Financial Overhaul, Perils Ahead

It’s tempting to think that financial regulatory reform is already a done deal in Congress, and some media coverage has even suggested that a new dawn is at hand because Republicans have stopped trying to filibuster.

Don’t be fooled. It’s true that the Senate is likely to pass some kind of bill. Unfortunately, the legislation is still at risk of death by a thousand cuts: scores of seemingly anodyne amendments that, if passed, turn the bill into a cynical joke.

You know the drill. “Everybody” agrees the financial meltdown exposed huge flaws in regulation and that reform is essential. It’s just that some people – on Wall Street, or at the banks — want to spare us from “unintended consequences.”

Yesterday, Senate Democrats managed to vote down a major Republican push to gut portions of the bill to regulate derivatives, like the credit-default swaps that blew apart AIG. I won’t get into the gory details. Suffice it to say that it’s a good thing the Dems prevailed.

Today, Republican Sam Brownback will push an amendment to exclude car dealers from oversight by the new Consumer Financial Protection Bureau. The whole idea of the consumer agency is to prevent the next iteration of subprime mortgages, a catastrophe that the “expert’’ bank regulators utterly failed to stop. Car loans are probably the second-biggest debts most people have, after their mortgages, and car dealers originate 80 percent of those loans. Car dealers are the local marketing arms of Wall Street, which designs the loans and securitizes them. And Republicans want to exempt them from the new consumer agency?

But I would like to focus on a third imminent that seems drier than derivatives or car loans but is at least as important: federal pre-emption of state financial regulations. And this time, it’s moderate Dems who are carrying water for the banks.

In the run-up to the mortgage meltdown, federal bank regulators fought hard to pre-empt any state efforts to crack down on shady bank practices. A number of states, like North Carolina and New York, were trying to crack down on abusive mortgage practices by subprime lenders. But many of the lenders were subsidiaries of national banks, and the Office of the Comptroller of the Currency declared that states had no right to touch them whatsoever. The feds did absolutely nothing to stop the explosion of no-doc loans, option ARMs, deceptive teaser rates and hidden “yield-spread premiums.’’

To the banks, federal pre-emption is an absolute top priority. They’ll tell you it’s incredibly hard to deal with a patchwork of regulations in 50 states. (Just think of the unintended consequences!) But the real reason is they don’t want to have to lobby in 50 different states when they can focus all their lobbying in Washington. It’s true that some states were even worse than Washington about regulating banks, but one strong state attorney general often provides a template for all the others. Just think about the role of state AG’s in tobacco litigation. That’s what really scares banks.

In truth, the Senate Democrats’ bill by Chris Dodd still gives the Feds considerable leeway to stall tough state regulators. But it is a whole lot better than the current situation, and the banking industry would like to muzzle the states even more.

The amendment to watch out for in the days ahead actually comes from a Democrat: Tom Carper of Delaware. Carper’s amendment would forbid state attorney generals from prosecuting banks that violate national consumer laws, much as the fed’s blocked Elliott Spitzer and Andrew Cuomo of New York from investigating racial and ethnic targeting by subprime lenders. It would also allow the Feds to override state consumer laws even when the Feds haven’t even begun to address a particular new form of abuse. This is almost literally begging for a repeat of the Fed’s obstructive shielding of nationally-chartered subprime lenders.

I can’t believe we would even think about going there again. As Elizabeth Warren recently wrote in a letter to lawmakers: Wal-Mart does business in 50 states, and it doesn’t go running to Washington to block states from imposing their own labor laws.

Don’t let it happen.

• Become A Funded Futures Trader