By Bartlett Naylor, Public Citizen
In the Treasury Department’s 150-page inaugural financial sector report, responding to a presidential Executive Order, perhaps the most revealing sentence that explains why its recommendations threaten to run the industry off the guardrails is this: “The financial crisis that engulfed the U.S. economy in 2008 was initially precipitated by weaknesses in U.S. housing prices, an increase in mortgage delinquencies, and plummeting values of mortgage-backed securities.”
Weakness in housing prices? An increase in mortgage delinquencies? Did these problems emerge with no clear source, such as weeds in the backyard? No. Wall Street crashed the economy. Bankers caused this calamity. The industry trapped homebuyers in expensive mortgages they couldn’t afford then packaged them into toxic securities sold around the world. When mortgage holders couldn’t pay, the housing bubble ruptured. In the end, millions lost their homes, their jobs and their savings; the economy lost some $20 trillion. Because of this, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act.
What’s needed, as Americans agree, is stronger Wall Street reform. Instead, Treasury proposes deregulation in its June 12 report.
From Treasury’s passively voiced pathology, its report becomes a concoction of recycled bank lobby wish lists. It recommends less capital, less analysis for banks. Treasury wants to revisit the Community Reinvestment Act, a law that encourages banks to make loans in the localities where they collect deposits.
Treasury takes its sharpest shots at the Consumer Financial Protection Bureau and the Volcker Rule.
The Volcker Rule restricts deployment of government-backed deposits for gambling, primly termed “proprietary trading.” Losses from traffic in toxic mortgage securities led to massive taxpayer bailouts.
Treasury claims to support the Volcker Rule principle but then proposes to clip its wings by proposing to remove what’s called the “purpose test.” That’s the core test of whether the bank is buying and selling a security to satisfy customer demand, which is permitted, or attempting to profit on an expected change in price, as in buying low and selling high, which is not permitted. All financial instruments of this type that are held less than 60 days are assumed to be gambles unless the bank can prove otherwise. Bankers complain that this requires them to prove intent, a subjective measure. However this can be solved and violations would be avoided if banks served only as brokers, matching buyers with sellers, without dealing directly in the security. But, Treasury doesn’t entertain that sensible option.
Under its suggestions in the report, Treasury would excuse banks with less than $10 billion in assets from the Volcker Rule. Among the problems that exemption would pose, it would invite speculators to acquire a bank. Losses among smaller banks may not cause systemic tremors, but such a wide exemption could reprise the savings-and-loan (S&L) crisis, where deregulation allowed this sector to own real estate. In this 1980s case, unscrupulous developers simply bought S&Ls as vehicles to fund their own real estate projects. That led to a glut of empty office buildings, and cascading rental prices even for legitimate developers.
Treasury would also let a bank of any size escape the Volcker Rule prohibition on proprietary trading if its trading assets remain below $1 billion. Again, if Treasury supports the principle of the Volcker Rule, it shouldn’t encourage bankers to engage in taxpayer-backed speculation at any size.
Treasury further proposes in its report to relax the restrictions on bank ownership of hedge funds. The Volcker Rule required that banks shed their hedge funds, which are high risk ventures. At their discretion, regulators could allow banks to own 3 percent of a hedge fund, provided that they support that with capital in addition to what supports the banks’ other operations. Treasury proposes to give banks three years, instead of one, to start new hedge funds before the size limits apply. Treasury should instead propose a ban on bank sponsorship of hedge funds. Wealthy investors already have plenty of hedge funds from which to choose.
If the Volcker Rule has problems, the answer is to reinstate the Glass-Steagall separation of commercial and investment banking to bar banks from proprietary trading and market making altogether.
As for the Consumer Financial Protection Bureau (CFPB), Treasury ignores why it was created. Before the 2008 crash, bank regulators subordinated consumer abuse as they focused on bank profits, a proxy for bank safety. They missed the fact those bank profits were built on a Ponzi scheme of reckless lending and mortgage securitization. Elizabeth Warren, then a Harvard professor, conceived the CFPB as a single-purpose cop to supervise banks’ consumer credit operations and to punish unfair, deceptive and abusive practices.
In 150 pages, Treasury makes no mention of foreclosure victims, of the Wells Fargo faux account scandal (Wells Fargo did advise on the report), of onerous payday debt traps. Instead, Treasury introduces the CFPB as an agency with an “unaccountable structure and unduly broad regulatory powers [that] have led to regulatory abuses and excesses.” From this claim, Treasury proposes to dull the CFPB’s teeth. It proposes that the director be removed at the will of the president. That’s not the procedure with the other bank cops. They are correctly independent of the president, and can only be removed for inefficiency, neglect of duty, or malfeasance in office. That’s because bankers with White House influence shouldn’t be able to prevent an investigation or a fine from the CFPB or any agency. Also, as with other banking agencies, the CFPB budget is insulated from Congressional approval for the similar reasons; bankers with influence over Congressional appropriators shouldn’t be able to influence bank regulator’s decisions. Treasury wants that funding independence terminated for the CFPB.
Treasury also wants to strip the CFPB’s supervisory authority. Treasury recommends returning supervision to the other banking agencies, the ones that missed the reckless lending that led to the crash.
Treasury also isn’t happy with the CFPB public consumer complaint data base. Here, consumers can register complaints about a financial firm, such as a credit card company. Consumers can leave complaints or access the database to research companies they may want to avoid before signing a contract. The Treasury report claims that it exposes companies to reputational risk. That’s a generous way of saying that a firm that abuses customers may lose business if the word gets out. Treasury wants the database closed to public viewing.
Treasury’s recommendations aren’t uniformly destructive. It advises expanding the powers of the Financial Stability Oversight Council. This collection of all the bank regulators was created to look across agency portfolios at problems that may fall outside any particular jurisdiction. That proved true when insurance giant AIG sold bond insurance without the ability to make good on claims.
This first report from the Treasury Department comes on the heels of the June 8 House passage of the Financial CHOICE Act, another massive insult to America’s financial stability. This bill, which passed with no Democratic support, contains similar provisions to the recommendations in the Treasury report. The CHOICE act repeals the Volcker Rule altogether. Both eliminate the independence of the CFPB. The CHOICE Act offers additional gifts to stock market scam artists. It also paralyzes regulators with unachievable analysis burdens. (If any new rules make it through this thicket, industry will undoubtedly complain about the length of analysis.) But Treasury promises to generate more recommendations in the coming months to raise the speed limits on Wall Street, so it may well match the CHOICE act’s breadth.
Many of Treasury’s recommendations don’t need Congress; they can be accomplished by regulators. Trump has infested his administration with bankers. Goldman Sachs accounts for more than a dozen positions. Treasury Secretary Steven Mnuchin not only counts as a Goldman alumnus, but also ran a foreclosure mill called OneWest bank, hardly a resume that suggests empathy for heartland Americans. SEC Chair Jay Clayton served as outside counsel for Goldman Sachs. Joseph Otting, the nominee for Comptroller of the Currency, worked with Mnuchin at OneWest bank. Within a year, vacancies will mean that Trump can take control of all the agencies, including the chair of the Federal Reserve.
There had been a flicker of hope for policy friendlier to Main Street. The president’s Executive Order to which this report responds issued principles. The first is to “empower Americans to make independent financial decisions.” Devaluing the CFPB contradicts that principle. The second is to “prevent taxpayer bailouts.” However, reducing the Volcker Rule limits on gambling makes bailouts more likely.
Candidate Trump promised to restore Glass-Steagall but unfortunately, there’s no mention of Glass-Steagall in this report, darkening that glimmer of hope.
Fortunately, the CHOICE act and the Treasury report remain proposals. Americans can tell their senators to ignore the CHOICE Act. If and when the Treasury proposals come before Congress or regulators, citizens can again voice their opposition. Public Citizen plans to alert our members when it’s time to comment.