Banking on hypocrisy
Banks or families?
For almost a year, the big banks and the American Bankers Association have presented that choice to Congress. Lobbyists argue that meaningful consumer protection will jeopardize the safety and soundness of banks, telling lawmakers that they must decide between the two.
While American families have made clear that they overwhelmingly support the reforms that a new consumer financial protection agency will produce — like clear, understandable terms and conditions for consumer credit products and accountability for the big banks — the lobbyists have made equally clear their plan to kill the agency.
ABA lobbyists now aggressively insist that separating consumer protection and safety and soundness functions would unravel bank stability. Yet just a few years ago, they heatedly argued the opposite — that the functions should be distinct.
In 2006, the ABA claimed to act on principle as it railed against an interagency guidance designed to exercise some modest control over subprime mortgages. It criticized the proposal for “combin[ing] safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them.”
The ABA went on to argue that the “marriage of inconvenience between supervision and consumer protection appears to blur long-established jurisdictional lines.” And then: “ABA recommends that the safety and soundness provisions relating to underwriting and portfolio management be separated from the consumer protection provisions.”
Read that again: The ABA in 2006 said that policymakers should separate safety-and-soundness and consumer protection — exactly the opposite of its position today.
This 2006 memo illustrates the ABA’s real consistency — consistent opposition to meaningful reform.
If there is a smoking gun in the battle over financial regulatory reform, the 2006 ABA memo is it.
In the memo, the ABA also argued that: 1) the proposed guidance “overstates the risk” of so-called nontraditional mortgages; 2) the nontraditional mortgages were not “inherently riskier” than traditional mortgages; and 3) the nontraditional mortgages “simply present different types of risks that may be well-managed by prudent lenders.”
So much for the ABA’s expertise on what increases the riskiness of banks.
The ABA’s efforts to block rules over subprime mortgages contributed directly to the economic crisis. They also offer irrefutable proof that bank lobbyists will say anything to block meaningful reform.
If saying down is up and up is down — or, for that matter, that the CFPA’s consolidation of seven bloated, ineffective bureaucracies into one streamlined agency will create more bureaucracy — then the ABA lobbyists are willing to say it.
They were just as willing to argue against the integration of safety and soundness and consumer protection functions in 2006 as they are willing to argue for the integration of safety and soundness and consumer protection functions today — so long as it derailed any meaningful consumer protection.
The lobbyists’ consistent theme is unmistakable: They oppose meaningful rules in the consumer credit market.
In 2006, they opposed any structure that might have produced rules to rein in subprime mortgage lending. In 2010, they oppose any structure that might rein in a broader array of tricks and traps.
They are now lobbying hard to water down the consumer agency’s independence with oversight vetoes and other administrative roadblocks that have no precedent in the federal regulatory apparatus — not out of principle, but because they don’t want meaningful rules.
The ABA’s reversal reveals that its safety-and-soundness argument is — and always was — a diversion.
The ABA’s premise that the country can’t have both meaningful consumer protection and safety and soundness is wrong. In fact, its defense against an independent consumer agency boils down to this: If banks can’t trick and trap people with fine print and legalese, they won’t be able to turn a profit.
When other industries have argued that tricking their customers is an essential part of their profit model, they haven’t gotten far. For example, it might be profitable in the short run to substitute baking soda for antibiotics, but basic safety regulations prevent such moves — and the pharmaceutical industry still manages to do just fine. In fact, the industry flourishes, bringing better, cheaper products to customers.
Similarly, the consumer agency now before the Senate is designed to cut out tricks and traps pricing, fine print that no one can read and sharp practices that strip billions of dollars from consumers.
The ABA’s position is particularly galling because it was the lack of meaningful, independent consumer protection that helped bring down the entire banking system and cause the current crisis. Without billions pumped into subprime mortgage lending, the housing bubble could not have inflated; Lehman and other MBS traders would have lacked the raw material that fueled their excessive risk taking, and the destabilization of millions of families and neighborhoods would not have occurred.
In the weeks ahead, the Senate does not need to decide between safety and soundness and consumer protection.
But the ABA is right about one thing: The Senate does need to decide between banks and families.