Guest Post: The Day After Groundhog Day for Financial Reform

By Tim Duncan, Chairman of American Business Leaders for Financial Reform

Financial regulatory reform was starting to feel a lot like a political version of the movie Groundhog Day. Like Bill Murray’s character in the movie – forced inexplicably to live the same day over and over until he learned from his mistakes – the Democrats on the Senate Banking Committee have been “days away” from reaching an agreement for a bi-partisan bill with Republicans for almost three months now. Finally, it appears that the calendar will also move forward on financial reform assuming Senator Chris Dodd’s announcement today that he would introduce a bill on Monday and have a Committee vote within a week proves to be accurate.

As with health care, financial regulatory reform has been a gold mine for the lobbyists, power brokers and political fund-raisers in Washington who profit from the debates and disputes that hound our country and who are forced to look for new business when decision and resolution allow us to move forward.

But unlike the health care debate, over 80% of the American people agree that Congress needs to act now to fix what is broken in our financial system. Polls show that the vast majority of Democratic, Independents and Republican voters agree that legislation is needed to protect consumers and taxpayers from another financial crisis. The polls also show that Americans are fed up with the financial services industry’s brazen attempts to stop reform and the political cow-towing to industry lobbyists.

The debate over financial reform has gone on for over a year – we are not acting hastily. At the behest of the financial services industry, proposed legislation has been scaled back again and again – particularly with regard to consumer protection. For every concession that has been made (the elimination of uniform product requirements, exempting community banks etc.) industry lobbyists have come up with two or three new objections and moved the goal posts back another 25 yards. We have reached a point where the industry’s objections to moving down the path to sensible financial reform would be almost laughable if the potential consequences were not so serious.

For example, the latest industry argument against the Consumer Financial Protection Agency is that protecting American consumers must be subservient to the safety and soundness of financial services companies. This is one of those arguments coming out of Washington over the last few years that are hard to respond to because they are so completely groundless (think death panels). It’s like trying to debate someone who claims that elephants grow on trees.

We have numerous agencies in government who look out for the safety and well-being of Americans. The Federal Aviation Administration is charged with making sure that we fly safely and not with insuring that airlines make money. The US Food and Drug Administration tries to prevent the distribution of dangerous drugs without considering how profitable deadly drugs might be to a pharmaceutical company. Would we want the National Highway and Safety Administration telling Toyota they were off the hook because sticking accelerators helped to insure the profits of the auto industry?

What makes the financial services lobbyists’ arguments even more preposterous is that until recently they were the ones claiming that government agencies charged with regulating the safety and soundness of banks had no business or right to try and implement consumer protection. For example, in 2006 when the Federal Reserve and the FDIC began to try and reign in non-standard mortgages, the banking industry went into full attack mode. But the industry argument then was that safety and soundness must be strictly walled-off from consumer financial protection. A letter to the FDIC from the American Banking Association in March of 2006, for example, carried on for pages about the separation of safety and soundness from consumer protection with choice tidbits such as this:

The American Banking Association is concerned that these apparent changes in supervisory and enforcement policy may arise simply from trying to marry safety and soundness supervision with consumer protection supervision. The result of this marriage of inconvenience between supervision and consumer protection appears to blur long-established jurisdictional lines.

This letter was signed by Paul Smith, Senior Counsel to the American Banking Association who we can assume knows something about banking and regulatory law.

Members of Congress and lobbyists fighting against an agency to protect consumers argue that the agency would be staffed by unrestrained zealots who would be hell-bent on bringing the financial services industry to its knees. Hardly. If we have learned anything over the past few years it is that we have the opposite problem – staff members at agencies who are prone to capture by the industries they are supposed to regulate. This can occur for contemptible reasons – bribes, lucrative job offers etc. – but more often than not its simply because of more frequent contact and interactions with industry than with consumers.

In addition, anyone with a cursory understanding of administrative law is aware that no governmental regulatory agency is free to proceed will-nilly in issuing rules, no matter how apparently sensible, without first considering the costs and benefits of the same. The legislation for creating the Consumer Financial Protection Agency has and will have an explicit provision requiring the agency to weight the costs to industry and the impacts on safety and soundness of any rule it proposes.

The federal Administrative Procedures Act (APA) will apply to the Consumer Financial Protection Agency as it applies to other federal agencies. The APA permits agencies to issue rules only after consideration of information and data presented by interested parties. An affected party can challenge a rule, and courts can set a rule aside if the agency’s action was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” or “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;” or “without observance of procedure required by law. The letter of the law and Court decisions over the years have made these provisions extremely demanding.

Yes . . .yes, I know. It’s so complicated when you actually have to read laws and take time to understand a complicated issue thoroughly. But the vast majority of the American people get it – we need to act to protect consumers and the country from the kind of abuses that caused the financial crisis.

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  1. jake chase

    “the vast majority of the American people get it – we need to act to protect consumers and the country from the kind of abuses that caused the financial crisis.”

    I doubt it will matter much. Securitization is dead. American consumers are tapped out. The economy continues contracting. Relentless downward pressure on wages continues. The casino has moved on to equities, soverign debt. What we need is an attack on leverage, default swaps, OTC derivative trading, a return to Glass Steagall, smaller banks. What I expect from soon to be ex Senator Doddering is one thousand pages of gobbledygook leading only to 50 page prospectuses for borrowers, the piling on of more costs on working families desperate for credit and having no alternative but to accept it at any cost. And of course, to watching Liz Warren polish her star on the talk show circuit. Consumer Financial Protection is a counteroffensive in the last war. It will be so much lipstick on the pig.

  2. Francois T

    Polls show that the vast majority of Democratic, Independents and Republican voters agree that legislation is needed to protect consumers and taxpayers from another financial crisis. The polls also show that Americans are fed up with the financial services industry’s brazen attempts to stop reform and the political cow-towing to industry lobbyists.

    As long as this country does not witness an electoral tsunami that would throw out most incumbents, these polls won’t matter one bit. That is how broken Washington is nowadays.

    There is an obvious reason for that: electoral expenditures are rising much faster than anything else in this country. For instance, the cost of a presidential election doubles every cycle…yes! double, as in a 100% increase every 4 years. Congress doesn’t have it any better.

    All this money ought to come from somewhere, doesn’t it? Since voters still do not understand that you get what you pay for, they keep refusing to pay for the whole bill. If not the voters, corporations and special interests groups, who understand very well the story of the piper and the payer, are quite willing to get out-sized returns on their investment by buying favors. They even get to write the rules…how’s that for a sweet deal?

    Of course, congresspeople and politicians at large are aware of the problem. But, when ask about public campaign financing, incumbent politicians will invariably reply: “Why should I give any advantage to a challenger?”. Personal interest trumps public good any day of the week in this day and age. Of course, rationalizations and justifications ex post facto keep flowing out of their mouths. My favorite is the one stating that “money does not influence our decision-making”.

    Huh huh! Must be why there are so many rules trying to wall off money and gifts from the decision-making process of the civil servants. After all, they are an inferior kind of human being, so susceptible to influence peddling that all these rules were needed to protect them, poor things. But our Congresspeople…Dude!! Don’t you KNOW they are impervious to lowly human impulses? That we are so lucky to have elected the modern version of the Incorruptibles?

    Yeah right! And I’m here to tell you that the Planetary Fairy will be there 12-12-2012 @ 12:12h GMT to neutralize the dire consequences of the Mayan Prophecy.

    BTW, the federal bureaucrats are far from being innocent victims in this sordid affair. They are very determined in keeping every bit of jurisdictional power they have, and grab more if they can, no matter how badly they’ve screwed up in the recent past. The Federal Reserve comes immediately to mind in that respect.

    Thus, while pretty much everyone who’s not married to the financial industry understands the need for serious reform, it won’t happen unless there are dire consequences for those who resist this powerful current. This means people will have to get very serious about removing mucho politicians from office. This will happen only if enough financial pain id felt across the hoi polloi.

    Guess we’re not there yet.

  3. Cog

    There was more meat on the bone to Corker’s speach than this article captured. Corker let out some of his caucus’ disposition yesterday that was telling. If you watch his full C-Span speech you will see how far they have come from Phil Graham’s free market insanity and almost uniformly reversed in a direction favoring “rules”. Those were his words! Watch it. The republican Senate is no longer the house of Phil Graham and we should all be relieved for that. During the Q & A, a reporter asked if Corker was talking about the Community Reinvestment Act when he referenced lending problems at the “bottom of the pyramid”. He shot back “I didn’t say anything about the CRA”, before saying he should be “more eloquent” and going into poor lending standards, the ratings agencies, leverage and the use of derivatives. He said nothing about FNMA and FHLMC, which evidentally will not fall under the agenda of this financial reform.

    I took this as a rare sign of republican contrition in contrast to the usual FNMA/FHLMC/CRA revisionist history that took on form during the 2008 election cycle. It was about time for some truth. The hurdles to a CFPA not withstanding, maybe, just maybe, the glass is half full.

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