The debate over the bureaucratic location and independence of the Consumer Protection Agency as part of the financial reform bill raises legitimate concerns about the relationship of consumer advocacy to the “safety” and “soundness” of the credit system. Consumers, however, were certainly abused and the existing regulation failed to protect them. Opponents of an independent agency fail to overcome the fact that consumer interests buried within another bureaucracy have been inadequately represented. Given this history, President Obama should continue his post health care assertiveness and not settle for the Senate’s version. He should insist on a truly independent agency.
First, let me reiterate. There is sufficient regulation to protect the consumer. But protection did not occur. Does one really think that the Federal Reserve (where Senator Dodd proposes the agency reside) will suddenly reverse years of neglect and become the prosecutor of bad practices when its primary job is monetary policy and “safety and soundness” of our financial system. Even the Consumer Advisory Council of the Fed favors an independent agency, saying the Fed failed to protect. If not the Fed, what other agency does the Congress have in mind?
Second, the argument that a new independent agency will enlarge the Federal bureaucracy misses an obvious point – namely, each agency from the Department of Urban Affairs to the National Credit Union Administration already has a consumer affairs division. Their personnel number in the thousands. Barney Frank’s proposed legislation calls for consolidation of these bureaucrats into the Consumer Agency.
Third, it is not only Main Street that needs protection. Sophisticated investors cannot penetrate the fog of bank practices. Two banking friends related examples of bizarre banking practices. When changing his bank credit card, one was told that it cost $15 to overnight the card. When he asked why he should pay such a fee when it was in the bank’s interest to get the card to him ASAP, the bank representative immediately waived the charge. A second friend tried to pre-pay a credit balance to stay within his limits. The bank told him it couldn’t be done without talking to a representative and that cost $20. That charge was also immediately waived when the customer complained.
These are examples from sophisticated investors. Think now of the Main Street consumers who can’t understand a word on their credit agreement. This week I lunched with a dean of securities law and he reiterated the common complaint of the inability of even a skilled attorney to understand the gobbledygook of today’s bank credit agreement.
Why, then, has this argument generated so much heat and become a pivotal partisan issue? There is a valid argument that the agency must have some regard for the issues of “safety” and “soundness”. There is a fear that rules promulgated by an independent agency will force financial intermediaries to issue credit cards or mortgages to credit unworthy people or take actions to undermine the financial system. It is hard to argue that a new independent agency will function any worse; or, in fact, do more harm to the credit system than the financial industry has already done to itself and the Country.
Fourth, the advocates of an independent Consumer Agency scare the financial industry in the same way Ralph Nader scared the consumer products establishment. I understand this point. Characterizing the argument as a fight between “families” and “banks” is class warfare and adds little beyond hysteria to the cause. Change, regrettably, requires some level of hysteria but the President’s good judgment in advocating the agency will be reinforced by supporting a dedicated intelligent regulator and not, inevitably, the loudest voice proponent.
Finally, safeguards can be put in place. “Safety” and “soundness” are important concepts. The regulations issued by the Agency should be subject to review by the Fed with the Fed having a limited time to object to them. The oversight of the Agency might include members of the FDIC, Fed, insurance regulators and other regulators which are responsible for oversight over the financial system. A process requiring public hearings on significant proposals could be required.
It is time to get financial reform done. More jabber is a loser for both parties. Republicans look like they are cow-towing to financial lobbyists. On the other hand, Senator Dodd and the Administration look indecisive. Barney Frank and the House look smarter. The financial system is lapsing into its pre-Lehman crisis mode. Financial reform and, with it, an independent Consumer Agency are needed and now.
Peter J. Solomon is Founder and Chairman of Peter J. Solomon Company, L.P., an investment banking firm. He was Counselor to the Secretary of the Treasury under President Jimmy Carter, Deputy Mayor for Economic Policy and Development under Mayor Edward I. Koch and Vice Chairman of Lehman Brothers in the 1980s.