As readers probably know all too well, the Office of the Comptroller of the Currency has long been the most cronyistic of all bank regulators. So the default assumption when it cranks up an investigation is to assume that it’s just a window-dressing exercise or worse, a stealth bailout of some sort.
Yet the Washington Post tells us that the OCC is widening an investigation into debt collection, where alleged robosigner JP Morgan is the sinner-in-chief. What gives?
By all accounts, incoming OCC chief Tom Curry is serious about trying to reform the agency. And if media accounts and the case filed by California attorney general Kamala Harris against JP Morgan are remotely accurate, JP Morgan’s conduct is so far beyond the pale that the OCC should be able to extract a handsome settlement and, more important, force reforms on the bank and the industry generally.
Now mind you, I’m not optimistic about Curry’s odds of success, and I therefore think the OCC should be shuttered and its responsibilities given primarily to the FDIC. But this situation serves to illustrate how the power dynamics in DC are shifting on bank reform.
There are several reasons why a regulator might be able to take ground on the debt collection matter. It’s not a critical business. It’s a by-product of other consumer lending businesses, and therefore dispensable. It’s not a major profit engine to any bank. It also has so much reputational downside that banks, if they weren’t hopelessly greedy, should thank regulators for pushing them to get out of it. In addition, the consensus is that banks are well out of the woods, and by implication, no longer need the Geithner extreme coddling treatment. The fact that Obama is finally moving forward with trying to replace Ed DeMarco means the Administration thinks its housing policies are succeeding and it therefore can dispose of DeMarco as its chief scapegoat.
Now cynics will point out that the banks wield so much power in Washington that they’ll still fight to keep every profit opportunity just on general principle, to defend their imperial right to make money, no matter how many consumers and laws they run over in the process. But Curry has a lot of reasons to take on this fight.
First is the California AG suit. Federal regulators hate being end-run by states; it makes them look bad. And on top of the California suit, the Washington Post reports that Iowa attorney general Tom Miller is organizing a 50 state effort, a replay of the 50 state attorney general effort on mortgages. Now Miller proved to be all hat, no cattle the last time around. But this is a lower-stakes initiative, as in it does not have the potential to blow up either systemically important banks or a huge asset class. And apparently an additional impediment last time was that the complexities of mortgage securitization was really beyond the expertise of most AGs, while debt collection is a pretty simple business (mind you, I’m also skeptical of these all-inclusive efforts, since Republican AGs tend not to get tough with banks. But the flip side is the Republican holdout on the Federal/State mortgage settlement, the AG from Oklahoma, who said in public that he didn’t think the banks should pay anything, actually extracted more than five times as much on average in terms of payouts to borrower than AGs in other states). And the third-party debt collectors who buy credit card and other hard-to-collect debt from banks are bottom-feeders and don’t have a lot of friends in high places. Cracking down on them would be popular and low risk politically.
Second is that JP Morgan looks more and more like a rogue bank. The OCC was played for a fool in the London Whale matter, and that has to rankle. In addition, Josh Rosner’s analysis of the extent of JP Morgan’s regulatory violations has apparently raised eyebrows in DC. I’m told there is growing recognition that Something Needs to be Done, and the debt collection abuses are a narrow enough matter to be a place to start.
Third, Curry really needs a clean win. He came into office with the embarrassing Independent Foreclosure Review careening out of control. He shut it down quickly, too quickly, with way too many loose ends. Given the fact that the “independent” consultants had racked up ginormous fees without figuring out what banks had done (that was the point, after all), Curry did not have good options. But he was too generous to the banks and the consultants in shutting it down (note it’s also likely that he was not given the straight scoop by his staff and the person in charge of this fiasco abruptly took a lesser job, which many surmise to have been a demotion). Similarly, even though the London Whale fiasco took place under the previous regime, Carl Levin’s hearings revealed the OCC to have again been a patsy. And with Elizabeth Warren and Carl Levin both continuing to hammer away on finance-related issues, the OCC has reason to be concerned about more credibility-destroying press.
But Curry has a big problem, which is the culture he inherited. The OCC has a horrifically compromised bank examination staff. And they’ll be the ones who should have been on top of JP Morgan, and are certain to be defending it instead. Every major bank has examiners that are resident at the bank. That means they quickly start to identify with the people in their workplace, meaning the bankers they supposedly supervise. Think many of them will rat out their friends and drinking buddies?
To make matters worse, of all regulators, the banks’ biggest fixer in DC, Promontory Group, hires heavily from former OCC examiners. Why be tough on a bank when it will annoy your colleagues and torpedo your chance of getting a lucrative sinecure down the road? (The FDIC does a better job of managing against this problem because the FDIC also has to deal with the mess of failed banks, while the OCC never has to eat its bad cooking. And the FDIC also has a cooling-off period before former examiners can take bank-related postings).
So debt collection is an important test case. I’m willing to have Curry surprise me, but if not, his failure would be proof that the OCC is irredeemable and needs to be shut down.