Felix Salmon

Has Corker killed the CFPA?

By Felix Salmon
February 24, 2010

The single biggest question hanging over the future of financial reform in the US right now is what exactly is acceptable to Bob Corker in terms of a Consumer Financial Protection Agency. Bloggers on the left are pessimistic: Simon Johnson says that “the consumer protection agency is likely to be gutted as the price of bringing Senator Corker on board”, while Tim Fernholz says that bringing Corker along could “cost the Democrats key provisions in the bill — most notably, an independent Consumer Financial Protection Agency”.

But now Taylor Griffin and Tony Fratto are finally spreading what seems like pretty concrete intelligence on the form that the Dodd-Corker compromise is likely to take, in the wake of a weekend trip that the two of them took to Central America.

The contours of the Dodd/Corker deal look like this: an independent agency with its own source of funding would be established to regulate all federally chartered banks. The agency would have two divisions: one to conduct prudential regulation and one for consumer protection. The agency’s director would decide disputes between the divisions.

We could see this arrangement picking up enough GOP votes to get through the Senate, the big question will be whether this is going to pass muster with an Administration and House Financial Services Committee Chairman who have insisted on a “stand alone” CFPA. This is not completely stand alone, but it’s closer to that description than some of the other compromise proposals.

I’m not entirely clear what this means, but it seems, on its face, to imply that the FDIC, OTS, and OCC will all be combined into one agency, which would then have somewhat conflicting goals, when it comes to the zero-sum tug-of-war between banks and consumers. On the one hand, it would be responsible for ensuring that banks are profitable and well-capitalized; on the other hand, it would be responsible for ensuring that banks don’t gouge consumers in their search for adequate profits.

Most worryingly, the consumer-protection part of the agency would only seem to have control over federally chartered banks. That’s a very bad idea indeed, since it’s precisely the non-bank financial institutions — subprime lenders, payday lenders, non-bank credit card companies, Walmart, etc etc — which need as much if not more regulation, from a consumer protection point of view, as the banks.

And to top it all off, Griffin and Fratto write that even if a Senate compromise passes, it could still be derailed by Barney Frank when it comes to reconciling the House and Senate bills.

So, there’s no good news here, I’m afraid. And I’m inclined to agree with Fernholz that if working with Corker means losing the guts of the CFPA, it’s best to ditch him altogether and just try to push something through the Senate with the support of Democrats alone.

3 comments so far | RSS Comments RSS

One good way to make sure banks are profitable and well-capitalized is to shut down the banks that aren’t profitable or well-capitalized. This can be done at relatively little cost to the consumer.

Posted by dWj | Report as abusive

good god, dWj has figured it out! If only Chris Dodd’s cronies didn’t all (work for/ loot) “banks that aren’t profitable or well capitalized” then dWj’s proposed reform would pass the Senate by acclamation.

Posted by johnhhaskell | Report as abusive

It’s looking like there will be no new laws. It seems like America is basically stuck with whatever laws are on the books now. Does that render America ungovernable?

Actually I don’t think so. US Code is already millions of lines long. I have no idea of everything that is in there but surely there are things for everybody!

From where I sit, the problem was never the laws on the books but the enforcement and the ethics of the banks. In the realm of liar loans and misleading loan bundlings, there could be fraud convictions galore. Banks should lose their charters over that. What else? Let’s see, simple fraud, securities fraud times 1000 (front running, false reporting, pump-and-dump or pump-and-short a-la Goldman and MBS), mortgage fraud, fraud related to credit default swaps not backed by an ability to pay, fraud related to so-called currency swaps with foreign governments based on falsified “historical” exchange rates.

The administration has completely taken its eye off the ball. The biggest wave of financial crime in history has just occurred and it is enforcement time. After the Savings and Loan Crisis, hundreds went to prison. The recent crime wave has been much larger. The biggest shock of all is the complete absence of enforcement. A few tens of billions spent on prosecutions would surely by money well-spent.

Surely after a robust round of prosecutions, the level of ethics will rise nicely. Trust me, nothing would do more to boost the standings of pols than the sense that America is still fair.

Truly, if existing laws cannot be enforced, what is the point of even one new law?

Posted by DanHess | Report as abusive

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