The Senate Banking Committee finally approved a financial reform bill without winning the bi-partisan support the committee’s chairman, Sen. Christopher Dodd (D-CT) had sought.
In addition to not winning bi-partisan support, it was approved without resolving many of the contentious issues that had thwarted compromise efforts and that will make it difficult to win Senate approval.
Dodd and Sen. Richard Shelby (R-AL), the committee’s ranking Republican, who initiated and aborted negotiations several times, have agreed to continue the effort to craft a bi-partisan compromise before the measure is sent to the Senate floor.
“I pledge to the chairman and my colleagues that I will continue to work with them…in hopes of reaching a broad consensus,” Shelby said in a statement. “As I have said many times,” he added, “if we place policy ahead of politics, we can, and I believe will, reach an agreement that will not only attract significant support, but will also be good for the American taxpayer, our financial system and our economy.”
Some industry observers are less optimistic about the legislation’s prospects, noting that most of the issues that tied the committee in knots for nearly a year have not been addressed, among them:
- The structure and authority of the Consumer Protection Finance Agency;
- The regulation of the derivatives industry;
- The supervisory authority of the Federal Reserve;
- The limits of federal preemption of state banking laws; and
- How to deal with failing institutions.
Responding to s expressed by Sheila Bair, chairman of the Federal Deposit Insurance Corporation (FDIC), Dodd deleted a provision that would have allowed the Fed to lend money to a systemically important financial institution to prevent it from failing. He also added language clarifying that state attorneys general could enforce only state laws not explicitly preempted by federal regulations. The initial wording would have allowed state regulators to enforce both state and federal laws against nationally chartered financial institutions.
“I know there will be a spirited discussion in the days and weeks ahead,” Dodd told reporters, “but I expect that all the members of the committee and the full Senate will understand very clearly that we are moving forward. The stakes are too high,” he continued, and the American people have suffered too greatly for us to fail in this effort. And we will not fail. We will have reform this year.”
While Dodd and other lawmakers say they are determined enact reform legislation this year – a top priority for the Obama Administration – it appears that the public may not share their sense of urgency about this issue.
A recent poll commissioned by Hamilton Place Strategies, a Washington, D.C. consulting firm, found that fewer than half of those responding strongly or somewhat favored reform of financial regulations, and only 18 percent thought reform should be among the top two priorities for legislators. Those identifying themselves as Democrats strongly favored reform (69 percent), but only 37 percent of independents and 23 percent of Republicans shared their enthusiasm for the initiatives and only 12 percent of respondents overall identified the creation of a consumer protection agency as the most important component of the reform legislation. While only 15 percent said they were confident the new regulations would improve protections for consumers, more than half said they were concerned that the regulations would increase costs for consumers and small businesses.
“These stats don’t speak well for the political popularity of a consumer financial protection agency,” a summary of the poll results suggests.
The three principals in Hamilton Place – Tony Fratto, Taylor Griffin, and Stuart Siciliano – all served in the administration of former President George W. Bush. A report summarizing the poll results describes the poll as “a purely independent policy poll intended to add additional understanding to the regulatory reform debate.”
CFPA STILL IN PLAY
Although the Senate Banking Committee has approved a financial reform bill, Democrats and Republicans are still negotiating one of its most contentious provisions – the Consumer Financial Protection Agency (CFPA). Unlike the House version of the bill, which structures the CFPA as a stand-alone entity, the Senate measure locates it within the Federal Reserve Senate bill puts the agency within the Federal Reserve, but requires a two-thirds majority vote of nine-member systemic risk council to overturn rules the agency adopts. The House bill would require only a simple majority to reject agency decisions. Negotiations between Republicans and Democrats on the Senate Banking Committee stumbled in part over the insistence of Republicans that the consumer protection focus of the CFPA not trump the safety and soundness concerns of bank regulators. However, in something of a reversal, Sen. Richard Shelby (R-AL), the committee’s ranking Republican, who had flatly rejected a stand-alone structure for the CFPA, has reportedly proposed just that, making the agency’s rulemaking subject to veto by a commission composed of industry regulators.
Press reports of that proposal were attributed to unidentified Congressional sources. Shelby himself has not disclosed details of this proposal, nor even confirmed that he has made it. A spokesman for the Senator told the Washington Post, “We continue to discuss different approaches [to consumer protection]. As Senator Shelby has said, his primary concern is not the agency’s form or location, but a meaningful role for safety and soundness regulators.”
Some industry analysts have suggested that Shelby’s apparent willingness to bend on the CFPA reflects Republican concerns that Democrats will paint their opposition to the agency as “support of Wall Street over Main Street.”
Recent press reports have also raised questions about the primary objection raised by banks and lawmakers opposing the CFPA – that the emphasis on consumer protection will undermine attention to safety and soundness. A recent American Banker article quoted several current and former industry regulators who think the concern is based more on “myth” than “reality.”
“I don’t buy that reasoning at all,” Kevin Jacques, a former regulator in the Office of the Comptroller of the Currency, now chairman of the Finance Department at Baldwin-Wallace College, said. “I would love to see one.”
Other regulators quoted in the article cited as examples of potential conflicts, the consumer protection inclination to give defaulting borrowers multiple opportunities bring their loans current clashing with the safety and soundness concern about the losses lenders would incur as a result. But that argument fails to recognize that the CFPA’s mandate is to prevent abusive lending practices, not to encourage affirmative lending policies. The decision to leave enforcement of the Community Reinvestment Act with the regulatory agencies underscores that point, Ellen Seidman, former director of the Office of Thrift Supervision, told American Banker. The CRA, she noted “is an affirmative obligation where consumer protection is not.”
Other industry observers have pointed out that, as a practical matter, conflicts between the CFPA and safety and soundness regulators are unlikely, because agency officials would consider regulatory concerns from the outset, while regulators, for their part, are unlikely to oppose reasonable consumer protections for fear of criticism by legislators and the public. That is the position the Obama Administration has maintained, in its (more or less) consistent insistence that the CFPA is an essential component of the reform legislation.
“There is no genuine conflict between consumer protection and safety and soundness,” Deputy Treasury Secretary Neal Wolin told American Banker, adding, “I reject entirely the notion that demanding responsibility, fairness, and transparency in consumer financial markets somehow puts financial firms at risk.”
INCREDIBLY SHRINKING HOUSEHOLDS
The economic downturn has taken a toll on household formations as well as household finances. Although the population increased by 3.4 million between 2005 and 2008, the number of households declined by 3.4 million as young adults either delayed plans to leave their parents’ homes or retraced their steps, when they were unable to support independent households they had established.
Those trends are reported in a recent study sponsored by the Mortgage Bankers Association (MBA), based on an analysis of household formations in six recessions over the past 40 years. The impact of the recent recession has been dramatic, according to Gary Painter, an associate professor in the School of Policy, Planning and Development at the University of Southern California, who conducted the study. Because the data went only through 2008, the household formation picture is probably darker than the study suggests, Painter said. Given the weak employment market that persisted through last year, “this study gives no reason to expect that household formation has picked up at all.” Among the study’s key findings:
- The likelihood that young adults will form independent households declines by up to 4 percentage points in an economic downturn.
- The relatively small (two percent) decline in the national homeownership rate probably understates the household formation loss, because the formation of renter households declined even more steeply.
- Overcrowding rates increased almost five-fold in the current recession, with native-born Americans affected most.
Because household formation rates are key predictors of home buying trends, the study does not hold out much hope for a near-term recovery in the housing market, Painter acknowledged. “There is no demographic silver bullet that will solve the supply overhang we are seeing in many housing markets around the country,” he noted. “The housing and mortgage industries will feel the impact of this reduction in the number o f households for years to come.”
A separate study by the Centers for Disease Control and Prevention documented another byproduct of the recession – a 2 percent decline in the U.S. birth rate in 2008 – the first such annual decline in the past decade. The pew Research Center reported separately that the states hardest hit by the recession – Arizona, California and Florida – were also among those reporting the steepest decline in births.
HIGH LEVEL FORECLOSURES
Lifestyles of the rich and famous now include foreclosures. Recent headlines have revealed that film star Nicola Cage, Italian film producer Vittorio Cecchi Gori and Wall Street executive Richard Fuscone are among the very well-heeled with very expensive homes who have faced or are facing foreclosure actions. The statistics suggest that these are not isolated incidents. Realty Trac reports that 352 homes with mortgages of $5 million or more were scheduled for foreclosure in February alone; only 1,312 homes in that category faced foreclosure in all of last year.
A Wall Street Journal article reporting the trend noted that while the super wealthy may be less likely to face foreclosure than those who are less well-off, they are statistically more likely to default on their loans. Data compiled by First American Core Logic indicate that nearly 15 percent of borrowers with mortgage balances of $4 million or more were in arrears by 90 days or more at the end of January compared with 8.7 percent for mortgage borrowers overall. Realty Trac is predicting that foreclosure rates for home sin the upper price ranges will accelerate this year as the foreclosure crisis intensifies.
Distress sales accounted for 29 percent of all home sales in January, the highest level since April of 2009 and just below the peak of 32 percent reached in January of last year. Analysts warn that future foreclosures – delayed by loan modifications and legal actions – represent a large, leaden shoe poised to drop on an already battered housing market, as the Obama Administration continues to seek a formula that will stem that tide.
Recent changes to the Home Affordable Mortgge Program (HAMP), the Administration’s flagship foreclosure prevention initiative, target assistance to unemployed borrowers and those whose loans exceed the value of their homes – a shift in focus that many analysts have applauded. Consumer advocates have particularly welcomed provisions encouraging lenders and loan servicers to reduce the principal balance on under water loans- a step that many HAMP critics have been urging almost since the program was unveiled. But even those who think recent changes put the program on the right track worry that the implementation problems that have plagued HAMP from the beginning will continue to undermine the results.
MISTAKES WERE MADE….BY WHOM?
Former Federal Reserve Chairman Alan Greenspan, who accepted much of the credit for the nation’s sustained economic boom and has come in for his share of the blame for the bust that followed, admits that he made a few mistakes during his two-decade tenure at the Fed– but not all that many. And if he missed the warning signs of the looming financial disaster, Greenspan told a committee investigating the cause of the crisis, he wasn’t alone. “Everybody missed it,” he insisted, “academia, the Federal Reserve, all the regulators.”
Addressing critics who have faulted the Fed for failing to act aggressively – or at all – to prevent abusive lending practices and reign in the subprime lending boom that shattered the mortgage financing system – Greenspan told the Financial Crisis Inquiry Commission, “We did do almost all the things that you are raising. And the consequence of that, I think, is that things were better than they could have been.”
His record wasn’t’ perfect, Greenspan acknowledged, but “when you’ve been in government for 21 years, as I have been, the issue of retrospect and what you should have done is a really futile activity. I was right 70 percent of the time,” the former Fed chairman insisted. “But I was wrong 30 percent of the time, and,” he admitted, “there were an awful lot of mistakes in 21 years.”
New York Times columnist Frank Rich was not impressed by Greenspan’s limited mea culpa. By the same logic, Rich wrote recently, the captain of the Titanic “could claim that he was on course at least 70 percent of the time, too.”
In a blistering critique, Rich noted the failure of Greenspan and other government leaders to acknowledge any responsibility for the financial crisis is symptomatic of our time. “We live in a culture where accountability and responsibility are forgotten values. When ‘mistakes are made,’” Rich added, “they are always made by someone else.”
