Monday, May 31, 2010

Financial Reform Devil In The Details

Financial Reform Devil In The Details

Late last week, the United States Senate passed a financial reform bill by a vote of 59-39. Two Democrats crossed party lines, as did four Republicans to come up with the result. Now, the House, which has already passed financial reform legislation, and the Senate, will have to reconcile their versions of the bill.

Now is the time for consumer advocates and others to counter the aggressive lobbying that will be done by banks and the auto industry to minimize the effects of legislation. This may also be an opportunity for the Congressional Black Caucus to raise its voice on the side of the many consumers who have been damaged by this financial crisis. While legislation is not meant to look backwards, but instead forward to prevent future crises, the CBC are among those who advocate for the least and the left out. Their perspective on financial regulation is badly needed.

The House would create a consumer protection agency that is freestanding; the Senate would house the agency inside the Federal Reserve Bank. In some ways having the Fed run consumer protection is like having the fox patrol the chicken coop. Isn’t this the same Fed that was part and parcel of the 2008 financial meltdown, the same Fed (then led by Alan Greenspan) that turned a blind eye to predatory and sub-prime lending and the market distortions that emerged from the packaging of substandard loan paper?

The Federal Reserve theoretically already deals with regulation around credit cards and mortgages and to date they’ve not done a good job. What will change when they now have a consumer protection agency? Hearings, anyone?

The House would exempt auto dealers from regulation, but the Senate would not. Why should auto dealers get a special break? Some say that we need people to buy autos to stimulate economic recovery. Shouldn’t they buy autos on fair terms? The lobbyists are lining up to make the case for auto dealers, but who is lining up for consumers?

This financial regulation reform makes it clear that the people have little power to affect legislation when lobbyists are involved. Too many are so happy that this financial reform legislation has been passed in both houses that they won’t look closely at the details or at reconciliation.

If we looked closely enough we might find that payday lenders, you know those folks who charge interest rates that veer into the triple digits, were able to stop a proposed provision of financial reform that would limit the number of payday loans (so called because you are borrowing against your paycheck) one individual could get.

The payday loan industry ran an astroturf campaign to stop a provision North Carolina Senator Kay Hagan introduced to limit payday loans to six (!) at a time. Consumers are worse off because the Hagan provisions were not included in the legislation.

Indeed, the final version of this legislation may be ready by the end of June. The House and the Senate aren’t too far apart on their provisions, which makes reconciliation easy. But neither the House nor the Senate has gone far enough in regulating derivatives, though both require derivatives to be traded publicly, and to be collateralized. This will stop the speculative nature of derivatives, except for the fact that the House provides lots of exemptions to derivative clearinghouse rules. Washington Senator Maria Cantwell (D) opposed Senate legislation because she said it had too many loopholes for derivative trading.

Banks got off easy in this legislation. They are still allowed to do proprietary trading, or to speculate with their own money. But their money is really shareholder money, so who protects the shareholder? Indeed, banking lobbies are likely to tweak the compromise legislation so that financial reform regulations are less onerous to banks. Yet less onerous regulation is what caused the financial services industry to seek a $700 billion bailout from the federal government.

Congress will be rushing to get back to their districts this summer, what with contentious mid-term elections to deal with in November. We can’t let their haste weaken legislation that is already far from ideal. Most Republicans have opposed financial reform regulations on the grounds that this legislation simply expands the role of government and increases the size of the bureaucracy. The Obama Administration will have to take a forceful role in ensuring that the haste to pass financial reform regulations does not gloss over important details.

And, most importantly, consumer protection must be a cornerstone of this legislation. Both the House and Senate bills are a step in the right direction. Still, the devil is really in the details on financial reform legislation, and negotiations that take place in this next month will be critical to the success of meaningful financial reform. 

(Julianne Malveaux is President of Bennett College for Women.  She can be reached at

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