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This Motley Fool series examines things that just aren't right in the world of finance and investing. Here's what's got us riled today. If something's bugging you, too -- and we suspect it is -- go ahead and unload in the comments section below.
For years, the Wall Street regulatory structure has been designed to fail. Consumer financial products were governed by seven scattered agencies, and to a large extent, financial companies could choose which agency would regulate them. Many agency budgets came from the companies they supervised, and so, in a destructive race to the bottom, regulators actually had to compete against one another to please the banks.
Consider two quick examples:
- Under the leadership of John Dugan, a former bank lobbyist, the Office of the Comptroller of the Currency (OCC) has been a big friend of the financial industry. The New York Times reports that out of the hundreds of thousands of consumer complaints fielded over the past decade to the OCC, fewer than 200 enforcement orders were issued. One likely reason Capital One (NYSE: COF ) applied for an OCC charter was to escape a credit card abuse lawsuit brought against it by the state of West Virginia.
- The Office of Thrift Supervision (OTS), which oversaw AIG (NYSE: AIG ) , Washington Mutual, IndyMac, and Countrywide, did such a horrendous job policing thrifts that the industry has basically ceased to exist. The OTS is being put out of its misery too.
To end this idiocy, the just-passed financial reform bill streamlines consumer protection into a single watchdog so that Wall Street will no longer be able to play regulators off one another. The Consumer Financial Protection Bureau (CFPB) will have the ability to issue rules covering all financial agencies. This will be a completely new system, one that will be significantly harder for Wall Street to game.
Will it work?
While Wall Street did win some important concessions in the reform bill, its attempts to gut the CFPB largely failed. The watchdog's budget, rulemaking powers, and enforcement authority will all be independent, and it can only be overruled if two-thirds of regulatory chiefs believe its actions will destabilize the financial system.
Exactly how it intends to protect consumers and whether it will be successful is pretty much up to its first leader. She or he will set the tone, strategy, and efficacy of the new watchdog for years to come. For people who care about the moral and economic integrity of our financial system, the first CFPB chief is easily one of the most important positions in decades.
Here's Elizabeth Warren, the brainchild behind the CFPB, and the most logical candidate to lead it, discussing what she'd like to fix about Wall Street:
I believe in contracts ... The premise behind contracts is that we both understood what the deal was, [and] we both make our individual decisions ... Contracts let the invisible hand work -- that's how markets are supposed to produce the magic of increased wealth for all of us ...
The problem is that consumer financial products don't work like contracts anymore. They are governed by contract law, but they don't work on the basic premise of contracts. There is so much incomprehensible fine print that the whole idea behind a contract has collapsed....
The invisible hand is withering and dying. In 1980, Bank of America's (NYSE: BAC ) credit card [agreement] was 700 words long -- that's a little over a page. Today, Bank of America's credit card agreement is about 30 pages long. What's happened in that period of time is that the words have multiplied, and the comprehensibility has shrunk. And that's become the central business model. So my view is, we've gotta shrink the legalese, we've gotta make contracts readable again. That's the basic premise behind this agency.
This all seems pretty self-evident. Our credit card agreements and mortgages should be written in language that even the non-legal scholars among us have a prayer of understanding. The fact that clarity is the exception, rather than the rule, is an embarrassment for the financial industry and those who are supposed to police it.
Why you should be indignant:
It would be shameful if Warren, as the watchdog's most high-profile visionary and advocate, isn't chosen to lead it.
But she has her share of enemies on Wall Street, and, allegedly, Washington. There are four major reasons one might oppose Warren's nomination -- all good reasons to support her:
- She's motivated, competent, and charismatic. If you want the new watchdog to fail at protecting consumers and our economy from abusive practices, blocking Warren's nomination is critical.
- Part of Wall Street and cozy regulators' awesome idea for a banking recovery is for banks to cover up bad losses and "earn their way out." Much of that money is supposed to come from draconian fees on customers, a tactic that would be made more difficult if Warren made Wall Street become more transparent. Overdraft fees alone -- effectively loans averaging 100% interest for a single day -- generated $38 billion last year for JPMorgan (NYSE: JPM ) , Wells Fargo (NYSE: WFC ) , Citigroup (NYSE: C ) , and the rest of the banking industry. But if honest dealings mean the financial industry is less profitable than we all thought it was, it should just pay smaller bonuses instead of relying on consumers and shareholders to continue bailing out its highly paid executives and traders.
- Unlike many bank regulators over the past 30 years, Warren would put her job before political gamesmanship. I once saw someone ask her whether she has Senate ambitions. Her response: "That, or I can stab myself in the eye."
- Warren has been a relentless public critic and advocate of transparency for the Federal Reserve and the Treasury Department's handling of bailout funds in her role as lead investigator. In Treasury Secretary Tim Geithner's testimony before the TARP Congressional Oversight Panel, she asked quite simply: "AIG has received about $70 billion in TARP money, about $100 billion in loans from the Fed. Do you know where the money went?" Her tenacity has probably embarrassed a lot of powerful people.
Geithner is reportedly blocking Warren's nomination, perhaps in favor of Assistant Treasury Secretary Michael Barr. Barr basically denied this to me and other reporters on Friday, telling us he believes Warren is "exceptionally well-qualified." Whether or not Treasury is indeed blocking Warren's appointment, Wall Street and its top Congressional allies are adamantly opposed to her nomination.
Warren is the perfect candidate to break through the all-too-cozy relationship between Wall Street and toothless watchdogs. It would be shameful if an individual who has shown such willingness to protect consumers -- not to mention speak truth to power -- is blocked from doing a job that is sorely needed.
If you're as outraged as I am about toothless watchdogs, click here to sign the petition demanding Warren be given the job to police Wall Street, or use the widget below.Start a Petition »
And if you want me to keep you updated on financial reform and investor rights, just shoot a blank email to firstname.lastname@example.org.