The Wonk Room

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?

Shelby: Consumer Protection Agency ‘Folly And Dangerous,’ ‘Would Make The System Less Safe’

Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL)

And then there’s Sen. Richard Shelby (R-AL), the ranking member of the Senate Banking Committee. Back in October, Politico called Shelby “a deal maker,” and said that “he’s looking more and more like he’s ready to compromise [on reg. reform] — regardless of whether his party leaders want to slow walk a Democratic priority.” Politico even reported that Shelby “hasn’t shut the door” on the creation of a Consumer Financial Protection Agency (CFPA). However, now that Banking Committee chairman Chris Dodd (D-CT) is gearing up to release his bill, Shelby’s door seems to be shut pretty tight:

Shelby backs stronger consumer protections “where appropriate, but believes the creation of a stand-alone agency is neither necessary nor wise,” said Jonathan Graffeo, spokesman for the Republican lawmaker. As drafted, the proposed consumer agency in Shelby’s judgment “would make the system less safe,” Graffeo said.

This comes just a few days after Shelby called the very notion of a CFPA “folly and dangerous.” As Reuters put it, “the latest assessment of Shelby’s views shows that he and [Dodd] have a long way to go.”

It seems then, that Senate Republicans are going to reprise the House Republicans’ argument that consumer protection responsibilities should not be removed and placed within a new agency, but should instead remain with the same regulators who had them — and failed to use them — in the buildup to the economic crisis. As McClatchy’s Kevin Hall wrote, “that’s the back story to the U.S. financial crisis. At every turn where regulation was missing in action, the actors did the wrong thing, all along the long, interconnected trail of transactions that make up mortgage finance.” That seems to be the system that Shelby is arguing to preserve.

One intriguing aspect of the Senate dynamic, though, will be how the Republicans approach Dodd’s plan to consolidate all of the existing federal bank regulators into one super-regulator. House Financial Services Committee Chairman Barney Frank (D-MA) and the administration oppose such a move. With Democrats on either side, where will Shelby and co. come down?

Does Resolution Authority Mean ‘TARP In Perpetuity’ Or ‘Permanent Bailout Authority’?

Rep. Barney Frank (D-MA) is expected to reveal legislation (possibly today) creating a “resolution authority,” which would enable the government to negotiate an orderly unwinding of large, complex financial firms like AIG, Citigroup, or Lehman Brothers.

The banking industry has already begun to criticize the proposal and Republicans have taken to characterizing it as enshrining taxpayer-funded “bailouts.” Last night, Rep. Spencer Bachus (R-AL), the ranking member on the House Financial Services Committee, and CNBC’s Larry Kudlow went so far as to call resolution authority “TARP in perpetuity,” and “permanent bailout authority“:

KUDLOW: It’ll perpetuate TARP, in perpetuity. TARP will be used to somehow string these institutions along. Is that right, is that fair, is that your question? [...]

BACHUS: It’s a permanent bailout authority.

Watch it:

While it makes sense, politically, to invoke the unpopular TARP to oppose anything that the administration is proposing, Kudlow and Bachus are pretty far off the mark. In fact, resolution authority is meant to ensure that the government doesn’t find itself, as it did last year, having to choose between letting a company’s disorderly collapse ripple through the economy or infusing that company with money to prop it up, indefinitely.

And contrary to Kudlow’s positing, the resolution money will not come from TARP. That said, there is a legitimate question of how it will be raised, and Frank and the administration were looking at two options to find the answer.

The first was having the largest banks pay into an insurance fund that would be used in the event of a failure that required resolution. The second, which Frank and Treasury have reportedly settled on, is having Treasury loan the failing institution money, which will then be recouped from the company’s assets and from a fee on other large institutions, after the fact.

Unfortunately, I think Frank and the administration have this backwards. We already have a system in which the Federal Deposit Insurance Corp. assesses fees on banks, which it uses to pay depositors when an institution fails. I don’t see why a similar system wouldn’t work to build a fund for resolution authority.

The big banks are going to cry foul either way, but at least if they had to pay into a fund, it’d be simple to say that the fee was meant to guard taxpayers against any of them failing. Collecting fees post-failure means that one firm will have to pay for the mistakes of another, directly, with some undetermined formula for how much each institution should pay.

Simon Johnson, professor at MIT Sloan School of Management, said that charging banks after the fact was “a non-starter,” while Rep. Brad Sherman (D-CA) said that “the only way he could vote for the bill would be if it had large insurance premiums levied on the biggest banks.” Indeed, framing the fee as insurance, instead of forcing banks that didn’t fail to pay a penalty, seems like the better way to go.

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.

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.

Republicans Love To Bash The Fed, But Still Trust It To Protect Consumers

At The American Prospect, Tim Fernholz noted that Sen. Chuck Grassley (R-IA) has engaged in a bit of confusing rhetoric regarding regulatory reform. Grassley seems to simultaneously believe that the Federal Reserve should do nothing but monetary policy, but shouldn’t have its consumer protection responsibilities removed and placed within a new Consumer Financial Protection Agency (CFPA).

As Fernholz wrote, “thank goodness Grassley is not on the relevant committee” (the Senate Banking Committee). However, Grassley is not the only one with this contradiction running through his head. Sen. Jim Bunning (R-KY) is struggling with the same thing, and has a seat on the Banking Committee, from which he announced today that he sees “very little chance of getting a consumer protection agency past this committee.” And his reasoning is that the Fed already has consumer protection duties that it simply didn’t use:

In 1994, we handed the Federal Reserve the power to regulate all banks and mortgage brokers on the loans that they make. That’s all of them! In 1994 they didn’t do a thing…Now, why would we write a new protection agency, if they’re not using the power we have to the Federal Reserve to start with?…They didn’t do their job, and now you want to create a new institution because the Federal Reserve didn’t do their job. I say you’re wrong to create a new institution. We should insist that the Federal Reserve does their job.

Watch it:

But just a few months ago, Bunning declared that the Fed should not be designated as a systemic risk regulator for the financial system because “the Fed has proven they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go.” In fact, he “promised to do everything in his power to stop the Fed.”

So the Fed has proven that it can’t be trusted, but it should still be trusted to protect consumers? There’s an odd dynamic at work here, because Bunning’s diagnosis is spot-on — he just comes to the wrong conclusion. The Fed undeniably failed to police the consumer market, even though it clearly had such powers. It received regulatory authority over mortgage lending in 1994, but didn’t release its “Guidance on Nontraditional Mortgage Product Risks” until 2006. This lackadaisical approach to consumer occurred not just within the Fed, but with all of the federal bank regulators.

Therefore, we should take consumer protection duties away from all of them and place them within a new agency, which will have no mission other than watching out for consumers. But Republicans — who love to hate the Fed the rest of the time, because it plays well politically — are willing to give the Fed another swing of the bat when it comes to protecting consumers.

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.

GOP Warns That CFPA Creates A ‘Czar For Financial Services Product Approval’

Today, the House Financial Services Committee began to debate the legislation that would create a new Consumer Financial Protection Agency (CFPA). Predictably, Republicans — who are staunchly opposed to the agency — broke out their false arguments about the agency restricting credit and eliminating jobs, but they also decided to tap into some of the GOP-generated “czar” hysteria by claiming that the CFPA’s director will be a “financial product approval czar”:

Rep. Jeb Hensarling (R-TX): [Consumers] have to go on bended-knee to this new federal czar for financial services product approval and beg that they can have a credit card or a mortgage.

Rep. Spencer Bachus (R-AL): The legislation gives this new agency and it’s czar-like chairman power to impose both fees and taxes on all financial products, which they broadly design.

Watch it:

First, like so many of the “czars,” the CFPA’s Director would be appointed by the President, but then confirmed by the Senate. Here’s the pertinent text in the bill (Section 112, page 20):

But more importantly, the point of the agency is not to approve mortgages or credit cards for individuals. The CFPA Director will not pull up John Smith’s credit report and decide whether or not he can have a Visa. Much like the Credit Cardholder’s Bill of Rights that was signed into law earlier this year (which placed outright bans on certain unfair practices), the CFPA will be able to ban products deemed deceptive or predatory.

For instance, as Federal Reserve Chairman Ben Bernanke advocated, no-doc loans (in which mortgages are given to consumers without any documentation supporting incomes or assets) should be done away with. Ditto for pay-day loans that have interest rates that climb to 400 percent or signing up consumers for exorbitant overdraft protection without actually telling them.

And of course, a lot of the subprime lending that led to the housing bubble — essentially the kind of lending that “occurs when the lender’s business model is based on making profits based on fees and defaults, not on the normal performance of a loan” — should be banned, as they have no legitimate purpose other than driving profits for mortgage lenders at the expense of borrowers. I’m willing to bet that their aren’t many homeowners who will be saddened to find that they can no longer access loans which result in them owing more on their house five years into their mortgage, despite making monthly payments. But that’s exactly what the GOP is advocating for.

Republicans Claim Derivatives Regulation Will Cause Job Loss And A ‘Decrease In The American Dream’

Today, the House Financial Services Committee began marking up regulatory reform legislation, and the first topic of debate was regulation of derivatives, the trading instruments made infamous by, among others, American International Group (AIG) and Lehman Brothers.

As proposed by Committee Chairman Barney Frank (D-MA), the legislation would require that derivatives dealers and companies heavily involved in speculative derivatives trading to list their activity on electronic exchanges, to provide some transparency to the opaque derivatives market. The legislation would also require companies to have more capital on-hand to protect against derivatives losses.

As Frank said, the lesson of recent years has “been that the systemic risk of not having this or a lot of this on exchanges is a negative.” Frank’s approach also matches up with that taken by the House Agricultural Committee, which shares jurisdiction over derivatives with Financial Services.

However, during the markup Republicans made it abundantly clear that they oppose the legislation, claiming that it will be a “job killer,” which will ultimately cause a “decrease in the American dream.” Watch a compilation:

Back when the Republicans first released their vision from regulatory reform, I wondered how seriously they would take regulation of derivatives. And here we have the answer: not very.

The concern that Republicans ostensibly have is that companies who legitimately use derivatives (so-called end-users) to hedge risks would find their access to derivatives restricted by a transparent market. Not only is that a silly argument — as transparency should help the legitimate users of derivatives to have better price information — but the legislation exempts companies “that use derivatives for commercial reasons to protect against risk” from participating in the exchanges. Companies would only lose that exemption “if regulators see a pattern of activity that places other participants in the transactions at risk.”

Let’s remember this chart, which shows that the vast majority of derivatives are used by traders — not by corporate end-users:

So by trying to scale back regulation, the GOP (wittingly or not) is doing the work of the Wall Street banks that use derivatives as a money-making end in themselves, not as a means to protect themselves. The committee plans to vote on the derivatives overhaul tomorrow.

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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Hensarling, Chamber Of Commerce Claim CFPA Will Cause Credit Squeeze — But It Didn’t In Canada

This was a busy week for discussion regarding the Consumer Financial Protection Agency (CFPA) that has been proposed as a key part of Congress’ regulatory reform effort. On Wednesday, consumer advocates, the banking industry, and the U.S. Chamber of Commerce presented their perspectives on the new agency before the House Financial Services Committee, and Thursday Federal Reserve Chairman Ben Bernanke followed suit.

When it hasn’t been trying to rewrite history regarding its position on global warming, the Chamber has been one of the organizations leading the charge against the CFPA. To that end, it released a report claiming that a serious (though unquantifiable) amount of job loss would result if the CFPA were to come into existence:

The CFPA would likely reduce an important source of credit to small businesses. This induced credit squeeze comes at a time when it is likely that small business credit will be already highly restricted as the lending industry digs out of the current financial crisis. The CFPA credit squeeze would likely result in business closures, fewer startups, and slower growth. Overall, this would cost a significant number of jobs that would either be lost or not created.

Rep. Jeb Hensarling (R-TX), who has been one of the top crusaders against the CFPA, cited the Chamber’s work, in an attempt to get Bernanke to agree with the notion that the CFPA would cause a credit squeeze, and thus job loss. Watch it:

This all sounds terrible, doesn’t it? A lack of credit causing businesses to downsize, resulting in hoards of job loss, all because of stifling regulation! There’s just one problem with the theory. In 2001, Canada created a consumer protection agency, the Financial Consumer Agency of Canada (FCAC) and, well, none of that happened. As McClatchy reported:

Republicans, backed by the U.S. Chamber of Commerce and bank lobbyists, warn that such an agency would bring punishing costs to consumers and small businesses and could regulate all forms of credit, even tabs at the bar or butcher shop. Canada’s experience suggests otherwise. “I certainly have not seen anything that shows that we are vastly different from the United States in terms of access to credit,” said John Rossi, who heads compliance and enforcement efforts for the Financial Consumer Agency of Canada.

The vice-president of policy at the Canadian Bankers Association did gripe to McClatchy about the fees that the consumer agency imposes on banks, but he “didn’t say these costs were onerous…nor did he suggest that the FCAC has hurt lending, questions that were put to him directly.” And as for job loss, when the agency was created in 2001, the Canadian unemployment rate was 6.9 percent. It was the same rate in 2005, on its way to a low of 5.8 percent before the global economic crisis hit. Not exactly a terrifying jobs record.

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.

Financial Services Lobbyists Banking On Moderate Dems To Push For Federal Preemption

Last week, House Financial Services Chairman Barney Frank released a scaled-back proposal for creating a new Consumer Financial Protection Agency (CFPA), which was reportedly meant to address the concerns of some Democrats on the committee. Among other changes, the bill will no longer mandate that financial firms offer consumer “plain vanilla” products before moving on to more complex products.

While the changes may have been necessary to win support on the committee, the financial services industry now sees an opening, and is “turning up the pressure on moderate Democrats on the panel to push for more concessions.” And as The Hill reported today, “lobbyists are tailoring their efforts to rewrite specific provisions in the bill,” particularly that giving states the right to impose regulations that are stricter than the national standard set by the CFPA:

The financial industry believes that will create a patchwork quilt of different state regulations that increases the cost to firms. Those costs might then be passed on to consumers. “What’s going to happen to a customer who moves from one part of the metro area of D.C. to another? Will they have different rules just depending on geography?” said Tracey Mills, spokeswoman for the Consumer Bankers Association.

Roll Call reported that “industry groups are largely relying on the 15 members of the New Democrat Coalition to carry their water to ensure that federal pre-emption remains part of the package.” Rep. Melissa Bean (D-IL) is reportedly working on a preemption amendment that could be offered in committee.

As I’ve pointed out before, preemption is a failed policy choice that contributed to the housing bubble by preventing states from going after national banks engaged in predatory subprime lending. That this lesson has been forgotten so quickly is a testament to the financial services industry’s influence over the regulatory reform debate.

As for the Consumer Bankers Association’s (CBA) specific question regarding whether rules will differ “depending on geography,” the short answer is “yes, they will.” But that’s not the huge worry that CBA makes it out to be. After all, differing state regulations in terms of health insurance requirements have not eviscerated the health insurance industry. And a consumer moving within the Metro DC area (from Virginia to Maryland, maybe?) will presumably not bring his mortgage with him, rendering this concern over different terms overblown.

In the past, Democrats have viewed preemption as a “compromise” to be made with the industry, and the classic example of this is the Employee Retirement Income Security Act of 1974 (ERISA). After a media exposé revealed that many Americans’ pension funds were disasterously mismanaged, Congress enacted ERISA to protect employee health and retirement benefits. But thanks to a preemption provision and a Supreme Court decision gutting the federal remedy that Congress intended to replace state law, ERISA became a boon for corporations looking to avoid state regulations. As the late Justice Byron White put it, ERISA resulted in the “perverse anomaly of leaving those Congress set out to protect with less protection than they enjoyed before ERISA was enacted.”

“Preemption doctrine often serves business interests at the expense of taxpayers…and also should offend lovers of local democracy,” wrote Tim Fernholz. “Why should the feds limit your ability to make rules?” And as long as the CFPA sets a strong minimum level of regulation, there will be no worries about a race to the bottom, in terms of states trying to coax business to their state by eliminating regulations. So hopefully, Frank will stand tall against the push to include preemption in the final regulatory reform package.

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.

Rep. Bachus: Regulating Wall Street Pay Would Be ‘Abandoning A Model That’s Worked For America’

Today, the Wall Street Journal reported that the Federal Reserve is crafting a proposal to significantly step-up its regulation of Wall Street compensation practices. According to the Journal, the proposal would allow the Fed to “reject any compensation policies” it believes encourage bankers to take too much risk. The Fed “wouldn’t set the pay of individuals, but would review and, if necessary, amend each bank’s salary and bonus policies to make sure they don’t create harmful incentives.”

Though the Fed’s proposal is still weeks away from being finalized, it has already provoked quite the reaction from the right-wing. Rep. Spencer Bachus (R-AL), the ranking member on the House Financial Services Committee, was asked about the policy shift on CNBC today, and claimed that the very notion of regulating Wall Street pay means “abandoning a model that’s worked for America”:

We all know there were compensation practices that created incentives for executives to take outsized risk. Having said that, why are we abandoning a model that’s worked for America? We’ve got the largest economy in the world, it’s over three times larger than the Japanese economy and we didn’t get that by government micromanaging companies and setting compensation.

Watch it:

The notion that Wall Street’s reckless compensation structures, which incentivized short-term risk taking over long term financial viability, worked well is ridiculous. And even Bachus couldn’t really bring himself to defend Wall Street, spinning off into a defense of capitalism itself, as opposed to “so-called utopian society.” But James Hamilton at Econbrowser laid out exactly how Wall Street’s perverse pay structures cause systemic problems:

Suppose that in 2005, the individuals who were putting together securities derived from subprime and alt-A mortgage loans could have known, with perfect foresight, events that were going to unfold in 2008. Would they have still done the same things they did in 2005? My concern is that, for many individuals, the answer might be “yes”, insofar as they were richly rewarded personally in 2005 for making exactly the decisions they did. It was other parties (namely you and me) who later down the road were forced to absorb the downside of their gambles

As for this particular proposal from the Fed, I think it’s yet another instance of the Fed promising far too little, far too late, and expecting the last crisis to be water under the bridge so long as it vows to do better next time. As Yves Smith put it, “the ideas on the table suggest any moves will [be] directed at the most extreme practices, simply to curry the image that the Fed is Doing Something.” The Fed has already shown that many of its regulatory responsibilities get shunted down the list of priorities — or outright ignored — when times are good, so I’d prefer that something other than Fed promises be the basis for regulating Wall Street’s compensation.

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.

Huge Racial Disparities Found In Lending Practices At TARP Banks

As the wreckage of the subprime bubble has settled, details have slowly leaked out about the pernicious lending practices that some of the biggest banks employed, particularly when it came to taking advantage of minority borrowers. The highest-profile example of this was Wells Fargo’s “ghetto loans,” in which the bank allegedly pushed minority borrowers who qualified for prime loans into subprime, which can add more than $100,000 in interest payments to a mortgage.

But according to a new report by CAP’s Andrew Jakabovics and Jeff Chapman, Wells Fargo was far from the only bank with obvious racial disparities in its lending. Jakabovics and Chapman looked at the lending data for 14 systemically important banks in 2006 — a year in which these 14 originated more than one out of every three higher-priced mortgages in the country — and the results are fairly appalling:

Overall, 17.8 percent of white borrowers were given higher-priced mortgages when borrowing from large banks in 2006, yet 30.9 percent of Hispanics and a staggering 41.5 percent of African Americans got higher-priced mortgages…Among high-income borrowers in 2006, African Americans were three times as likely as whites to pay higher prices for mortgages—32.1 percent compared to 10.5 percent. Hispanics were nearly as likely as African Americans to pay higher prices for their mortgages at 29.1 percent.

So not only were the banks handing out subprime loans to minorities on a much greater scale, but they were issuing them to lots of low-risk borrowers — households earning more than twice their area’s median income, most of which reported six-figure incomes — at a dizzying rate (which was, again, significantly higher for minorities). I would be interested to hear how the banks explain away that one.

To be fair, many of the banks that have the most egregious stats actually bought their racial disparities, as some of the biggest subprime lenders collapsed and were acquired by the big banks. Bank of America, for instance, acquired LaSalle and Countrywide, both of which were far more likely to offer higher-priced loans to minorities than Bank of America itself. JP Morgan bought Washington Mutual, which was the worst of the banks analyzed, “with fully 56.9 percent of African Americans and 42.3 percent of Hispanics paying higher prices, compared to 16.9 percent of whites.”

The banks examined in the report were the recipients of 43 percent of the funds dispersed under the Troubled Asset Relief Program (TARP), and Jakabovics and Chapman advocate not allowing any of the banks that still owe TARP funds to pay them back without receiving a passing grade on fair lending practices from the TARP’s Inspector General.

These numbers also make the case for the creation of a Consumer Financial Protection Agency (CFPA) with strong enforcement abilities over fair lending practices. Discriminatory lending is illegal, but these numbers show that not very much was done about it. This was presumably a profitable form of lending for these institutions, which regulators charged with ensuring the safety and soundness of banks would have been loath to pull back.

By removing consumer protection responsibilities from the traditional bank regulators, and placing it with a new agency, consumers will have an advocate within the regulatory system, and discriminatory lending of the sort Jakabovics and Chapman found will hopefully be met with the sort of penalties that it deserves.