Financial Reform: Consumer Financial Protection Agency and Resolution Authority

I've been holding off talking about this, news has been coming out in dribs and drabs, but now that Dodd has released his version, I think that things will move forward more quickly, so here is what we has happened so far.

First, in both the House (Rep. Barney Frank) and Senate (Sen. Chris Dodd), we have changes to allow for resolution authority for the banking mega-giants (I prefer Sen. Bernie Sanders' alternative of breaking them up into small and manageable pieces to both bills, but that's just me), and for a consumer financial protection agency. (CFPA)

First, the CFPA, and it should be noted that the House bill has moved further along the legislative process, and as such, it has incorporated more bad ideas as amendments, such as sunsetting the Home Valuation Code of Conduct (HVCC), which was proposed by Rep. Gary Miller (R-Realtor).

The objection to the HVCC is not that it is inaccurate, but that it is accurate, and so it makes more difficult to move homes, because it shows that a lot of people overpaid, and are now under water.

Freddie Mac has issued a report saying that HVCC has substantially improved loan quality, which, since the taxpayers back up Freddie, and Fannie, and the FHA, means that Miller won one for his realtor friends at the expense of the taxpayers.

Additionally, we have another amendment that would remove the ability of the CFPA to regularly audit the products of about 98% of the banks in the United States. They could still write the regs, but they could not regularly check to see if they were actually followed at the smaller banks, or enforce them.

As Felix Salmon says, it's a bloody mess:

So the CFPA can write rules for small banks, and can investigate complaints at small banks, but can’t examine small banks, or enforce its own regulations at small banks? It all seems like a horrible mess to me.

He suggests that perhaps an online clearing house of complaints, basically "crowd sourcing" them to send to the CFPA would be a way of dealing with this.

Additionally, we have an amendment from Rep. Melissa Bean (DINO-Finance industry) that would allow the Office of the Comptroller of the Currency to preempt state consumer protection regulations, though, it must be noted they have to promise that it's because, they "have found that the state law 'significantly' interfered with federal regulatory policies."

It should be noted that this is the same office of the OCC that fought Eliot Spitzer tooth and nail when he saw evidence of banks were engaging in predatory lending against minorities. (Thankfully, while Spitzer lost this suit at the appellate court level, his successor, Andrew Cuomo, continued to pursue the litigation, and won at the Supreme Court).

Note that these are all problems because the House bill is further along, and as such, has been put through the sausage machine, and as Bismark noted, it resembles the making of sausage.

Dodd's bill is "clean" at this point, which means that it covers all banks, and that it does not allow agencies to preempt stricter state laws, so I think that it clearly better here.

Next we have the issues of systemic risk and resolution authority, and while the Dodd and Frank bills are different, Dodd calling for after-the-fact payments in the event of a resolution/bankruptcy, and Frank calling for a before-the-fact insurance fund like the FDIC.

What has happened here, I think, is that the initial proposal, put forward by Timothy "Eddie Haskell" Geithner was that the big banks be required to pay after the fact, and as more comments came in, most notably FDIC Chairman Sheila Bair's blistering criticisms of the idea (also here and here) in favor of an FDIC style system.

President Obama, when Congressmen are calling your Secretary of the Treasury a bitch, it's time to reconsider his employment.

Geithner does not like an FDIC style system, thinking that it, "would encourage risky behavior by 'creating an expectation of explicit insurance.'"

The word for this is "bullsh&^". As Luis Gutierrez (D-IL) noted in when Geithner testified before Congress:

Let’s create the fund, just like the FDIC, so when we need to resolve [a financial institution], it stands. Your argument is, ‘oh, but Luis, moral hazard’…I don’t see banks racing to the precipice of destruction and bankruptcy because the FDIC exists. Nor do I go to an insurance company and take out a life insurance policy on myself, and the next day decide, wow, maybe I’ll just start smoking. Maybe I’ll start drinking, maybe I’ll start driving my car in a crazy manner. Maybe I really don’t care whether I live or die. I’ve got life insurance, what the hell if I die, everything is taken care of. No, that’s not the way it works.

The reason the Timothy Geithner thinks that there is a "moral hazard" problem with a prepaid insurance because, "That great vampire squid wrapped around the face of humanity,"^* Goldman Sachs, told him to say this. Geithner is a poster boy for regulatory capture.

There is also another problem, one which has led Barney Frank to take Bair's side in all this:

“If you wait until after the fact, you would then have to go to the taxpayer first and get the assessment to repay it and some people are afraid that would never happen,” said Frank, a Democratic representative from Massachusetts.

Which is what happened this time. If, after Lehman had gone down, we had demanded that the rest of the industry pay the costs of liquidation of the firms, it would have driven into bankruptcy too, so when there is a need, the money will never be collected. Goldman Sachs, of course, knows this, which is why they want a phony reimbursement plan.

Frank/Bair are right here, and Dodd/Geithner are wrong, but I think that we will end up with the FDIC type plan when everything settles out, because it is so clearly the best solution.^†

A big surprise, to me at least, is the fact that Geithner, and by extension Obama, is actually calling for some restrictions of the power of the Federal Reserve, specifically he wants the legislation to strip the Federal Reserve of the power to make AIG type bailouts of insolvent firms:

Geithner, in testimony to the U.S. House of Representatives Financial Services Committee, said the Fed should keep its ability to act as an emergency lender of last resort, but only to solvent firms in times of severe stress in financial markets -- with Treasury consent.

"Any firm that puts itself in a position where it cannot survive without special assistance from the government must face the consequences of failure," Geithner said. "The proposed resolution authority would not authorize the government to provide open-bank assistance to any failing firm."

I guess that no one can be wrong all the time, not even Timmeh.

So, Dodd's bill is out now, and, at least in its current "virgin" state, it's much bigger overhaul of the regulatory framework, it:

• Strips regulatory authority from the FDIC, OCC, and Federal Reserve.
• Removes much of the authority for the Fed to make emergency loans to banks, and requires fuller disclosure of these loans.
• Removes the authority that private banks have to choose directors, and places the authority in the Federal Reserve board, and makes the chairman of the board for the regional Fed banks a Presidential appointment with formal Senate confirmation.
• Here, I would go further, and enact a 1-term for the Fed Chairman, because, much like the FBI, the level of power accrued by the chairman can create situations where is both unaccountable, which is necessary for managing monetary policy, and where the financial markets demand his reappointment.
  
• Creates a CFPA.

Note here that in stripping regulatory authority from the Fed, and leaving the monetary policy there, Dodd is not moving to an untried model: The UK does this, with the Bank of England controlling monetary policy, and the Financial Services Authority doing regulation of the financial markets, and it a little (very little) bit better than our current layout.

Simply put, we cannot afford another Randroid nut-job like, Alan "Bubbles" Greenspan to be in the position he held, where he controlled all of monetary policy, and was simultaneously the most powerful person in the United States (world) in terms of financial regulation, for 18½ years....It Damn near destroyed us.

I like Dodd's bill more than Frank's, and I think that the concerns of people that I generally agree with, like Felix Salmon, about the curtailing of the powers of the Fed, are misplaced.

Cutting the Federal Reserve down to size is a feature, not a bug, and one of the best features, at that.

The Wonk Room's nickel tour comparison, as well as foot notes, are after the break:

Provision	Senate Bill	House Bills
Consumer Financial Protection Agency (CFPA)	Includes a CFPA with rule-writing authority, with no federal preemption of state law. All financial institutions are subject to examination by the CFPA.	Includes a CFPA with rule-writing authority, and bank regulators can preempt state law on a case-by-case basis. Financial institutions with less than $10 billion in assets are not subject to CFPA examinations.
Consolidated Regulators	Consolidates all existing federal bank regulators into one super-regulator, the Financial Institutions Regulatory Authority (FIRA). Removes bank supervisory powers from the Federal Reserve and the FDIC.	Merges the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC), leaves other regulators in place.
Resolution Authority	Includes resolution authority, funded by an after-the-fact assessment on institutions with more than $10 billion in assets. Institutions must draw up a “living will,” to be used in the event they must be unwound.	Includes resolution authority, pre-funded by an assessment on institutions with more than $10 billion assets. Institutions must draw up a “living will,” to be used in the event they must be unwound.
Systemic Risk	Creates a new Agency for Financial Stability, composed of the federal bank regulators and two independent councilors appointed by the President. The council will make decisions regarding systemically risky firms.	A systemic risk council, composed of the federal bank regulators, will make decisions, to be carried out by the Federal Reserve. The Fed would be empowered to conduct “on site” examinations of any systemically risky firm.
Breaking up risky firms.	Gives federal regulators the authority to break up systemically risky firms on a case-by-case basis.	Gives federal regulators the authority to break up systemically risky firms on a case-by-case basis.

^*Alas, I cannot claim credit for this bon mot, it was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.
^†Why yes, I am sounding like I have the political acumen of Little Orphan Annie, why do you ask?