In a quote potentially for the ages, John C. Dugan, Comptroller of the Currency since 2005, told the Senate Banking Committee yesterday, enforcement of consumer protection laws “should stay with the bank regulators, where it works well.”
This is a bold statement. Does Mr. Dugan have any evidence to support the idea that consumer protection vis-à-vis financial products currently works well? A close reading of his written testimony to the Senate Banking committee reveals none.
In fact, his whole testimony sounds like it comes from a parallel universe – one that did not just experience the biggest banking crisis in world history.
On p.18 of his testimony, he does have a good statement of the broader issues (emphasis added).
“Today’s severe consumer credit problems can be traced to the multi-year policy of easy money and easy credit that led to an asset bubble, with too many people getting loans that could not be repaid when the bubble burst. With respect to these loans – especially mortgages – the core problem was lax underwriting that relied too heavily on rising house prices. Inadequate consumer protections – such as inadequate and ineffective disclosures – contributed to this problem, because in many cases consumers did not understand the significant risks of complex loans that had seductively low initial monthly payments. Both aspects of the problem – lax underwriting and inadequate consumer protections – were especially acute in loans made by nonbank lenders that were not subject to federal regulation.”
The “especially acute” in the last sentence may be correct, but we know that many regulated banks (covered by all the existing regulators) participated in exactly the same rip-offs of consumers – which created the basis for a financial system meltdown.
Remember that the OCC supervises over 1,500 national banks, which includes many that have run into serious difficulties recently (a full list is not easy to find, but start here and here; or use this search; the list includes Citi, BoA, Wells Fargo, etc). (Post here stories of how OCC-supervised banks either took care of you as a consumer or mistreated you. Did the OCC side with you or the bank?)
The heart of Mr. Dugan’s objection to the Consumer Financial Protection Agency (CFPA) as proposed appears on p.25,
“The Proposal would vest all consumer protection rulewriting authority in the CFPA, which in turn would not be constrained in any meaningful way by safety and soundness concerns. That presents serious issues because, in critical aspects of bank supervision, such as underwriting standards, consumer protection cannot be separated from safety and soundness.”
Mr. Dugan wants to put the bank first – and if that involves taking more from the consumer or even taking advantage of the consumer, so be it (read the first full paragraph on p.26 carefully).
My favorite statement comes at the end.
“Our experience at the OCC has been that effective, integrated safety and soundness and compliance supervision grows from the detailed, core knowledge that our examiners develop and maintain about each bank’s organizational structure, culture, business lines, products, services, customer base, and level of risk; this knowledge and expertise is cultivated through regular on-site examinations and contact with our community banks, and close, day-to-day focus on the activities of larger banks.”
Is this why almost all our major banks essentially failed in 2008?
By Simon Johnson
The Baseline Scenario 
Yes, pesky homeowners are to blame for crashing the system by taking on insane levels of debt they apparently never intended to pay back. That’s the implication here. Banks did nothing wrong. We the people crashed the system and we currently are getting what we deserve, losing our homes by the millions, watching our investments disintegrate like starship crew members being beamed into deep space.
There will have to be organized street protests outside the Capitol demanding better consumer protection (more accurately, consumer protection period, since none exists at the moment, whatever Capo Dugan says).
True analysis Mr. Johnson.
Tell the banks not to fear, their predecessors made plenty of money without all the subterfuge and camoflage that’s now considered business as usual.
They could avoid all this regulation, of course, if they’d go re-locate their ethics and dust them off.
“The Proposal would vest all consumer protection rulewriting authority in the CFPA, which in turn would not be constrained in any meaningful way by safety and soundness concerns. That presents serious issues because, in critical aspects of bank supervision, such as underwriting standards, consumer protection cannot be separated from safety and soundness.”
I agree that regulation should be holistic. (Though as always I’m satisfied that just a hard cap on the SIZE of these gangs would take us 90% of the way toward solving all other problems.)
But that’s an argument for giving any new regulatory body greatly expanded powers, not for leaving things balkanized in the way of the status quo. (Nor is it a strong argument vs. a new kind of fragmentation, if he’s correct in characterizing it that way.)
Do any of you have any experience with filing a consumer complaint with the OCC?
Here’s how it works. You fill out a form and supply reams of supporting documentation. The OCC notifies the bank, which send a form letter calling you stupid and telling you that your claim is baseless. You never once hear from or speak to anyone at the OCC.
Yes, consumer protection works very well, for the banks.
In my mind, the only way a CPFA can work is one that is truly independent and is a consumer advocate.
From what I can tell, many Americans watch Fox-TV and read the National Inquirer as their sources for information and news. This tells me many Americans need consumer protection whether they know it or not.
If a CPFA is “nanny state” so be it! The point is the “kids” on Wall Street went crazy and so did the credit card holders and mortgage buyers. The upshot is the American taxpayer will pay $12.5 trillion for the bailout over the next decade is one estimate. $12.5 trillion in the United States alone.
So like it or not a CPFA may be needed to help prevent a recurrence of excessive irresponsible behaviour writ large that brought the world to the brink of global Depression and caused millions and millions of people to lose their jobs.
He IS citing a “parallel universe”. But, for the moment, it seems to be the “universe” that matters the most.
Dugan’s is the very face of the Regime. Clearly, he will need to be in the dock when the show trials begin. To arraign only the lice at the Summers/Bernacke/Geithner level will do little to assure those they’ve victimized that true justice is about to be be done. They’ll want to see something in the way of an attitude change as well, something that Dugan may come to embrace while in custody, perhaps.
Have you read this? Homeowners are not as innocent as you seem to imply.
http://blogs.wsj.com/developments/2009/07/28/study-finds-underwater-borrowers-drowned-themselves-with-refinancings/
Tippy Golden: “In my mind, the only way a CPFA can work is one that is truly independent and is a consumer advocate.”
Hear, hear!
Why is he still in this position, Mr Obama? Can you tell us that?
“Yes, pesky homeowners are to blame……….”
Those homeowners who couldn’t find a good job paying good wages because the bankers have all the money that should have been invested in new businesses?
bogglesthemind
“Why is he still in this position, Mr Obama?”
For the very same reason that Obama is, sir. Because we continue stupidly to believe that the franchise and the imagined remedial capabilities of this system have any meaning whatsoever. What do you think the word “opposition” means in present circumstances, anything at all? The existence of an out-of-power “party” simply serves to funnel public outrage into a black hole. To give up the illusion of there being a “democracy” here is the beginning of sanity.
good eye Pat. what i saw happening here in Michigan is that people were either A) not making enuf money to support a rising cost of living; or B)they were trying to keep up with the Jones and over spent so that what people would do is max out the credit cards on vacations, out to dinner, 100 gallons of gas for the SUV, nice clothing, etc. then after the equity in their homes went up enuf, they would re-finance the home, dump the credit cards and car loans onto the mortgage using the equity and then have their slates wiped clean so they could start living on the credit cards again. people kept doing this and now that the bottom has fallen out, Michigan is crashing hard. I don’t think we have felt the full brunt of this yet. It’s only gonna be a matter of time before either the room people had on the cards runs out and they can’t refinance because they have no equity, or they lose their jobs and just file bankruptcy and walk away from it all. then they won’t have any disposable income to live on.
posting so i can get follow up emails. sorry i forgot
If I may I would like to float a theory to you all. I think that since the baby boomers and the generation before them built up such tremendous wealth that it is now gonna be sucked back from them by this economic catastrophe. I believe this was planned all along. The last 30 years peoples’ wages and benefits have disappeared so that more and more they have had to depend upon inheritance to help them out. I think the plan has been to let generation X go broke so that the previous generations have to use what little savings they amassed to bail the future generations out. When that runs out, all will be poor again, living like pessants, waiting for some scrap to fall their way. The economy is built upon consumerism, all the wealth that people put into it is through spending. All that spending is swallowed by the large multi-national corporations and none is ever let back out. Without that circular motion of income, we are suffering a major economic wall.
Dugan needs to go ASAP. He did a crappy job in the lead up to this and now is just plain being insubordinate in opposing a major part of the Administrations banking reform package. When people voted for Change they can believe in, a big part of that was centered on the banks and the regulators of them, yet we have this GOP holdover still in charge of things….WHY?
I guess John C. Dugan was surprised that all the people who lost their jobs and had their houses foreclosed on forgot to write the OCC a thank you note.
Isn’t it precisely to separate consumer protection from safety/soundness that we need different entities?
Unfortunately, part of my pessimism over a new consumer protection agency is that I don’t think it will be able to stay independent for long in a crisis. Suppose – purely hypothetically – that Capital One got into dire straits and needed the boost of double-cycle billing to pull it back from the brink (or at least was able to convince OCC of this). Do you really think OCC/Treasury would not prevail on consumer protection to give COF a pass, just this one time, just long enough…
One scary aspect of the meltdown for me was that all of a sudden we had Bernanke and Paulson running around buying and underwriting and guaranteeing, with little concern for law and no concern for mandates. For about eight weeks – roughly mid-September to Thanksgiving – they WERE the government.
If the Fed wouldn’t stay independent despite years of precedent and institutional safeguards, I don’t expect some gadfly office, however well-intentioned, to be able to do much.
The current regulators protect the interests of the banks and not those of financial consumers. The regulators are well educated, bean counters that spend their time hoping that the information that the banks share with them is somewhat truthful so the US doesn’t experience a banking meltdown. The problem is that the banks are even better at hiding their off balance sheet practices from the regulators….than they are at hiding their hidden fees and interest rates from consumers.
After allowing the meltdown of the US financial system the federal regulators have no standing to argue that they are competent to protect the financial consumer. And lets not forget that this meltdown occurred because no one was looking out for the best interest of the mortgage consumer. Like the others, John Dugan is protecting his turf to the detriment of the average US citizen.
Mr. Dugan sounds like he’s been fed talking points by the banks they examine. He reminds me of the famous scene at the end of Butch Cassidy, when Butch and Sundance are perched high on a cliff and can see the posse chasing them in the distance. Butch says to Sundance “who are those guys?” Dugan is part of the posse of bogus non-reformers and Butch and Sundance are us. They finally decide to jump. Which may be what we have to do. Maybe the only way is by endorsing real revolution. If reform can’t work (look at what is happening at the behest of the health care oligarchy as we head deeper into August) then what can we do but grab pitchforks. I’ve written so many letters to my Republican representative that he won’t respond any more. It doesn’t matter, because he, like the rest, are controlled by the big bucks that I don’t have. I think Mr. Dugan is just one of them, and also, pathetically, a wonk trying to defend his turf and afraid of change.
Why would Congress even be interested in getting input for reform from such as he, because they know that he is pro status quo, like them. Barnie must be going nuts listening to this, but the GOP loves it.