The Weekly Walk of Shame: Toothless Watchdogs

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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.

Today's subject:
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:

  1. 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.
  2. 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.
  3. 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."
  4. 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.

What now:
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

Ilan Moscovitz doesn't own shares of any company mentioned. The Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 21, 2010, at 5:41 PM, beadgrrl wrote:

    "Brainchild" does not connote a person. In this scenario, CFPB is the brainchild of Elizabeth Warren. (as in, the CFPB is the child of Elizabeth Warren's brain). What's up, TMF? I don't usually see that kind of mistake in your articles.

  • Report this Comment On July 21, 2010, at 5:46 PM, beadgrrl wrote:

    PS: Otherwise, great article. I am a big fan of Elizabeth Warren--she has been on The Daily Show a couple of times and I liked her attitude and her perspective.

  • Report this Comment On July 21, 2010, at 7:41 PM, kydderr wrote:

    on the user above, keep to the point.

    Yes, we should insist Elizabeth Warren be given this position; did Congress ( ever ) do the right thing????????????//

  • Report this Comment On July 21, 2010, at 8:05 PM, xetn wrote:

    I just have to ask, what difference will it make who is appointed? Please demonstrate when any regulation ever prevented an event or series of events that the regulations were designed to prevent? Most regulations are "knee-jerk" reactions to events that did happen, only after the fact. Just like the current piece of garbage the congress just (barely) passed.

    For example the Fed already had complete oversight of the banking system in the US, including anything resembling a bank, foreign or domestic. Did they prevent the meltdown, did they foresee the problems in the financial system, or were they at the center of the problem? And now they will have more responsibility?

    Another really simple example of the failure of regulation: traffic laws. Even though there are laws against speeding or running red lights, it happen all the time. Where is the prevention?

    Regulation is like the lock on your door that is supposed to keep the bad guys out of your house, but if they are determined, they will gain entry in spite of the lock.

    In short, regulation is a wasteful system that does little to prevent businesses for doing bad things. And on top of that, it is extremely expensive costing and estimated $6000 + for every man, woman and child in the US. This huge expense is one reason driving many companies off-shore along with their jobs. And even worse, is it prevents the formation of many small companies because they simply cannot afford the cost of compliance.

  • Report this Comment On July 21, 2010, at 8:45 PM, TMFDiogenes wrote:

    Regarding xetn's comment.

    1. I can say for myself and for a lot of people that yes, traffic laws and the police that enforce them do, in fact, affect behavior without hurting small businesses.

    2. Warren has been pretty clear on this point: her mission is to shrink the fine-print and bring transparency to markets so that even non-legal scholars can understand the products they buy. How exactly does increasing transparency by stomping out market distortions like fine print -- which brings us closer to the perfect information assumptions upon which markets are predicated -- make markets worse off? I'd love to see a two-page credit card agreement. Maybe then I'd feel more comfortable getting one.

    3. If you don't believe me, watch the video.

    What this comes down to is trusting Warren more than Wall Street and Washington. I'm comfortable with choosing Warren.


  • Report this Comment On July 22, 2010, at 8:50 AM, TMFRoyal wrote:

    Bamboozling the public with mind-numbing complexity is not a business model.


  • Report this Comment On July 22, 2010, at 8:58 AM, ragedmaximus wrote:

    When yesterday was such doom and gloom with big ben and stock market dow-109 so why is today so great futures up to +110 at one point even with more unemployment claims piled on. WTF was so great overnight to have futures soaring at 5am est WTF this is such a b.s. manipulate wall street game looking for longs suckers money what will they think of next?

  • Report this Comment On July 22, 2010, at 9:06 AM, ragedmaximus wrote:


  • Report this Comment On July 22, 2010, at 9:08 AM, ragedmaximus wrote:


  • Report this Comment On July 22, 2010, at 6:24 PM, billypae wrote:

    How are the banks supposed to make any money to get themselves out of this mess? Interest rates are too low to make Citigroup any revenue, which the government overlooks as a source of tax revenue also. The government is being its own enemy. It's like the right hand doesn't let the left hand do anything. If banks really were allowed to make more money through banking, the government would get more taxes and everyone would be happier. We need to raise interest rates instead of worry about the stock market. We need to be more proactive instead of worried and passive aggressive. In Macroeconomics, raising the interest rates alone would increase the supply side of the supply-demand curves of GDP and prices, which would amount to more jobs alone. In other words, raising interest rates would stimulate lending by banks to corporations (supply side) and thereby create jobs. Jobs would then stimulate the equilibrium point to a point along the recovery or growth curve. Jobs help pay back debt or credit cards, and banks get more revenue. We need to help the banking sector. That much is obvious.

    I wish the government would not sell itself short and low for example in Citigroup and downturn share prices by threatening to sell its shares. If the government would realize that Citigroup could return to $50 dollars a share by three years or so in a recovery to NORMAL (as it was 3-10 years ago), individual investors could again buy at the low current prices and take advantage of the huge opportunity. JP Morgan Chase, Wells Fargo, US bank, and HSBC have all made quick strides to recover back to normal stock prices, so why can't we invest heavily in Citigroup collectively WITH the government to make about 10 fold ($4.09 to 50.00 dollars per share would be a huge profit that everyone would benefit from. Wouldn't we?) If the government is tepid, consumer and business confidence is affected too. Government, can we lend more confidence to Citigroup and help invest in a sure fire winner?

  • Report this Comment On July 22, 2010, at 11:06 PM, TMFDiogenes wrote:

    Low short term interest rates are generally good for banks, because it usually means a larger spread between short and long term rates. Banks borrow short term and lend long term, so they make more money when the spread is wider. Right now, rates are quite favorable for them.


  • Report this Comment On July 04, 2011, at 7:02 PM, formergovie wrote:

    I am a big fan of consolidating redundant bureacracies into a cohesive working unit, but that's not what's happening here. A new agency is being created because the previous one's became too cozy with the organizations they are supposed to regulate. This is classic Economic Theory of Government, solid in decades of history, ala Buchanan. Yet, magically, the old ones are still here and now we have a new one that will act differently. I understand everyone's desire, and Ms. Warren may be a terrific person, but government agencies operate by the history of the old regulatory agencies. I am sure people said the same things about the first leaders of Fannie Mae, Freddie Mac, OCC, FDIC, FHA, the Federal Reserve. Why is this going to be different from the history of the prior agencies...because someone talks well on morning tv?????

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