The progressive blogosphere seems pleased with Elizabeth Warren’s initial foray in the Senate Banking Committee. For instance, Huffington Post trumpeted, “Elizabeth Warren Embarrasses Hapless Bank Regulators At First Hearing.” While Warren fronted the question many American have asked, “Why no trials of big banks?” and made a coded reference to Aaron Swartz, it’s more accurate to say that the jury is still out on how effective Warren will be.
Warren makes effective use of a bad format, but let us labor under no delusions at to its limitations. The time limits on questions in Congress wind up producing sound-bites, grand-standing, and run-out-the-clock obfuscation rather than meaningful interaction. So while it looks like Warren scored a “gotcha” on the OCC and the SEC, her question was more of a trap than it might have appeared, and the compressed response time may have unwittingly served to leave the public more in the dark about what reasonable regulatory conduct might look like.
Now if Warren had had the time to engage in a Socratic dialogue with the Tom Curry of the OCC (and he’d decided to be forthcoming), it might have gone more like this:
Warren: So when did you last put a big bank on trial?
Regulator: Well, we give consent orders. The banks have to comply with them in areas we regulate.
Warren: Well, they often don’t. You just settled a consent order with ten servicers because they didn’t comply with your consent order to conduct an independent investigations of complaints from borrowers who’d been foreclosed upon. Did you consider ligitating? Did you investigate their actions?
Regulator: That would take too long. Our priority was to get money to homeowners faster. We announced checks will be gong out in March.
Warren: Well that might have seemed like a more pressing priority, but that gets back to the issue I raised earlier: it looks like the banks made money from their illegal conduct and the fees are just reducing their profits some. Can you tell me if your agency has ever even given serious though to taking a big bank to trial?
What this type of discussion would hopefully eventually tease out is that banking regulators don’t consider ligitigating because they have a ton of power over banks. They can revoke their licenses. That was what Benjamin Lawsky, the New York banking superintendent, threatened to do to Standard Chartered. From his order:
IT IS NOW HEREBY ORDERED that, pursuant to Banking Law § 39(1), SCB shall appear before the Superintendent or his designee on Wednesday, August 15, 2012, at 10:00 a.m., at the Department’s offices located at One State Street Plaza, New York, NY 10004, to explain these apparent violations of law and to demonstrate why SCB‟s license to operate in the State of New York should not be revoked;
This sort of thing is so Not Done that all the regulators in DC who had been involved in the negotiations became apoplectic and started calling Lawsky a rogue regulator. And substantively, all they could do was name call. Standard Chartered tried a bit of wet noodle waving in the form of leaking that it might sue Lawsky. Lawsky got a big settlement and the bank admitted to $250 billion of impermissible money transfers, when it has earlier asserted only $14 million were out of compliance.
In the days when regulators weren’t so craven, you’d see occasional shows of regulatory muscle. Salomon Brothers, then the biggest Treasury bond dealer, had a trader who was trying to rig bids at auction by abusing a gentleman’s understanding as to how many bonds a firm could bid for. When the Treasury made the understanding a rule, the trader went nuts, abused the Treasury official, and kept submitting overly large orders. The Fed (which runs the auction) threw the excess orders out and told Salomon to get the trader to behave. After a while, he started submitting bids in customers’ names without their permission, which is illegal. The firm figured it out but didn’t report it to the Fed. The Fed found out via the Wall Street Journal. Four days after the story broke, the head of the firm, the vice chairman, the general counsel, and the trader’s boss all resigned at the instigation of the Fed. The Bank of England also forced Barclays CEO Bob Diamond to resign over daring to impugn one of its officials during the investigation of the Libor fixing scandal.
So the fuller answer to Warren’s question to the banking regulators* would involve addressing why don’t they sue (answer: they have so much power they don’t need to sue) which then gets to: “Well if you have so much power, why do you tolerate so much bad behavior?” And it also, in practice, gets to “Since in reality, you aren’t willing to pull the license of a major bank, since it is too big to fail, and you and they know that, why aren’t you using litigation?” Her question would allow her to get to the core of the TBTF issue and lack of effective regulatory responses, but there is no way for her to begin to get there in five minutes in a committee hearing.
So while Warren fans are happy with her debut, these star turns are useful for signaling, but they are not how she will make a difference, if she can make a difference. The Senate gives her ready media access, but the convention in the Senate is for newbies keep a low profile for the first six months. Warren might be allowed some liberties on banking issues, given her expertise in this arena. Notice how she breezily overstepped her time limits in the video clip. But expect her to hew to convention elsewhere, otherwise she could undermine her ability to get things done. Remember, Hillary Clinton had to bring fellow Senators coffee as a freshman to prove she didn’t have airs.
That also means we are likely to remain in the dark about where Warren stands on other issues that affect middle class families, like social insurance programs and the progressivity of taxes, until after the deficit pact is done (Warren will be expected to fall in with the party position), unless we have another kick-the-can deal in March and real fights take place when she is in a position to operate a bit more freely.
So the early signs of how tough-minded Warren intends to be will come through the letters, speeches, and positions she takes on banking matters outside the formal Committee sessions. Her early talk is promising, but we need to see how she follows up with action.**
Update 3:50 AM : Reuters took note of the fact that some other Senators expressed their unhappiness about the foreclosure review settlement:
Lawmakers also expressed concern about a settlement between more than a dozen banks and the Office of the Comptroller of the Currency and the Federal Reserve in which the banks agreed to pay some $9.3 billion to end case-by-case reviews of past home foreclosures.
New Jersey Democrat Bob Menendez asked whether it was fair to end the reviews if certain borrowers still wanted them.
“Despite keeping their legal rights to sue the banks, most borrowers don’t have the financial means to litigate their cases if they feel the compensation was inadequate,” he said.
Thomas Curry, who heads the OCC, said the settlement “isn’t perfect” but that it was necessary to end a long, flawed review process that had grown expensive.
It pains me that the media dutifully parrots the official value of the settlement, which has a lot of hot air in it (writedown of deficiency judgments, which are pretty much worthless as it is). The number that matters, which is the pot out of which wronged borrowers will be paid, is $3.3 billion, a mere 1/3 of the headline number.
*Even though the SEC was in the hearings, I don’t consider it to be a banking regulator. It is a securities market regulator. And it is also hopelessly hamstrung by being dependent on Congressional appropriations. Joe Lieberman regularly threatened to cut the SEC’s budget even when it proposed taking only fairly tame, pro-consumer moves. You can be sure the retaliation would be brutal if the SEC were to step out too far on any issue, save maybe enforcement against foreign financial firms.
** I am sure some readers are going to pipe up about how I had argued against Warren running for the Senate. Let me remind you of the core issue, which was that being in the Senate was not the highest and best use of her talents and visibility. The first idea for her was to change the discourse in the US by primarying Obama and making the fallen state of the middle class her issue. She would have gotten even more profile and could have moved the Overton window to the left. Second was for her to form a shadow CFPB at Harvard to keep the real one honest and keep pressure on the banks by making consumer finance abuses more visible.
In general, I think Warren underestimates her personal power and therefore overestimated the value of the Senate to her. She managed to get a new Federal agency created through publicizing a study she helped lead at Harvard (the Harvard Bankruptcy Project, which provided the research foundation for her bestseller, The Two Income Trap) and personal lobbying. That’s a remarkable accomplishment. She got far more visibility and credibility through her work at the Congressional Oversight Panel and in setting up the CFPB. She can still probably make a difference at the Senate, but Senators are required to represent their constituency, not just focus on banking-related matters. I hope she does find that she’s able to promote her policy agenda through the Senate. The jury is out on that issue as well.