The Wonk Room

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.

Financial Services Industry Thrilled It Has ‘Lots Of Time’ To Influence Regulation Reform Bill

Even before the administration officially released its plan for regulatory reform today, the legislation wasn’t given much of a chance of passing this year. The thinking is that, with health care and climate change bills currently in markup, there just isn’t time to devote to financial regulation. The Senate will reportedly not even touch the topic until after August recess (though the House may move on it in July).

I get that there is a lot going on in Congress. Still, I worry that the delay not only kills any momentum for changing the system, but also gives the banking and financial services industries ample time to throw their money and influence around. Consider this reaction to the plan from the institutional brokerage firm Concept Capital (via Economix):

In our view, this plan is as negative for financial firms as the industry feared. Still, this is not the end of the game for financial firms. This proposal will change radically as it slowly moves through Congress. We expect a flood of negative headlines in the coming weeks and months, especially as we expect the House Financial Services Committee to begin voting on legislation in July. Yet the congressional agenda is packed and key Senate leaders are distracted. So we see little Senate movement in 2009. That gives the industry lots of time to try to modify the final bill.

As Ezra Klein put it, a delay provides a window “in which the broader public can lose interest in financial regulation and the financial industry can ramp up its lobbying effort in the Congress. It also puts us a lot closer to an election, which will make that lobbying effort all the more effective.” And here’s Concept Capital, admitting what a great opportunity the delay is!

Look at the example provided by the failure to pass cram-down legislation. There was pretty widespread agreement that something needed to be done to address the housing market, and a bill that would have allowed bankruptcy judges to cram-down mortgage payments for troubled homeowners eventually made its way through the House. Then it sat in the Senate, the banking and mortgage industries picked it apart, and it ultimately failed.

Peter Solomon, an investment banker and counselor to the U.S. Treasury in the Carter administration, said that the administration’s plan may already have been scaled back “because lawmakers and the public perceive the financial crisis has abated.” An administration official, meanwhile, told reporters that “the president wants to see a bill he can sign this year.” “We can’t afford to wait. We can’t afford to let our financial system continue to operate under a regulatory system that is inadequate,” the official said. I hope the administration can hand at least some of that sense of urgency over to Congress.

Chamber Of Commerce Joins Bank Lobby To Oppose Consumer Protection Agency

Today, the Obama administration is rolling out its plan for reforming financial regulation, and a key facet of the plan is the creation of a consumer protection agency (which will be officially named the Consumer Financial Protection Agency). The agency will be charged with overseeing how financial products like mortgages and credit cards are marketed to consumers.

Yesterday, the banking lobby voiced its displeasure with the idea of a new agency, and advocated simply relying on the same regulators that let the house burn down in the first place. And according to National Journal, the bankers have found an ally in the Chamber of Commerce:

Firing a warning shot ahead of the Obama administration’s proposal for overhauling the nation’s financial regulatory system, the U.S. Chamber of Commerce today warned it will vigorously oppose creation of a stand-alone consumer safety commission for financial products. Creating such a regulatory authority “is not a silver bullet for enhanced consumer protection,” said David Hirschmann, president of the Chamber’s Center for Capital Markets Competitiveness. “In fact, it may be a lead balloon.”

Last week, the Chamber rolled out a $100 million campaign to “defend and advance economic freedom.” The Chamber’s press office wouldn’t talk to me because it’s “not entertaining calls from bloggers at this time,” but I’d sure like to know if any of that $100 million is going towards lobbying against this new agency.

Anyway, if it’s designed correctly, a consumer protection agency could be a very good thing. Part of the leadup to this crisis was no one adequately policing mortgages on the ground level. Thus, lots of lousy loans were handed out and then sold to Wall Street, which securitized them and came back for more, fueling more bad lending.

As Matt Yglesias points out, it’s unclear how much of this was fraudulent lending, but in light of stories like that involving Wells Fargo — which is accused of intentionally steering minorities who qualified for prime loans into subprime — I’m sure the agency will have some things to look at. It’s also encouraging that the agency’s rules “wouldn’t pre-empt state laws, which mean states could push for tougher policies banning certain lending practices.”

That said, the agency will only be effective if it’s on par with the banking regulators and can keep up with financial innovation. It can’t be second tier, without enough resources or stature to do its job effectively. The administration’s plan calls for “stable, robust funding,” and giving the agency “sole rule making authority” in terms of consumer protection. We’ll see if Congress decides to grant those requests.

Banking Lobby Takes Aim At Proposed Consumer Protection Agency

Tomorrow, as part of its plan to overhaul the nation’s financial regulation system, the Obama administration plans to announce the creation of a new consumer protection agency. According to CNN Money, “its mission will be to protect consumers from deceptive or dangerous mortgages, credit cards and other financial products.”

Already, the banking lobby — which has been quietly moving against multiple facets of the Obama regulation plan — is voicing its displeasure with the proposal:

“It’s bad for the consumers,” said Steve Bartlett, president of the Financial Services Roundtable, a lobbying group for banks. Financial industry advocates object to the idea of carving out the enforcement of consumer protection from the mandates of existing regulatory agencies that oversee companies. They argue that consumer protection is intertwined with ensuring that a financial firm is on stable footing. “Give the power for consumer protection to the agencies that have real power,” Bartlett said.

But the current economic mess has revealed that the “agencies that have real power” actually don’t have any power, particularly when it comes to consumer protection. They are simply too far removed from the action to get an adequate sense of how financial products are being marketed to consumers on the ground level. They are looking out for the safety of institutions, not the well being of an individual consumer getting suckered into a bad mortgage or credit card deal.

As Professor Elizabeth Warren — a staunch advocate of a consumer protection council — told The Wonk Room, “all these lousy mortgages got sold, one family at a time…If we had had just basic safety standards in place from the beginning, then we never would have fed these into the front end of the financial system.” And that’s the point of the new council — to watch the origination of these products. Various states tried to regulate mortgages at the ground level back in 2002 and 2003, and were effectively stopped by the Bush administration’s regulators. How many toxic assets would have never found their way into the system if those efforts had been allowed to proceed?

One financial services lobbyist who spoke to Reuters predicted that the consumer protection agency will be stripped out of the final regulation package. If that happens, it will be to the detriment of consumers and to the advantage of the banks that are throwing their weight around Capitol Hill.

How Many Times Will Sen. Kyl Side With The Banking Lobby?

During the (ultimately failed) effort to pass cram-down legislation through the Senate in April, Republicans were pressuring bailed-out banks to not compromise on the bill. Today, in a disturbingly thorough rehashing of just how much power the banks wielded during that debate, the New York Times provides the identity of one of these senators:

Senator Jon Kyl, the Arizona Republican leading the charge against the bankruptcy change, told bankers there would be consequences if they dealt with the Democrats. According to an April 20 e-mail message between industry officials in touch with Mr. Kyl, he told them “not to make a deal with Durbin and then come looking to Republicans when they need help on something like regulatory restructuring.”

In an interview, Mr. Kyl, the Senate’s No. 2 Republican, did not recall whether he had made the statement, although he remembered telling bankers that he could not defend them if they did not first defend themselves. “I very pointedly said, ‘Don’t make a deal with Durbin on this. You don’t need to. If he has the votes he wouldn’t be dealing,’ ” Mr. Kyl recalled.

As I noted at the time, Kyl was taking a stand against cram-down — a bill aimed at helping troubled homeowners — just as Arizona’s foreclosure rate was spiking. This New York Times report shows that not only was Kyl pushing the banks on cram-down, but he was doubling down and promising to support them on regulatory reform, which is one of the next issues that the Obama administration plans to tackle, much to the banks’ chagrin.

Kyl followed up his performance on cram-down by being one of just five senators to vote against the Credit Cardholders’ Bill of Rights, another bill of which the banks weren’t very fond. In the last five years, Kyl has received more than $1 million from the banking industry and securities firms.

Rep. Colin Peterson (D-MN) said this week, “I will tell you what the problem is — [the banks] give three times more money than the next biggest group. It’s huge the amount of money they put into politics.” And in the first three months of this year, just four of the banking industry’s top trade groups spent nearly as much on lobbying “as they did in all of 2001.”

92 Percent Of Corporate Tax Break Meant For Domestic Investment Went To Pay Dividends, Buy Shares

Back in April, researchers at the University of Kansas released a report showing that for every dollar corporations spent lobbying for a particular income tax break in 2004, they saved $220 in taxes. The goal of providing the tax break — as expressed by the corporation’s lobbyists — was that the money saved would be invested in domestic productions. Congress believed that this is where the money would go, and thus the tax break — which allowed corporations to repatriate overseas earnings at far below the normal tax rate — was granted.

Well, analysts at the National Bureau of Economic Research took a look at what the corporations actually did with the money and it turns out that domestic investment was not high on the list:

Now the most detailed analysis of what actually happened — using confidential government data as well as corporate reports — has estimated what happened to the $299 billion companies brought back from foreign subsidiaries. About 92 percent of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends. There is no evidence that companies that took advantage of the tax break…used the money as Congress expected.

Incidentally, the law “specifically said the money could not be used to raise dividends or to repurchase shares.”

Kristin J. Forbes, an economics professor at the Massachusetts Institute of Technology and one of the authors of the study, said that “the restrictions on how the money will be spent seem to have been completely ineffective“:

“Dell was a great example,” she added, referring to Dell Computer. “They lobbied very hard for the tax holiday. They said part of the money would be brought back to build a new plant in Winston-Salem, N.C. They did bring back $4 billion, and spent $100 million on the plant, which they admitted would have been built anyway. About two months after that, they used $2 billion for a share buyback.”

The researchers do “say their findings did not indicate that any companies violated the law barring use of the money for share repurchases and dividends.” Even if that’s the case, this is one more example of corporation’s gaming the tax system and using their huge presence in Washington to unduly influence tax policy. These numbers should be brought up again and again as the debate over the Obama administration’s corporate tax reforms proceeds.

Financial Firms Spent $27.6 Million Lobbying For Mark To Market Rule Change

Back in April, the Financial Accounting Standards Board (FASB) changed the mark to market accounting rule, which gave banks more leeway in assessing the value of securities that they hold on their books. As Floyd Norris reported at the time, “the change seems likely to allow banks to report higher profits by assuming that the securities are worth more than anyone is now willing to pay for them.”

Today, the Wall Street Journal revealed just how much the banks were willing to pay to bring the change about:

Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter. [...]

Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate.

As Andrew Leonard put it, this “is as well documented a case of big-bucks lobbyists succeeding in getting the rules changed in favor of their clients as you will ever see.”

At the time, FASB was widely criticized for caving to political pressure by deciding to make the change. And in fact, according to the Journal’s report, following the change, “three [FASB] members threatened to resign in protest, concerned that FASB had jeopardized its credibility.”

Banking Lobby Successfully Defeats Mortgage Cram-Down Provision

Today, a proposal to change bankruptcy law and allow bankruptcy judges to cram-down mortgage payments for troubled homeowners failed in the Senate by a vote of 45-51. The provision, which was introduced as an amendment by Sen. Dick Durbin (D-IL), required 60 votes to pass. In recent weeks, support for the measure evaporated in the face of furious lobbying by the banking and mortgage industries. Prior to the vote, Durbin — who this week said that bankers “are still the most powerful lobby on Capitol Hill” — took to the floor to decry the banking industry’s influence in the cram-down debate:

At some point the senators in this chamber will decide the bankers shouldn’t write the agenda for the United States Senate. At some point the people in this chamber will decide the people we represent are not the folks working in the big banks, but the folks struggling to make a living and struggling to keep a decent home.

Watch it:

The American News Project noted that the Mortgage Bankers Association was “in a celebratory mood” at its annual meeting this week, because “a massive lobbying campaign” against cram-down appeared to be working.

Will Bailed Out Banks Prevent Credit Card Reform From Passing?

Today, President Barack Obama is meeting with executives from the credit card industry, in order to advocate “more legal protection for the millions of Americans who use credit cards.” As CBS reported, “the credit card issuers include the same big banks – Bank of America, Citicorp and JPMorgan Chase – that have gotten billions in bailout money meant to stimulate consumer lending.” Other participants reportedly include representatives from Capital One, Visa, and Mastercard.

This comes one day after the House Financial Services Committee approved legislation aimed at curbing abusive practices employed by credit card issuers:

The House measure would restrict card companies’ ability to raise rates on existing customers and ban certain controversial practices, such as applying payments to the portion of a borrower’s balance with the lowest interest rate. It would also bar issuers from charging interest on parts of the balance that were already paid on time, a practice known as double-cycle billing.

The committee vote was 48-19, with 9 Republicans joining all voting Democrats in supporting the measure. 19 Republicans voted against it. The bill (HR 627) will now move to the House floor, where it is expected to pass.

However, according to the New York Times, the proposal is “in jeopardy because of lobbying by banks and their trade groups, particularly in the Senate.” “Having won some early skirmishes by teaming with Republican allies, the banks now appear to have the upper hand and may wind up killing — or at least substantially diluting” the measure, the Times noted.

As Chris at Americablog wrote, “there’s no question more consumers could have been smarter about how they deal with easy credit, but the same could also be said about Wall Street, yet they received a fat bailout.” And as TARP watchdog Elizabeth Warren pointed out, bailed out banks hiking rates and fees amounts to “asking taxpayers to pay twice.”

Indeed, there’s plenty of blame to go around when it comes to the amount of debt Americans are carrying, but that doesn’t mean that curbing abuse is any less important. In fact, the Federal Reserve was planning to implement many of these reforms anyway, and one of the reasons that industry is so concerned by the House’s bill is that “it believes a law would be harder to overturn than a [Federal Reserve] regulation.” So if given the chance, will the Senate vote to protect consumers, or will it bend to the will of bailed out banks?

GM To Close ‘Most’ U.S. Factories For Nine Weeks, After Spending $1 Million Per Month Lobbying This Year

MSNBC is reporting that General Motors (GM) plans to close “most” of its U.S. factories for up to nine weeks this summer, due to its swiftly growing collection of financial problems:

Two people briefed on the plan say General Motors Corp. will close most of its U.S. factories for up to nine weeks this summer because of slumping sales and growing inventories of unsold vehicles. The people did not know exactly when the shutdowns would occur, but both say they will include the normal two-week closure in July to change from one model year to the next.

But just yesterday, the Associated Press reported that GM spent $2.8 million lobbying Congress — nearly $1 million per month — in the first quarter of 2009, which is actually 15 percent less than it spent on lobbying in the final quarter of 2008. GM also said this week that “it is completing the layoff of 3,400 white-collar workers in the U.S.”

“We’re a part of what is arguably one of the most regulated industries and provide a voice in complex policy discussions. We meet strict reporting requirements and our spending is reflective of the breadth of issues that affect our business,” said GM spokesman Greg Martin. But it’s worth asking: How many days could GM keep some factories open with that money? How many workers could have earned just a little bit more in wages if that lobbying hadn’t occurred?

Dick Armey’s Clients Required The Bailouts That Armey’s FreedomWorks Is Now Protesting

As ThinkProgress has been documenting, the anti-Obama “tea parties” going on today are not the “grassroots” effort that organizers claim, but are actually the work of corporate lobbyists, aided and abetted by Fox News. Lee Fang pointed out that one of those lobbyists — former Majority Leader and current FreedomWorks chairman Dick Armey (R-TX) — is one of DC’s top “hired guns,” and FreedomWorks is one of those orchestrating the “grassroots” tea party movement.

With the tea parties, FreedomWorks is organizing protests against “a federal government run amok with economic bailouts.” However, Armey’s lobbying firm represented three of the financial behemoths that brought the economy to its knees, necessitating such a widespread government response in the first place. In just the last year, Armey’s firm, DLA Piper, has represented:

- American International Group (AIG)

- Lehman Brothers

- Merrill Lynch

The reasons for the lobbying listed on these institutions’ disclosure forms range from “Congressional hearings on financial services crisis” and tax issues to simply “policies affecting securities firms.” DLA Piper also represented TARP recipient Discover Financial Services.

Let’s look at these institutions for a moment. AIG attached a hedge fund to its insurance company, and wound up with $40 billion in credit default swaps that it couldn’t honor. It then paid out $165 million in bonuses, after being kept alive with $170 billion in taxpayer money.

Merrill Lynch incurred catastrophic losses on subprime mortgages, and was rescued by Bank of America, which needed an infusion of taxpayer money upon realizing the extent of Merrill’s losses. Merrill also paid out $3.6 million in bonuses right before merging with BofA. Lehman, meanwhile, went bankrupt after mucking about in subprime mortgages, sending a shock through the financial system, and ensuring that the government would not allow another big investment bank to fail.

These are the kinds of characters that Armey’s firm represents, and its a safe bet that DLA Piper wasn’t enlisted to push for tougher regulations or more stringent capital requirements. And now Armey is helping to orchestrate “protests” against the very actions taken to bring the economy back from the brink to which these financial institutions helped push it.