensure that all problems disappear. After all, Great Britain has just one regulator (with the Bank of England responsible for monitoring systemic risk), and still faced a financial shock. But consolidation would, at least, prevent banks from playing regulators off each other, and stop the completely nonsensical practice of making regulatory agencies compete for the “right” to regulate a particular institution.

As the New York Times reported, Comptroller of the Currency John Dugan and Federal Deposit Insurance Corp. Chairman Sheila Bair have been “at each other’s throats” on a whole host of issues since the economic meltdown, and refusing to consolidate the regulators “could intensify their turf battles.” While that may be great in terms of providing Corker with an afternoon’s entertainment, it does not help create a regulatory environment that is efficient and holds regulators accountable.

Wall Street Banks Enlist Big Business In Fight Against Derivatives Regulation

National Journal noted over the weekend that a new coalition of business groups — which includes the Business Roundtable and the U.S. Chamber of Commerce — is starting to criticize the Obama administration’s plans to regulate the vast, unregulated derivatives market, “much to the relief of several big Wall Street banks that had been waging a lonely and uphill lobbying effort.”

The group is calling itself the Coalition of Derivatives End Users, and Wall Street derivatives dealers reportedly “appreciate all the help they can get from corporate end users to ease new curbs.” “End users are very important,” one banking lobbyist said, “because they have the most credibility.”

There are, of course, absolutely legitimate reasons to use derivatives to hedge against fluctuations in various markets. But let’s not lose sight of the fact that the world of derivatives is almost exclusively dominated by a few big Wall Street banks, who are dealing in derivatives as an end, not a means. In fact, 97 percent of the derivatives held by U.S. commercial banks are in the hands of just five banking behemoths — JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup and Wells Fargo — who are not using them the way an airline does.

Felix Salmon today pointed to this data from the Office of the Comptroller of the Currency, which shows that while end-users have reduced their derivative exposure to a seven-year low of $2.4 trillion, Wall Street dealers have upped theirs to an all-time high of $187.6 trillion:

As Salmon wrote, “what has happened in recent years that derivatives dealers now need $78 in nominal derivatives exposure for every $1 in end-user exposure? When Adair Turner talks about ‘profitable activities so unlikely to have a social benefit, direct or indirect, that [banks] should voluntarily walk away from them’, this is surely a prime example of what he has in mind.” BNET’s Alain Sherter, meanwhile, put it this way:

Bankers will say, as they have for years, that derivatives help financial firms manage risks. So they do. But they also help companies make money. The issue isn’t whether derivatives have constructive uses, such as in hedging risk — it’s whether derivatives are more useful in generating profits. If so (and it is so), that can lead to banks acting recklessly, especially when they’re under enormous pressure to boost their financial results.

Michael Greenberger, an adviser for Americans for Financial Reform, said that he believes the end-user complaints are “inspired by banks emphasizing the small, short-term costs of new regulations to their customers against the long-term financial interests of the public at large.” And allowing a huge market to remain in the shadows can only work against that long-term interest.

JP Morgan CEO Jamie Dimon Uses CGI Stage To Hit Regulatory Reform

Editor’s note: The Wonk Room is reporting from the Clinton Global Initiative conference this week. This is our fifth post.

In the wake of an economic crash caused in large part by financial wizards passing paper back and forth without creating anything, panelists at the Clinton Global Initiative today discussed how to make banking more socially useful. The discussion inevitably wound its way to the regulatory reform package currently before Congress, at which point JP Morgan Chase CEO Jamie Dimon seized the opportunity to attack the idea of creating a Consumer Financial Protection Agency (CFPA):

We need to simplify and strengthen our system, not add. We’re trying to just add multiple layers of regulation. I tell people, if our legal department didn’t do a good job, we would fix our legal department. The government would create another legal department. [laughter] And all you’re doing is replicating the same thing in a different form.

Listen here:

However, the CFPA is not meant to replicate existing agencies, but to fill a void that currently exists, as no agency is solely responsible for consumer protection. It will also remove the consumer financial protection responsibilities from the other regulators, such as the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Trade Commission, in a sense providing some of the simplification that Dimon says is necessary.

“I think clearly you have had a lot of abuses, and whatever was on the books wasn’t being enforced,” said Morris Goldstein, a former top official at the International Monetary Fund and a researcher for the Peterson Institute of International Economics. “I think it makes sense to try to wrap it together and give someone the responsibility to deal with the great bulk of it.”

With his choice of language disparaging the CFPA, Dimon is channeling the Chamber of Commerce, which is circulating ads warning against the CFPA proposal that read “maybe instead of making government bigger, we should focus on making government better.” Plus, as CAP’s Andrew Jakabovics and Jeff Chapman found, JP Morgan was no angel during the subprime boom:

JP Morgan Chase, like other major banks in 2006, was much more likely to charge higher prices to African-American and Hispanic borrowers than whites and Asians, even among high-income borrowers. Over two-thirds of JP Morgan Chase’s higher-priced lending was done through a subprime arm—Chase Manhattan Bank.

As David Lazarus put it in the Los Angeles Times, “if banks play fair and keep their noses clean, they’ll have nothing to fear. So why are they so fiercely opposed to having a new cop patrolling the neighborhood?” Indeed, the banks look like they are using the spectre of big government to defend their right to rip-off and deceive consumers.

Bank Lobby Pans Dodd’s Plan For A Super-Regulator: The Current System Is ‘Pretty Good’

Sen. Chris Dodd (D-CT) has surprised a lot of people by proposing to consolidate all of the banking regulators into one new super-regulator, which is an idea that goes much further than any of the Obama administration’s proposed regulatory reforms. And it has the banks concerned:

“It’s the wrong way to go,” said Steve Verdier, senior vice president for the Independent Community Bankers of America [ICBA]. “We don’t think that as far as regulation of banks is concerned, that solves any problems we had. The checks and balances under the current system are pretty good.”

Edward Yingling, president of the American Bankers Association, added that complete consolidation “hasn’t worked in other countries that have tried it and it faces plenty of opposition in Congress.” But it’s an idea worth exploring, as it would definitely cut down on one of the bigger problems with the current regulatory system — regulator shopping.

Far from having a system of “checks and balances,” as the ICBA described it, the current system pits regulators against each other, in an attempt to woo banks (and the lucrative fees that they pay to their regulators). This leads to a race to the bottom, which was most apparent in the Office of Thrift Supervision (OTS), which regulated the likes of AIG, Countrywide, Washington Mutual and IndyMac, all of which suffered from what Treasury Secretary Tim Geithner called a lack of “adult supervision.”

As Lucas Puentes put it, “with their future growth (or shrinkage) more or less tied to the number of banks they regulate, today’s regulators have an unmistakable incentive to provide a permissive regulatory environment that favors the banks. Under this perverse system, it’s simply not in their best interest to crack down on the banks they regulate.” With one super-regulator, this problem would effectively be done away with.

As Tim Fernholz pointed out, Dodd may just be “starting off with his maximal demands, intending to negotiate from there, rather than presenting a prepackaged compromise, the latter of which has become a White House standby in the past year and hasn’t seemed like the most effective legislative strategy.” And it’s not like a single regulator would be devoid of its own set of problems. The UK, for instance, has one single bank regulator, and it didn’t weather the economic crisis much better than the U.S. But the proposal should not be dismissed out of hand, and if nothing else, seriously considering the idea would send a message to the banks that serious reform is on the table.

DeMint: Instead Of Regulating Wall Street Banks, We Should Cut Their Taxes

Yesterday, President Obama spoke at Federal Hall in New York — right across the street from the New York Stock Exchange — to lay out his vision for reforming the country’s financial regulations. “We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses,” he said. “Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.”

The regulatory reform effort has encountered stiff opposition in Congress from both the financial services industry and Republicans, who contend that the legislation is “an unwarranted intrusion on markets that could hamper the nascent economic recovery.” But Sen. Jim DeMint (R-SC) went a step further, claiming that instead of looking at better ways to regulate Wall Street, Obama should really be looking for ways to cut Wall Street’s taxes:

Instead of looking at more regulation, we could do a lot by fixing our tax system here in this country, to make us globally competitive. The President needs to focus on what really has caused problems and look at what has really made America so prosperous, and I’m afraid that’s not the lens he’s looking through right now.

Watch it:

So in DeMint’s world, Wall Street placed huge bets on the mortgage market and leveraged itself 40-1 because its taxes were too high? And lowering their taxes would prevent them from ever again imploding the financial system?

Actually, Wall Street banks already pay far below the statutory corporate tax rate of 35 percent by taking advantage of myriad tax credits and write-offs, as well as by sheltering income in low-tax (or no-tax) countries. For instance, Morgan Stanley had an effective tax rate of 21 percent in 2008, which was huge compared to the one percent (yes, one!) that Goldman Sachs paid. And this is by no means a phenomenon restricted to Wall Street, as many U.S. corporations lower their tax rate by ten or twenty points thanks to tax havens and other intricacies of the corporate tax code.

DeMint is espousing the same rhetoric as the CNBC crew, which believes that as long as Wall Street is making money, regulation is unnecessary, and that money-making should be abetted by all aspects of the tax code. But Goldman Sachs made a record breaking $3.44 billion profit in the second quarter of this year, so the tax code doesn’t seem to be holding it back. In fact, the profits that Wall Street is starting to rack up make a financial transactions tax (which levies a small tax on trades and, as Dean Baker pointed out, “would be too small for normal investors to even notice”) something worth exploring.