A HARVARD activist is tipped to lead a consumer agency that will rule over finance firms from Wall Street banks to payday-loan stores.
Barack Obama today signed into law the most sweeping financial-system overhaul in the US since the Great Depression, putting the country on a course toward a more muscular regulatory framework.
The law – the Wall Street Reform and Consumer Protection Act – gives the government authority to take over and liquidate failing financial firms, injects transparency into transactions involving financial instruments called derivatives and will restrict banks from making risky bets with their own capital. It directs agencies to write hundreds of new rules.
But one provision that barely survived the bruising debate on Capitol Hill will have the most direct bearing on millions of ordinary people’s lives: a new agency meant to protect consumers from abusive financial products, called the Bureau of Consumer Financial Protection.
The proposal was the source of some of the most intense debates in the long struggle over the financial-regulatory overhaul, and the battles are far from over.
The biggest to loom is over who will head the agency, and that heated up this week as liberal groups insisted the White House give the job to Elizabeth Warren of Harvard Law School, whose idea the agency was. Banking groups were urging key senators to oppose Ms Warren, calling her an activist who would impose policies they argue would hurt the availability of credit, especially for those with low incomes.
With Democratic leaders in Congress joining liberal consumer groups and unions in pushing for Ms Warren – and with many Republicans opposed – the contest is shaping up to have the intensity and drama of a Supreme Court nomination. Senate confirmation is needed.
Mr Obama’s choice, expected soon, will be a momentous one because the first director will have great influence over the agency’s direction, wielding an annual budget of about $US500 million ($570m) that doesn’t require approval from Congress.
The new consumer regulator will be funded by the Federal Reserve and have independent powers to write and enforce rules governing how loans and other financial products are offered, bearing on everything from the type of mortgages people can get to the fees on their credit cards.
The agency will be able to enforce its rules against any bank with more than $US10 billion of assets, as well as all large mortgage lenders, student-loan companies and payday-loan firms. It will have an army of examiners to probe these companies’ practices. Small banks will have to follow the new rules written by the agency but they will be examined by other federal regulators.
The bureau’s policies and rules could be overturned by other regulators only if they “would put the safety and soundness of the US banking system or the stability of the financial system of the US at risk”.
As an entity borne on a deep economic downturn, the agency is a modern analogue of the bureaucracies spawned by the Great Depression, like the Securities and Exchange Commission and Federal Deposit Insurance Corp.
Signing the financial-overhaul bill today, Mr Obama said, “Our financial system only works – our market is only free – when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system. And that’s what these reforms are designed to achieve.”
Ms Warren had a front-row place at the ceremony, and afterward lunched with White House senior adviser Valerie Jarrett. Tonight in the US, about a dozen Democratic legislators will hold a news conference to call for Ms Warren to be nominated to head the agency. But Senator Christopher Dodd, the Connecticut Democrat who heads the Senate Banking Committee, said on Monday that Ms Warren might not be “confirmable”.
Another candidate to head the consumer agency is Michael Barr, an assistant Treasury Secretary and former University of Michigan law professor. During debate over how to construct the new financial regulations, Mr Barr negotiated for months with bankers, and many prefer him to Ms Warren. Mr Barr also is very close to Treasury Secretary Timothy Geithner, which could help his candidacy.
Also a possibility is Gene Kimmelman, the Justice Department’s chief counsel for competition policy and inter-governmental relations. He, like Mr Barr and Ms Warren, has a record of advocating measures that could crimp banks.
From the day the proposal for a financial consumer-protection agency was introduced by Mr Obama in June 2009, it repeatedly faded and was resurrected. The debate pitted the White House, congressional Democrats and labor unions against thousands of US business people, from bankers and auto-dealers to dentists and lobstermen.
Supporters said the government needed new powers to protect Americans from abusive financial practices such as hidden fees in the fine print, which they argue helped cause the financial crisis. Opponents said the agency was a sign of “nanny state” that treats regulators as better equipped than citizens to make decisions.
The bureau survived when a handful of activists, politicians and administration officials were able to splinter the opposition with a mixture of canny politics and luck.
Massachusetts Democrat Barney Frank, supporting a new agency, drove it through a balky House of Representatives. In the end, its structure – and the compromise that smoothed its passage – sprang from an off-the-cuff suggestion from one of its critics, Republican senator Bob Corker of Tennessee.
Early last year, aides to Mr Obama, searching for ideas, dusted off a 2007 paper by Ms Warren envisioning the new bureaucracy. A Harvard law professor born poor in Oklahoma 61 years ago, Ms Warren was the granddaughter of a couple who lost their savings in the Depression after a bank failure. In the 1990s, after serving as an adviser to a bankruptcy review commission set up by the president of the time, Bill Clinton, she waged a long battle against efforts to make personal bankruptcy laws more business-friendly.
The idea of a consumer financial agency wasn’t universally popular in the Obama camp. Some aides warned Mr Obama it would spark a big fight and might not pass.
In April 2009, White House chief economic adviser Lawrence Summers and Ms Warren, long-time acquaintances from Harvard, met for three hours at an Indian restaurant in Washington, hashing out ideas about the possible design of such an agency. Playing a devil’s advocate, Mr Summers questioned how such a bureau could be insulated from political influence. Ms Warren left with a sense she had Mr Summers’s support of the agency.
Two months later, Mr Obama appeared in the East Room of the White House before lobbyists, consumer activists and lawmakers and outlined his vision for the new consumer agency. Many were taken by surprise.
Consolidating powers of multiple regulators, it would write and enforce rules affecting a range of companies, from Wall Street banks to payday-loan stores. Almost any company that offered a financial product to consumers would have to answer to it. Administration officials thought the concept would resonate so strongly with the public that it would smooth the passage for the entire financial overhaul. But bankers and Republicans went on the attack, saying it would create an ungovernable bureaucracy and restrict credit.
Twenty-three business groups representing a wide range of industries sent a letter to all House members a month later urging them to delay any vote on the new agency. The letter so roiled Capitol Hill that Mr Frank had to scuttle a planned vote in his Financial Services Committee on the issue because it was unclear Democrats could hold together.
Two days later, Treasury Deputy Secretary Neal Wolin met 250 bankers in a ballroom at the Capital Hilton. “We cannot go back to business as usual,” he said, asking for their support for an agency.
Barrie Christman, chairman of Principal Bank in Iowa, stood up after the speech. “As the doctors would say it: ‘First, do no harm’. We do believe there are solutions out there – we just have significant concerns about many of the approaches that are in the current proposal.” She received thunderous applause.
The US Chamber of Commerce launched an ad campaign featuring a butcher complaining a new agency would drive up his costs. The ad attracted so much attention that in October, 2009 it drew a rebuke from Mr Obama, who called it “completely false”.
Mr Frank of Massachusetts strongly backed the agency, believing that some lenders, left to their own devices, will take advantage of consumers. But he can be a pragmatist, and when he saw that votes for the proposal were slipping, he reshaped it. He scrapped a White House plan to require companies to offer no-frills versions of their financial products, and he offered exemptions to community banks, aiming to disarm an influential source of opposition.
Despite the changes, when the broad financial-overhaul bill neared a final House vote on December 10, 2009, the agency’s survival was in doubt. Walt Minnick, a conservative Democrat from Idaho, rallied support for replacing the agency with a council of regulators with skimpy powers. Mr Frank, the White House and unions mobilised against the Minnick alternative, and it narrowly lost.
In the Senate, the agency proposal had a vocal critic in the ranking Republican on the Banking Committee, Richard Shelby of Alabama, who called it a “nanny state” idea. Mr Dodd, under pressure from the White House and liberal groups, broke off talks he’d been having with Mr Shelby, and instead started negotiating with Senator Corker, although the Tennessean also was opposed to a stand-alone consumer regulator.
On February 24, the two met with Mr Geithner. The Treasury Secretary asked them to preserve the Fed’s power to regulate banks. Seeing an opening, Mr Corker interjected: “If you want the Fed to have that supervisory power, can we just let the consumer regulator be housed there also?” Both Mr Dodd and Mr Geithner were non-committal.
The following Saturday, Mr Corker sat in his kitchen in Chattanooga, Tennessee., scrolling through his BlackBerry as he and his aides put together a final proposal for Mr Dodd on a consumer division within the Fed. When they finished, an aide printed out the proposal and walked it to Mr Dodd’s office. They didn’t email a copy to anyone else for fear it might leak.
On March 2, The Wall Street Journal reported that Mr Dodd and Mr Corker were near a deal. Activists on the left and right were shocked.
Mr Frank dismissed it as a “joke”. Ms Warren told the Huffington Post that if Congress couldn’t create a “strong” consumer agency, her preference would be “no agency at all and plenty of blood and teeth left on the floor”.
Said Mr Corker a few days later: “What happened was, you were on the five-yard line and the lights went out.”
White House officials told Mr Dodd he should proceed without the support of Mr Corker, because the concessions were too costly. But Mr Dodd kept the core of Mr Corker’s offer, to win Republican support. He would house the agency within the Fed – a seemingly technical change that nonetheless gave some in the GOP comfort the agency would be tamer.
To win broader political support, Mr Dodd agreed to limit its scrutiny over auto-dealers and also put many small businesses beyond its reach.
Even as that appeared to win the day, liberal groups were wary. Travis Plunkett, legislative director at the Consumer Federation of America, stayed in the Dirksen Senate office building until 4am on June 25 as Democrats negotiated the final bill. He stood for hours with a colleague in the hallway, at one point losing $US5 in a vending machine as he tried to find caffeine to stay awake. He was there to protect against “negative developments”, he said.
Now that a consumer financial-protection bureau within the Fed has been approved -and is expected to be fully operational within a year – it remains to be seen what effect it will have on credit. Some consumer advocates acknowledge that certain borrowers, particularly low-income people, will be affected, as products such as payday lenders are more tightly regulated. They say tighter controls will prevent borrowers from being hit with abusive loans.
At the signing ceremony, attended by nearly 400 people, Ms Warren of Harvard Law moved through the room like a celebrity, as a number of lawmakers asked to have their pictures taken with her and she obliged. “What a day,” she said afterward. “Who would have thought?”
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