the gulf that grew between Wall Street and Main Street has hurt everyone.
That’s because regulators never chose to make the connection that having strong consumer protections would not only help consumers, but also protect banks from losing money due to their “innovation.”
The Obama administration’s proposal to create a Consumer Financial Protection Agency (CFPA) to regulate consumer financial products is a major component of its plan for financial regulatory reform. Big banks from JPMorgan Chase to thousands of regional and community banks are lobbying to defeat the plan as it makes its way through Congress.
Jamie Dimon’s op-ed creates the public illusion the banks are for reform (at least in the areas that would benefit their business), while actively lobbying behind the scenes against any attempts at meaningful overall reform.
The reality is the banks would like nothing better than to keep Americans actively using credit to support the banks addiction to the interest and associated fees cards generate. Lenders collected a record $18.1 billion in credit card penalty fees, a 69% increase from 2003. Banks keep raising fees and interest rates on cards to offset rising borrower defaults. According to Fitch Ratings, losses on U.S. credit cards hit a record 10.44% in June.
As the largest credit card issuer in the USA with card services comprising 23% of its managed net revenue by line of business,* JPMorgan Chase has a vested interest in mitigating any damages that the CFPA could impose on their fee and penalty generation. Jamie Dimon will often speak of “doing the right thing,” yet this superstar of finance earns revenue by entrapping customers in products they don’t stand an even chance of escaping.
In essence the banks are running their own type of Ponzi scheme. After a bank collects an outrageous rate of interest and fees, Joe defaults. Now the bank will need to acquire Jane as a new customer, to generate revenue to cover Joe's loss, and so on. It was easy to attract new customers as home prices continued to rise, but the scheme unraveled in the post-bubble era of rising unemployment.
The House Financial Services Committee wants to complete work on the bill to establish the CFPA by the end of July to go to the Senate in September. House Financial Services Chairman Barney Frank told The New York Times:
Anyone who thinks we’re not going to create this agency is mistaken. The American public wants it.
After all the bad blood created by bank bailouts, does the usually politically astute Jamie Dimon and other financial institutions want to create a public relations nightmare for themselves by going against the tide of consumer sentiment?
The Times writes that
Administration officials said the proposal would create a ‘level playing field’ and provide the same regulation for particular consumer products regardless of what kind of financial institution was selling them.
As Michael Barr, assistant Treasury secretary for financial institutions, told the Times:
The agency will be able to get to the root of the mortgage crisis that we saw in the past. It will be able to go in to examine, supervise the operations of previously unregulated parts of the sector.
What good is a mortgage (mort=dead/gage =pledge) with an interest rate so high the homeowner cannot pay it and the home ends up in foreclosure? It hurts both borrower and lender. Beyond the banks who received government assistance, the financial industry has a societal obligation to correct the damage they have done. Greater regulation of the financial industry will force profits to come from a return to more conventional or conservative banking. The era of laissez-faire highly leveraged finance is finished.
If, as Dimon writes, banks are to “re-earn the trust of the American people,” then JPMorgan Chase and all the other financial institutions opposing the creation of the CFPA should “do the right thing” now and stop increasing rates and fees in order to squeeze as much short term profit while they can before the CARD legislation takes effect in February. Decimating the banks retail customers is never a way to generate long term profitability for the institutions, as recent history has aptly demonstrated. In reality, the Consumer Financial Protection Agency will save banks from themselves.
*Following JPM’s acquisition of WaMu. Source: Jamie Dimon Letter to Shareholders, 2008 JPM Annual Report.