Good luck trying to understand the financial reform bill that the House is debating this week. The extremely complex piece of legislation, which could be altered by any of hundreds of proposed amendments, is intended to prevent another financial meltdown. If history is any guide, it will eventually fail.
There is far too much in this bill for a simple dissection. But its most controversial provision is the creation of a new federal Consumer Financial Protection Agency. Depending on whom you believe, CFPA will be either an effective advocate for consumers or a dead weight on banks that will further gum up the free flow of credit. The new agency would both replace and supplement consumer protection roles currently held by an entire alphabet soup of agencies and organizations.
Consumers looking for honest markets and honest dealings are protected by a large number of government and private-public agencies, including:
>> For securities, the Securities and Exchange Commission and the Commodity Futures Trading Commission. There is also a series of private, self-regulating organizations, some of which were chartered by Congress: the Municipal Securities Rulemaking Board, the Financial Industry Regulatory Authority, and then each stock exchange that polices its own trading.
>> For banking, with which the CFPA is primarily concerned, the Federal Deposit Insurance Corporation, the Federal Reserve, the Comptroller of the Currency, and the Office of Thrift Supervision. Fannie Mae and Freddie Mac, which purchase mortgage paper from banks and sell bunches of it in mortgage-backed securities, also have their own regulator.
>> For insurance, 50 different state regulators.
For context, this complicated web of regulators did not stop Bernard Madoff from swindling his clients to the tune of $18 billion. That’s despite five SEC investigations into Madoff’s activities over 16 years.
And despite the existence of an entire agency whose sole purpose was to regulate Fannie Mae and Freddie Mac — until last year known as the Office of Federal Housing Enterprise Oversight — those two quasi-public institutions went belly up after creating and selling billions in toxic mortgage-backed securities that poisoned the nation’s credit markets and brought the economy to a standstill.
If there is a lesson from these incidents, Rep. Scott Garrett, R-N.J., told me this week, it is that “more regulation is not always the solution. We had enough regulations on the books, and the regulators had enough authority. They just didn’t do their jobs.”
But the futility of regulation is a simple lesson that Congress never learns. In response to the failures of existing regulators armed with sufficient power, Congress creates new regulators and gives greater power to the ones that exist.
In the case of the CFPA, banks large and small fear the pinch of what will now be two separate regulators — one pushing them to take greater risks in the name of consumers’ rights, and another demanding prudence and soundness. The confusion of these two objectives within the bill anticipates the confusion that will follow when regulators attempt to enforce both.
“To create two regulators for every bank and other financial institution — one trying to keep it sound financially and another to protect its customers from abusive loan practices — will lead to conflict and paralysis,” wrote Rep. Walter Minnick, D-Idaho, in a recent op-ed.
Garrett made the same point by referring to the mess at Fannie and Freddie. The two government-sponsored enterprises were pulled in opposite directions by two administrations’ Departments of Housing and Urban Development, which wanted to see more home mortgages for riskier customers, and the regulator charged with their soundness.
“Now we’re going to create the same problem for the entire financial industry,” Garrett said.
David Freddoso is an editorial page staff writer who can be reached at [email protected].
