Did Sen. Richard Shelby (R-Ala.), the Senate banking committee's ranking member, try to sabotage the Senate's financial-reform talks last week by leaking a draft proposal on consumer protection from committee chair Sen. Chris Dodd (D-Conn.)? A source with close knowledge of the Senate's negotiations tells Mother Jones that Shelby, who'd abandoned his role as the Republican lead negotiator and was replaced by Corker, could very well have leaked the two-page proposal to news outlets to kneecap Dodd's ongoing efforts to craft a comprehensive financial-reform bill. "Dodd gave it to Shelby and Corker, so one of them leaked it," the source says. "Shelby could've leaked it to sabotage the talks."
To be sure, the draft proposal has circulated among both Democrats and Republicans involved in financial-reform talks. Both Corker and Shelby, however, have openly opposed an independent consumer protection agency—Corker called it a "non-starter," and Shelby said it was "folly and dangerous." A stronger consumer-protection agency has support elsewhere: The House included an independent Consumer Financial Protection Agency in its reform bill passed in December. And even Dodd himself has previously said that "[t]here needs to be an independent agency that looks out for people when they take out a loan, open a checking account or use a credit card." Dodd's leaked proposal—which would create a Bureau of Financial Protection within the Treasury Department to oversee large banks and some non-bank institutions—has been viewed as a political compromise to his Republican counterparts, yet unnamed sources with knowledge of the ongoing talks have been quoted as saying that the BFP is unpalatable to Corker and Shelby. Because Dodd has tried to keep a tight lid on the progress of his negotiations, it's unclear whether his BFP proposal is still being considered or not. The Senate banking committee is supposed to release a draft of its bill sometime this week.
If you're Paul Krugman, then the answer to that question is, Yes. In his column today, the liberal economist essentially calls the Senate's financial-reform talks a fakery and a sham, adding that the only thing weak financial reform would do "is create a false sense of security and a fig leaf for politicians opposed to any serious action—then fail in the clinch."
The impetus for Krugman's remarks is Sen. Chris Dodd's plan (PDF) to create not an independent consumer protection agency—the kind the House passed and the Obama administration purportedly supports—but a Bureau of Financial Protection housed within the Treasury Department much like the Food and Drug Administration is housed within the Health and Human Services Department. Consumer advocates and experts say Dodd's watered-down version of consumer protection raises numerous questions about the independence and efficacy of a Treasury-housed bureau, especially given the subpar records before the crisis of two other regulators within the Treasury—the Office of Thrift Supervision and the Office of the Comptroller of the Currency. And there's also the problem of no apparent Republican support for Dodd's compromise plan, too.
When it comes to consumer protection, Krugman argues, no reform would be better than what Dodd is proposing:
Some have argued that the job of protecting consumers can and should be done either by the Fed—or as in one compromise that at this point seems unlikely—by a unit within the Treasury Department. But remember, not that long ago Mr. Greenspan was Fed chairman and John Snow was Treasury secretary. Case closed. The only way consumers will be protected under future antiregulation administrations—and believe me, given the power of the financial lobby, there will be such administrations—is if there’s an agency whose whole reason for being is to police bank abuses.
In summary, then, it’s time to draw a line in the sand. No reform, coupled with a campaign to name and shame the people responsible, is better than a cosmetic reform that just covers up failure to act.
Now, while consumer protection is arguably the centerpiece of financial reform, there's still the issue of regulating over-the-counter derivatives, monitoring and reining in banks that become too big and too interconnected to fail, and creating some kind of authority to unwind or "euthanize" institutions when they pose that kind of systemic threat. Which is to say, a watered-down consumer protection agency won't kill the entire bill. But don't be surprised to hear many more reform advocates joining Krugman's line-in-the-sand camp.
By proposing a Bureau of Financial Protection within the Treasury Department as opposed to an independent Consumer Financial Protection Agency, is Sen. Chris Dodd (D-Conn.), the Senate's architect of financial reform, dooming the future of consumer protection? As a leaked outline of his watered-down plan for consumer protection (PDF) shows, Dodd plans to give more power to the Treasury, whose internal agencies already regulate national banks (the Office of the Comptroller of the Currency) and thrifts at the state and federal levels that were at the forefront of the mortgage meltdown (the Office of Thrift Supervision). The OCC and OTS, both at the center of the regulatory lapses before the crisis, offer a glimpse of why Dodd's plan could spell disaster for consumer advocates lobbying for tougher reforms and better regulation.
The much-maligned OCC and OTS, you'll remember, sided with lenders in the run-up to the meltdown, kept lowering the regulatory bar for the institutions they monitored, and let countless cases of fraud and wrongdoing occur under their watch, as numerous media reports have shown. Under the OTS' watch, three of the biggest banks its was supposed to be regulating were shut down in 2008, including Washington Mutual—the largest bank failure in history. An OTS regulator was even demoted for approving backdated documents from IndyMac making the bank look healthier than it was. (IndyMac failed two months later.)
Sen. Chris Dodd (D-CT) has dealt the death blow to consumer protection. The silver-haired senator, who chairs the Senate banking committee, plans to announce this week the creation of a Bureau of Financial Protection inside the Treasury—not unlike the Food and Drug Administration’s placement with the Health and Human Services Department—instead of an independent, standalone Consumer Financial Protection Agency, according to a leaked document obtained by the New York Times. The fate of consumer protection has been a chronic migraine for Dodd; his initial Republican co-negotiator, Sen. Richard Shelby (R-AL), abandoned talks with Dodd over a dispute on the CFPA, and Dodd’s current dance partner, Sen. Bob Corker (R-TN), called an independent consumer agency a “non-starter.” If Dodd does indeed gut the CFPA, the decision sets the stage for a showdown with the Obama administration and the House, both of whom want the CFPA, and in particular Rep. Barney Frank (D-MA), who told Mother Jones the agency was a “dealbreaker” for him.
According to the leaked proposal, the president would appoint the Bureau of Financial Protection’s director and its responsibilities would include overseeing big banks as well as non-banks, like the subprime lenders who peddled millions of explosive mortgages and preyed on unwitting consumers. The agency, the Times reports, would also have the authority to implement new financial regulations, but would handle rule-making a lot like the SEC does now:
The Dodd proposal would require the bureau to consult with other regulators before issuing rules and to make public any objections raised by those regulators, along with an explanation of how the bureau addressed the concerns. Those regulators also could appeal the proposed rule to a new interagency council tasked with detecting systemic risks.
The proposal would exempt banks and credit unions with assets of $10 billion or less. It would give the bureau the power to enforce regulations on large banks and nonbank lenders, in conjunction with other regulators, but would largely have to defer to other regulators in the case of smaller banks.
Dodd’s decision to go with a Treasury-housed consumer-protection agency instead of an independent agency—which he claimed to have supported earlier this month—is undoubtedly a move to garner bipartisan support for financial reform in the Senate. The senior senator has stated on numerous occasions that he wants to pass a major financial-reform bill before he retires this fall, and ditching a tough, standalone Consumer Financial Protection Agency for a more bureaucratic solution is one way to win some Republican support, even though Dodd himself said last fall that "There needs to be an independent agency that looks out for people when they take out a loan, open a checking account or use a credit card."
Inside a Wall Street-inclined Treasury Department—the previous secretary was a former Goldman Sachs CEO; Geithner, while not a banking alum, relies on Wall Street’s advice more than anyone else; and plenty of other current staffers are former Big Finance types—it’s unclear whether consumer protection would actually be a priority or not. Elizabeth Warren, who initially concocted the idea of a CFPA and is a leading consumer advocate in Washington, certainly won’t be pleased with Dodd’s new plan, just as most consumer advocates lobbying for greater crackdowns on predatory practices will be left disappointed.
If there is a winner emerging from Dodd's new consumer plan, it's the lobbyists who lobbied to kill the CPFA. Chief among them is the US Chamber of Commerce, who went so far as to create an entire website, StoptheCFPA.com, to ensure the independent agency met its demise. Now, as Dodd and the banking committee roll out their bill this week, it looks like the lobbying onslaught by the Chamber and its allies paid off.
Fed up with the predatory practices and utter absence of foreclosure help from Wall Street, local politicians, unions, and citizens in Los Angeles have decided to battle the big banks and financial services community themselves in LA's own version of "Move Your Money." While Washington stumbles its way toward financial reform, a bill in the Los Angeles city government right now would crack down on banks and lenders who hang out to dry beleaguered homeowners and would rein in unfair practices; the bill would also create a series of policies calling for the divestment of LA's funds now held by large banks to more consumer-friendly ones. The campaign, led in part by the union SEIU, will be voted on before LA's city council as early as next Friday, an SEIU rep says, and marks a major effort in the "Move Your Money" campaign to yank both consumers and cities' own dollars out of bailed out institutions that aren't helping consumers, and into smaller, often local banks or credit unions.
A representative for SEIU today sent me the latest details of LA's "Move Your Money" bill under discussion by an LA city government committee, which recently took the following actions:
Adopted the standards for banking relationships based on foreclosure prevention, small business lending, neighborhood banking and send to the full Council for approval;
Called for the creation of a “report card” to evaluate the track record of banks that want to do business with the City. This report would include data on the number of small business loans provided, evidence of working with homeowners facing foreclosure, the number and location of branches and ATMs and the use of federal TARP funds. It would also allow LA policymakers the opportunity to choose banks that are giving back to the community;
Directed the Chief Legislative Analyst to mandate a system of periodic assessment in addition to the report card to evaluate whether financial institutions meet the standards of socially responsible investing. This would include an annual, public report to the Council and Treasurer. The city would then give preference to banks in the top two deciles and lead to possible divestment for those that do not;
Instructed the City Administrative Officer (CAO), in coordination with the Treasurer, the Chief Legislative Analyst (CLA) and the City Attorney, to enforce a moratorium on any new swap deals, and renegotiate or cancel current interest rate swap transactions at no cost to the city. The city will not do any business with banks refusing to renegotiate or cancel swaps deals. The city is currently paying $10 million each year on swaps deals and would be forced to pay $29 million to exit them;
Requested that pension funds and proprietary departments with their own investment pools create similar policies to the ones proposed by the committee.
SEIU is also trying to introduce similar legislation in Maryland, and hopes the city-wide "Move Your Money" campaign will catch on. It's an ambitious effort, without a doubt, and while a few hundred depositors moving their money from, say, Citigroup to Weequahic Credit Union is more symbolic than anything, convincing a half-dozen cities to do the same could have a sizeable impact.