The Bank Lobby's Insane Assault on Consumer Protection
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Without question, the most important part of President Barack Obama's new plan for financial regulation is the creation of a special regulator to protect consumers.
If the administration's plan goes through, the existing sieve of consumer protections in the financial world will finally be consolidated into a single agency that answers only to consumers, not bank balance sheets. Anyone who sells financial products to consumers, from the lowliest mortgage brokers to high-flying Wall Street elites, will finally have to play by a single, fair set of rules.
You might think that after watching predatory mortgage lending drive the entire global economy off a cliff, the bank lobby would try to keep a low profile during the debate. But you would be wrong.
The bank lobby, led by the terrifyingly powerful American Bankers Association, is in full-on attack mode. And while Big Finance has several aspects of the Obama overhaul in its sights, it's fighting hardest against the new consumer regulator. The ABA has already launched a barrage of money, distortions, contradictions and outright lies in an attempt to protect its inalienable right to pillage our pocketbooks.
Nowhere was this more apparent than in a July 14 hearing before the Senate Banking Committee in which ABA Chairman and CEO Ed Yingling attempted to rewrite the history of the financial crisis as a story in which bankers are completely innocent and a mysterious, unregulated shadow banking system emerged to corrupt the prudent and consumer-friendly banking business.
"It is now widely understood that the current economic situation originated primarily in the unregulated or less-regulated non-bank sector," Yingling said in written testimony. "For example, the Treasury's plan noted that 94 percent of high-cost mortgages were made outside the traditional banking system."
The statement is shockingly misleading. Yingling implies that banks had almost nothing to do with the subprime implosion, when in fact, they were the primary players. The largest subprime mortgage lenders throughout the boom, and even into today, are the big, mainstream banking companies, including Wells Fargo, Citi, Chase and HSBC, according to data from the National Mortgage News, a banking trade publication. In 2006 alone, Wells Fargo Home Mortgage issued more than $74 billion in subprime loans.
So how does Yingling get away with this blatant distortion? By falling back on a series of complex corporate distinctions. When Yingling says "bank," he's referring to the place you deposit your paychecks, places with branches that have simple names like "Citibank." These banks are regulated by federal agencies like the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). Citibank's primary regulator is the OCC.
But all of the major banks are owned by a much bigger corporate holding company. Citibank, for instance, is a subsidiary of Citigroup Inc., which has dozens of other subsidiaries where it can hide its activities from the OCC. Citigroup's main subprime issuer was a company called CitiFinancial -- a specialty lender that was "outside the traditional banking system" by virtue of not being part of Citibank, but was very much part of the same corporate behemoth.
The Federal Reserve has regulatory supervision over the big bank holding companies, and by extension, the crazy specialty subcompanies the holding companies own. But in 2001, Fed Chairman Alan Greenspan ruled that the Fed would not be regulating consumer protection at the holding-company level, which meant that nobody was watching any of these specialty units. Only Citibank itself was subject to federal supervision.
"The Fed has never cared about regulating anything," says William Black, who teaches law and economics at the University of Missouri at Kansas City but was a senior banking regulator in the 1980s.