BackSo, where do you house consumer protection?
So, where do you house consumer protection?
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No, that’s not a trick question.
The American Bankers Association and its lobbying brethren, including the Financial Services Roundtable, sent a letter last week around Capitol Hill pressing their case that the US Federal Reserve should supervise them.
On Monday night, they seemed to have lost part of that battle as senators tentatively agreed to limit the Fed’s regulatory power over just the biggest banks.
Now the debate is going to move to the much-discussed consumer protection agency should also end up under the Fed’s purview.
Their preference for the Fed in itself raises a question about its ability to regulate the banks for the benefit of the system. And it points to a larger debate over where a consumer protection agency should be housed. Should such an agency have true independence—in effect, its own street address—as many Democrats believe it should, so that it has real power to act on its own?
Or should it be given the equivalent of a room in the basement of the Fed, next to the janitor’s closet—as the bankers themselves and many Republicans would prefer?
That the debate has devolved into an issue of location, location, location is yet another reminder of how the urgency of the financial crisis now feels like a mud-slog.
This week, senator Christopher Dodd, chairman of the senate committee on banking, housing and urban affairs, is expected to finally unveil the Senate’s version of a financial reform bill.
It may address some of the big-ticket items that are supposed to avoid another financial fiasco on a global scale— such as higher capital requirements for banks to reduce risk, some version of a resolution authority to wind down failing investments banks (such as Lehman Brothers) and insurance giants (such as American International Group Inc.), and perhaps a say-on-pay plan.
But the fate of the proposed consumer protection agency remains the biggest question mark.
The US administration first proposed the idea of an independent watchdog for consumers to safeguard the citizenry from predatory lenders and fine print.
Its impact would be limited, truth be told. It would do virtually nothing to change the undergirding of Wall Street and its risky products, such as derivatives and collaterized debt obligations, that helped put the system at risk.
Worse, at least according to the latest reports about drafts of the Bill, the agency may not have any oversight of nonbanks such as wholesale lenders—such as Ameriquest and Thornburg—which were largely responsible for some of the worst subprime loans to people who could not afford them.
Nonetheless, it is hard to argue against the notion of consumer protection. Democrats have made the agency a requirement of any reform legislation. Republicans have argued that it is unnecessary given that regulators already have the power over banks‘behaviour (even though regulators didn’t use those powers when they needed to).
So the debate has turned to the question of who should run this agency. The Democrats want it to be run independently; Republicans and most of the banks want it inside Federal Reserve, where they say it will be free of political influence.
“We haven’t seen the details yet, but believe that consumer protection and bank supervision should be housed under the same roof," said Scott Talbott, senior vice-president for government affairs for the Financial Services Roundtable.
Edward L. Yingling, president of the American Bankers Association, differs somewhat with Talbott. He says, “We don’t care where you put it," adding that their position has always been “we're totally against it".
Word is that Dodd’s reform proposal, which seems to get more watered down by the day, would make the agency part of the Fed, an idea that has Rep. Barney Frank up in arms.
“After all the Fed bashing we’ve heard? The Fed’s such a weak engine, so let’s give them consumer protection? It’s almost a bad joke," Frank told Politico last week.
In fairness, if everyone were to agree that the agency is not going to be independent, the Federal Reserve may be the best place for it, given that it is one of the few places in Washington with an understanding of the banking system and markets.
The Securities and Exchange Commission would seem like a natural place for a consumer protection group because part of its mission is, ostensibly, to protect consumers in the stock market. But its recent track record is not stellar. What’s so interesting about the battle over the proposed consumer protection agency is that Republicans have painted the Obama administration as being in the tank with Wall Street.
But now they are the ones that seem to be helping Wall Street this time around.
©2010/THE NEW YORK TIMES
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