By James Kwak
With the financial reform bill out of the Senate Banking Committee last week (another good thing that happened while I was away) and fresh off of victory in the health care war, the Obama administration is upping the rhetorical pressure to pass financial reform. This was most obvious in Deputy Treasury Secretary Neal Wolin’s speech at the U.S. Chamber of Commerce last week, in which he called out his hosts with fighting words: “the Chamber of Commerce – funded, no doubt, with a good deal of your money – has launched a lavish, aggressive and misleading campaign to defeat the proposed independent agency.”
Elizabeth Warren, who has never minced words when it comes to enemies of consumer protection, steps up today with an even more withering attack on the flip-flopping of the American Bankers Association, which was for the separation of consumer protection from prudential regulation before it was against it. As Warren says:
“ABA lobbyists now aggressively insist that separating consumer protection and safety and soundness functions would unravel bank stability. Yet just a few years ago, they heatedly argued the opposite—that the functions should be distinct.
“In 2006, the ABA claimed to act on principle as it railed against an interagency guidance designed to exercise some modest control over subprime mortgages. It criticized the proposal for ‘combin[ing] safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them.’”
Huh? To understand the ABA’s position in 2006, you need to realize that it was arguing against a proposal by the major regulatory agencies to make consumer suitability (the appropriateness of a mortgage product for a consumer) an element of safety and soundness regulation. And so the ABA argued that consumer issues and safety-and-soundness were two separate things. But this is what it really cared about (from the 2006 ABA comment, page 9):
“In discussing underwriting, the Agencies should be focusing on risk levels of default and loss and creditworthiness of borrowers rather than ‘appropriateness.’ We are concerned that the Agencies are creating a new ‘appropriateness’ or ‘suitability’ standard that we are very reluctant to see applied in lending, if ‘suitability’ is to mean something other than creditworthiness.”
In other words, the ABA’s bottom line is that it does not want regulators worrying about consumers at all, and it will use whatever argument happens to be handy at the moment. In 2006, it was for separating prudential regulation from consumer protection. Now that the threat is an independent consumer protection agency, it is for unifying consumer protection with prudential regulation (because that would preserve the existing set of regulatory agencies, none of which is primarily responsible for consumer protection).
The ABA’s current argument is that if you split consumer protection from prudential regulation, the consumer protecters will write rules that will make it hard for banks to make money, thereby weakening the banks. While this argument seems to make sense, it has two independently fatal flaws. First, the implication is that if banks can’t survive without screwing their customers, then they should be allowed to screw their customers. Second, it flies in the face of the lessons of the past few years, when, as Warren says, “it was the lack of meaningful, independent consumer protection that helped bring down the entire banking system and cause the current crisis”; the banks nearly failed (would have failed without government support) because their customers couldn’t pay off their toxic mortgages.*
Of course, the ABA is a lobbying organization, and some (like a majority of the Supreme Court in Citizens United) might say that this is how politics is supposed to work: corporations that have certain interests should be able to give money to lobbying organizations that will do whatever it takes to advance those interests, and being constrained by things like logical consistency or even a sense of shame would be a dereliction of duty for those organizations. So maybe the ABA is just doing its job. But that doesn’t mean that the members of the United States Senate have to fall for it.
(By the way, did you know that Elizabeth Warren also wrote, “If you want to understand how Wall Street captured Washington and how it tenaciously hangs on to that power, read 13 Bankers“?)
* Yes, I know this is a bit complicated, because many of the toxic mortgages were originated by nonbank mortgage lenders, who then sold the mortgages to banks, who packaged them into mortgage-backed securities and CDOs and held onto some of the tranches of those CDOs, which were what blew up the banks (in part — Lehman also added a healthy dose of explosive commercial real estate). But the banks were largely responsible for the originations in the first place, both because they provided the demand for the toxic mortgages and because in many cases they provided the funding for the nonbank mortgage lenders.
Update: Shahien Nasiripour has more.