Financial Regulatory Forum

INTERVIEW-Watchdog’s fate in U.S. Senate key to financial reform

By Reuters Staff
January 19, 2010

By Kevin Drawbaugh

WASHINGTON, Jan 18 (Reuters) – The tag on U.S. financial regulation reform may as well say “Made on Wall Street” if bank lobbyists manage to gut the Obama administration’s proposed consumer watchdog agency,  Elizabeth Warren said.

The head of a panel monitoring the government’s bank bailout program, Warren is a Harvard Law School professor and a fierce critic of the banking industry. She is also rumored to be front-runner to become the first chief of President Barack Obama’s proposed U.S. Consumer Financial Protection Agency.

The CFPA would be a new government regulator devoted to shielding Americans from financial rip-offs like the abusive subprime mortgages at the core of the 2008 financial crisis, and the prolonged recession and bank bailouts that followed.

But the proposed agency, already pared back last month in the House of Representatives, is in trouble in the Senate.

Under pressure from big banks fighting hard to kill or weaken it, senators are said to be discussing downgrading the CFPA from an independent agency to something less than that.

Such a move would undermine the integrity of the reform project overall and set up the United States for another cycle of financial predation, crisis and bailout, Warren said.

The Senate will reconvene on Wednesday with analysts expecting agreement in the banking committee on financial regulation reforms within weeks.

“The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants,” she told Reuters in an interview.

“The question of who is in control is not going to be revealed by some nuance of how to deal with leverage ratios or credit default swaps clearing,” she said.

“It’s not that those issues aren’t important; they are. But those are skirmishes on the edges of a huge battle over reining in an out-of-control industry. The CFPA has real teeth, and it is the centerpiece of meaningful reform.”

SWEEPING PLAN

The Obama administration last year unveiled a sweeping plan to tighten bank and capital market regulation in response to an international financial crisis triggered by the bursting of a U.S. property price bubble and cascading follow-on effects.

The European Union is also pursuing ambitious changes aimed at preventing another crisis in the future.

Central to U.S. and EU strategies is finding new ways to deal with so-called “too big to fail” financial powerhouses, such as Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup and Bank of America.

So dominant have these firms, and a handful of others, become that old laws governing them no longer work. Writing new ones means tackling the complexities of over-the-counter derivatives, capital standards, leverage ratios and the like.

In the swirl of debate over such esoteric topics, Warren said it is crucial that consumer protection be addressed and that banks, seeking to protect their profit margins, not be allowed to squash changes that would help everyday people.

Consumer protection is relatively simple and could easily be fixed, she said. The statutes, for the most part, already exist, but enforcement is in the hands of the wrong people, such as the Federal Reserve, which does not consider it central to its main task of maintaining economic stability, she said.

Setting up the CFPA is largely a matter of stripping the Fed and other agencies of their consumer protection duties and relocating them into a new agency.

PROFITS THREATENED

The problem is that a strong CFPA directly threatens the banks’ ability to sell confusing, deceptive, fee-heavy financial products that generate huge profits, Warren said.

That’s why the industry — for many years the leading source of campaign funds to Washington politicians from both parties — is so adamant in opposing the CFPA, making it politically dangerous for lawmakers to back it.

Warren said she is skeptical that the CFPA could be effective if it became a division of another agency.

“The industry wrote the rules that permitted them to behave so recklessly. They captured the agencies, which took the cops off the beat. They funneled enormous resources into the political process to make sure there wouldn’t be any new cops.

“Then they made hundreds of billions of dollars by selling deceptive products. The sale and resale of those deceptive products crashed the economy. The industry then demanded government bailouts and guarantees,” she said.

“Right now we’re writing the final chapter in this story. It will show whether we’re going back to the first move, letting the industry write the rules again, or whether the crisis actually changed something.” ((Editing by Diane Craft; kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax)))

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