Dodd’s Proposed Compromise

Senate Banking chairman Chris Dodd is circulating his new compromise plan for a consumer financial regulator. The New York Times and Wall Street Journal both summarized the proposal last night, but here is a copy of Dodd’s still-rough outline.

As compromises go, it could be worse. It drops the idea of a stand-alone agency that would be devoted entirely to consumer financial regulation, a cornerstone of the White House financial overhaul and of the House-passed bill. Instead, it would create a “Bureau of Financial Protection” within the Treasury. Its director would be selected by the President, rather than the Treasury secretary, and it would have its own budget.

Do we care? It’s true that Washington delights in theological battles about boxes on organizational charts. The real issues are about the regulator’s legal authority, its budget and its willpower.

But here are two reasons you should care. First, the failure of federal bank regulators to stop the mortgage madness was a key contributor to the financial crisis. Second, the banking industry is fighting tooth and nail against a stand-alone consumer financial protection agency. If the banks think this is worth a pitched battle, then you can bet this isn’t about angels on the head of a pin.

By packing the new agency into Treasury, rather than at the “prudential” bank regulators, Dodd is trying to hold onto a central lesson from the crisis: federal regulators didn’t stop the mortgage madness because they saw their main job as protecting the financial health (aka, “safety and soundness”) of banks rather than of consumers.

The theory of the Dodd compromise is that Treasury is less likely to be co-opted by the banks, because Treasury doesn’t directly regulate their safety and soundness. By contrast, the traditional bank regulators almost live at the institutions they regulate, and deal with their problems in secrecy so as not to rattle public confidence.

But that’s a theory. In practice, Treasury under both Republican and Democratic control has been extremely sympathetic to banks throughout this crisis. Tim Geithner, the current secretary, was much less enthusiastic than the White House about clamping down on executive pay. Likewise, he resisted Paul Volcker’s proposals to ban proprietary trading at banks. And I am quite sure he never liked the Democratic push to let bankruptcy judges revamp mortgages — a push that many argued would give troubled homeowners more leverage to negotiate loan modifications.

Another bad sign is that Dodd’s proposal incorporates a big concession that House Democrats made to the banking industry. Specifically, the House bill would make it very hard for states to enforce tougher consumer protections than those imposed by the Feds.

That’s a big deal. During the heyday of mortgage madness, states like New York and North Carolina fought to clamp down on predatory lending, only to be pre-empted by the Office of the Comptroller of the Currency when it came to nationally-chartered banks and their subs.

Don’t assume that the banks and Wall Street securitizers have been permanently chastened by crisis. As my friend Karen Shaw Petrou related a few weeks ago, she’s already getting sales pitches from a national bank for a no-doc mortgage refinancing of up to $3 million.

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