Monday, December 14, 2009

Consumer Protection Agency A Goliath In The Making

One of my brothers is a regional vice president at Wells Fargo Bank in Portland, Oregon. We talked by telephone yesterday and after exchanging views on family and college football I asked him what he thought about pending new regulations on the financial institutions now being offered by President Obama and Congress.

"The (proposed) consumer protection agency is a disaster waiting to happen," he vowed. Now, my brother is no apologist for the banking institutions. He laments that greed and lack of regulation were instrumental in last September's financial meltdown. I was not equipped to challenge his view on the House's bank regulatory bill. So I spent half this morning trying to educate myself.

The legislation would govern the simplest payday loan and the most complicated high-finance trades. In its breadth, the measure seeks to impose restrictions on every house of finance, from two-teller neighborhood thrifts to huge interconnected conglomerates.

The cornerstone is creation of  the Consumer Financial Protection Agency that would take over consumer protection powers from current banking regulators.

My gut reaction is that such a colossal bureaucracy unless implemented pragmatically would handcuff the banks by overreach in their normal transaction of conducting business. It was followed by a belief based on factual evidence the regulators were out-smarted by the exotic high-risk trading techniques developed by a clique of Ivy League mathematics geeks.

It must be said that a New York Democratic congressman offered an amendment that passed and diluted tighter controls on the $600 trillion global derivatives market. by a 304-124 vote. Scott Murphy's amendment
created an exception for nonfinancial companies that use derivatives as a hedge against price, currency and interest rate changes rather than as a speculative investment. The amendment also provided an exception for businesses that are considered too small to be a risk to the financial system. The Obama administration originally proposed no exceptions of derivatives.

Meanwhile, the banks are taking a low profile fighting the consumer protection agency and handed that task to the U.S. Chamber of Commerce.

This is how serious they are, according to McClatchy News Service. The Chamber said it's spending about $2 million on ads, educational efforts and a grassroots campaign to kill the agency. It said that the grassroots effort has led to more than 23,000 letters sent to Congress to date. The Center for Responsive Politics said that for the 2010 election cycle, commercial banks have donated almost $3.7 million to lawmakers. Companies that provide credit have given about $1.4 million. Mortgage bankers and brokers have given $581,423.

"If you look at this actual bill, the powers are so broad and so ill-defined that the scope of who is covered is incredible," said David Hirschmann, the president of the U.S. Chamber of Commerce's Center for Capital Markets, "They've managed to create a proposed new regulator for anyone who directly or indirectly provides credit to consumers."

Hirschmann said. "If you allow people to give gift cards for your store . . . you've got a new regulator. It's amazingly broad in scope, scale and power."

Reports McClatchy:

Until the current crisis, responsibility for these consumer protections fell to several separate regulators, who made consumer protection subservient to their core mission of regulating institutions for safety and soundness.
Predatory lending and no-documentation loans helped spawn the housing crisis. Weak oversight by federal regulators allowed mortgage bonds to be sold to investors as the safest of investments when they were far from it.

When economic times got tough last year, banks began padding their balance sheets by socking surprised consumers with new credit card fees that were hidden in contractual fine print.

"In practice, nobody really took it seriously. . . . I think clearly you have had a lot of abuses, and whatever was on the books wasn't being enforced," said Morris Goldstein, a former top official at the International Monetary Fund and a researcher for the Peterson Institute of International Economics. "I think it makes sense to try to wrap it together and give someone the responsibility to deal with the great bulk of it."

Meanwhile, President Obama continued playing hardball with the nation's major bank executives today, urging and cajoling them to expand their lending for small businesses and consumers as the right thing to do after being bailed out by nearly a trillion dollars in taxpayers money.

"America's banks received extraordinary assistance" from the government, Obama said at a press conference following a meeting with the heads of the largest banks. "Now that they're back on their feet we expect an extraordinary commitment from them to help rebuild our economy."

Sunday night on CBS "60 Minutes," Obama said "I did not run for office to be helping out a bunch of fat cat bankers on Wall Street."

I hate to say it but I doubt bankers will be moved on a guilt trip placed on their shoulders by the president.

The amount of money on loan from banks fell by almost $600 billion, or 7.2 percent, from September 2008 to September 2009, according to the Federal Deposit Insurance Corp. Lending to businesses, excluding construction loans, fell 15 percent.

I am not convinced tighter regulation would produce fewer consumer loans. The consumer will bear the increased costs of the transactions passed along by the banks because of the burdening federal paperwork. The critical issue is that there will be money to loan and right now the banks are hoarding to cover their previous losses. 

Or, is it a case of leery bankers demanding more collateral and higher credit ratings to counter the bad loans they made when money was plentiful as offered by Euro, Middle East and Asian investors? If that's the case, then the $600 billion shortfall in lending is a mirage since most of it turned into toxic assets and shouldn't have been loaned in the first place.

The House bill, authored by Rep. Barney Frank, chairman of the Financial Services Committee, that includes both the Consumer Financial Protection Agency and Financial Services Oversight Council, will be considered by the Senate in January.

"I doubt it will pass the Senate," my brother predicted. Stay tuned.


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