When the Obama administration proposed a new government agency solely devoted to protecting consumers who buy financial products, government officials knew they’d be facing opposition from Wall Street, banks and the financial services industry. But who knew that some of their most vocal opponents would come from the government itself?
That opposition became crystal clear when Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corporation Chief Sheila Bair and several other regulators showed up on Capitol Hill last Friday. Testifying before the House Financial Services Committee, they seemed more interested in protecting the powers of their own agencies than in making changes to the financial system.
First up at Friday’s hearings, Treasury Secretary Tim Geithner reiterated the need for a Consumer Financial Protection Agency, saying the economic crisis shows that the current financial system “failed in its most basic responsibility” to supply credit and protect consumers. “I think it’s very hard to look at that system and say that it did anything close to an adequate job of what it was designed to do,” Geithner told the committee. Hard to disagree with that assessment, considering the record number of home foreclosures, bad mortgage loans and rising credit card defaults in the past year.
The proposed CFPA would take over consumer protection powers currently spread throughout several government agencies, including the Fed, the FDIC, the Office of Thrift Supervision and the Office of the Comptroller of the Currency. That doesn’t sit too well with the chiefs in charge of those organizations. Following Geithner’s testimony, Bernanke said consumer protection responsibilities should stay with the central bank, arguing that the Fed’s bank supervisory powers go hand in hand with consumer protection. John Bowman, acting director of the OTS, and John Dugan, head of the OCC, both said enforcement of consumer protection should remain within their agencies. While FDIC chair Sheila Bair endorsed the creation of the CFPA and said that the CFPA should be able to write new enforcement rules, Bair said that federal banking regulators such as the FDIC should retain authority to supervise insured institutions.
Geithner’s response: “With great respect to the Chairman and other supervisors who are reluctant to do this, they are doing what they should, which is defend the traditional prerogatives of their agencies. I think frankly all arguments should be viewed through that prism.”
It’s been a tough going for the CFPA this summer. House Financial Services Committee Chairman Barney Frank (D-Mass.) delayed plans to mark up the bill to create the new agency until after Congress returns from its summer recess in September. Frank said he believes the CFPA bill has enough support to win approval but agreed to slow down to give the opposition a chance to weigh in. Meanwhile, Republicans have proposed an alternative that would strip the Fed of its regulatory role and abolish the OCC and the OTS. In their place would be a single regulator for depository institutions, which would include an office focused on consumer protections. Unlike the administration’s plan, the GOP-envisioned regulator would have no authority over nonbank institutions, such as mortgage brokers.
All this has moved the CFPA off the fast-track that Barney Frank talked about just a few weeks ago and gives industry lobbyists more time to work on defeating the proposal for a consumer financial watchdog.