Feb 25 2010

Editorial: The Big Bank Excuse

On Capitol Hill, the Obama plan to create a Consumer Financial Protection Agency has been failing on the merits. But rather than examine why so few people want a new bureaucracy deciding which financial services Americans can use, the left has chosen instead to blame Wall Street for blocking its creation. Just one problem: Wall Street doesn't oppose it.

President Obama's financial consumer agency would have the power to set its own budget, collect fees, dictate how financial products are structured and sold, demand unlimited information from banks, and judge products as "abusive" or "unfair," no matter how many consumers want them -- all without regard to the safety and soundness of the banks that offer them.

The new agency would not replace all the other banking regulators. Instead it would supplement them, ensuring conflicting directives to the regulated banks. For these reasons and more, the idea has stirred opposition from small-town bankers and skeptical taxpayers.

You'd never know this by listening to the new agency's most vociferous backers. Elizabeth Warren, appointed by Congress to oversee the Troubled Asset Relief Program, wrote in these pages recently that "the same Wall Street CEOs who brought the economy to its knees have spent more than a year and hundreds of millions of dollars furiously lobbying Washington to kill the president's proposal for a Consumer Financial Protection Agency." Connecticut Attorney General Richard Blumenthal, now running to replace Chris Dodd in the Senate, has urged Congress to "seize this historic moment and stand strong against Wall Street lobbyists."

Against whom? Wall Street's trade association, known as SIFMA, says that since securities products will not be regulated by this new agency, the industry has no position on it.

Testifying recently before the Financial Crisis Inquiry Commission, Goldman Sachs CEO Lloyd Blankfein explained why his firm has nothing at stake here: "Because we are an institutional firm that largely focuses on corporations, governments and large public and private investing organizations, we do not have retail businesses." He added that "we agree that a more specific focus on consumer protection, whether in the context of a new agency or otherwise, is warranted."

JPMorgan Chase CEO Jamie Dimon has wisely spoken out against this bureaucracy, but that's because of the impact on the Chase consumer banking side of the house, not the Wall Street trading at JPMorgan. Moreover, the CEOs who sailed their companies into the rocks have long since been fired. Unlike in politics, failure is punished in business. Mr. Dimon is a case study in navigating around the housing disaster.

But even Mr. Dimon may come to appreciate the Obama proposal when he realizes the advantages it confers on giant firms like his. Smaller competitors will have a tougher time affording the lawyers and lobbyists to guide them through all the new red tape. This may be why the country's biggest bank, Bank of America, recently endorsed the consumer regulator.

But a coalition of politicians and giant banks will not necessarily be able to push this into law. Senate Democrats had been sending signals that they were ready to drop this turkey until the President threatened a veto if financial reform was not to his liking.

Mr. Dodd, Chairman of Senate Banking, seemed to understand why 33 House Democrats voted against a new consumer agency and not a single Republican voted for it. Small-town bankers, already complaining about regulators tightening the screws after the credit crisis, were "scared to death" about still another layer of bureaucracy, according to one Democratic Congressman.

Also influential before the December House vote was a study by researchers at the University of Chicago and George Mason that predicted the regulatory burdens of the Obama plan would raise interest rates, reduce access to credit, and reduce net new jobs created in the economy by 4.3%.

Meanwhile, polling hasn't shown a public all that eager to be protected from services that they now rely on and may even appreciate. Taxpayers have learned that Washington lending policies designed to benefit consumers without regard to the safety and soundness of the lenders is a recipe for creating disasters like Fannie Mae and Freddie Mac.

In the Senate, the ranking Republican on the Banking Committee, Richard Shelby, has been willing to give consumer regulators a voice alongside safety-and-soundness experts within a new bank regulator. But he's not willing to let consumer protection trump all other concerns. We're guessing Mr. Dodd would have gone for Mr. Shelby's deal until Team Obama made clear that an independent bureaucracy, free from the constraints of sound banking, was essential.

If Senate discussions now yield anything like the planned Obama consumer regulator, the result will be huge new costs for the economy and unknown risks for the taxpayer. Wall Street couldn't care less, but Main Street will pay the bill for this experiment for many years to come.