Good for Deputy Treasury Secretary (and YLS alumnus) Neal Wolin for wading into the American Bankers Association to defend the Consumer Financial Protection Agency. According to FinReg21’s article:
Wolin firmly rejected the argument made by American Bankers Association chief executive Ed Yingling in recent congressional testimony that responsibility for consumer protection should not be separated from the responsibility for safety and soundness. . . .
The industry has argued that prudential regulators are careful to preserve a profit margin on financial products, to keep financial institutions sound.
This is a staggeringly cynical argument. Basically it says that you should combine prudential (solvency) and consumer safety regulation because otherwise the consumer safety regulators will reduce profits to the point where banks will not make enough money to be healthy. This logically implies that if there is a banking product or practice that is unsafe for consumers, but whose elimination would threaten banking profits, you should allow that product or practice. Is this really what the industry means?
I couldn’t believe anyone would actually say this, so I tried to find a source. I looked in the most obvious place, which was Ed Yingling’s July 14 testimony before the Senate Banking Committee. To his credit, I couldn’t find that argument in all its brazen glory. However, I did find torrents of partial truths like this one attempting to make the same argument:
Consumer protection and financial system safety and soundness are two sides of the same coin. Poor underwriting, and in some cases fraudulent underwriting, by mortgage brokers, which failed to consider the individual’s ability to repay, set in motion an avalanche of loans that were destined to default. Good underwriting is the essence of both good consumer protection and good safety and soundness regulation.
Note in passing that the spokesman of the American Bankers Association places all the blame on “mortgage brokers.” More importantly, what Yingling leaves out is that from the perspective of the individual bank there is no contradiction between fleecing customers and making lots of profits (which is what makes you safe and sound). (a) Originate bad loans; (b) pocket fees; (c) sell bad loans to an investment bank for distribution; (d) repeat. What threatened to bring down banks was the fact that they held on to too much of the risk of those loans, either on their balance sheets or in their off-balance-sheet entities.
Yingling’s testimony is page after page of that. This is going to be a real battle.
By James Kwak