John Dugan, Controller of the U.S. Currency, Misses the Mark

By Simon Johnson

In a quote potentially for the ages, John C. Dugan, Comptroller of the Currency since 2005, told the Senate Banking Committee yesterday, enforcement of consumer protection laws “should stay with the bank regulators, where it works well.”

This is a bold statement. Does Mr. Dugan have any evidence to support the idea that consumer protection vis-à-vis financial products currently works well? A close reading of his written testimony to the Senate Banking committee reveals none.

In fact, his whole testimony sounds like it comes from a parallel universe – one that did not just experience the biggest banking crisis in world history.

On p.18 of his testimony, he does have a good statement of the broader issues (emphasis added).

“Today’s severe consumer credit problems can be traced to the multi-year policy of easy money and easy credit that led to an asset bubble, with too many people getting loans that could not be repaid when the bubble burst. With respect to these loans – especially mortgages – the core problem was lax underwriting that relied too heavily on rising house prices. Inadequate consumer protections – such as inadequate and ineffective disclosures – contributed to this problem, because in many cases consumers did not understand the significant risks of complex loans that had seductively low initial monthly payments. Both aspects of the problem – lax underwriting and inadequate consumer protections – were especially acute in loans made by nonbank lenders that were not subject to federal regulation.”

The “especially acute” in the last sentence may be correct, but we know that many regulated banks (covered by all the existing regulators) participated in exactly the same rip-offs of consumers – which created the basis for a financial system meltdown.

Remember that the OCC supervises over 1,500 national banks, which includes many that have run into serious difficulties recently (a full list is not easy to find, but start here and here; or use this search; the list includes Citi, BoA, Wells Fargo, etc). (Post here stories of how OCC-supervised banks either took care of you as a consumer or mistreated you. Did the OCC side with you or the bank?)

The heart of Mr. Dugan’s objection to the Consumer Financial Protection Agency (CFPA) as proposed appears on p.25,

“The Proposal would vest all consumer protection rulewriting authority in the CFPA, which in turn would not be constrained in any meaningful way by safety and soundness concerns. That presents serious issues because, in critical aspects of bank supervision, such as underwriting standards, consumer protection cannot be separated from safety and soundness.”

Mr. Dugan wants to put the bank first – and if that involves taking more from the consumer or even taking advantage of the consumer, so be it (read the first full paragraph on p.26 carefully).

My favorite statement comes at the end.

“Our experience at the OCC has been that effective, integrated safety and soundness and compliance supervision grows from the detailed, core knowledge that our examiners develop and maintain about each bank’s organizational structure, culture, business lines, products, services, customer base, and level of risk; this knowledge and expertise is cultivated through regular on-site examinations and contact with our community banks, and close, day-to-day focus on the activities of larger banks.”

Is this why almost all our major banks essentially failed in 2008?

Comments

[Leftfield:]

No mention of the Wall St. AAA-rated leveraged financial "products" that multiplied failure into $quadrillions by some respected measured.
Sure, there was a stampede to lend to the uncreditworthy so Wall St. could have "product" to leverage to obscene profits. The little guy who had a chance at a house did not bring down the world as he took his best shot at a better life. The "responsible" stewards making megabucks making bad loans and "products" are now getting paid for screwing our next generations while escaping effective oversight.
Wall St. gets forbearance and bailouts and the average American looks at the idiocy of "cash for clunkers."

Aug 05 02:43 PM

[whidbey:]

The man has a point. The drive to reform is leading to chaos. We may discover that it is helpful to have a little less of the rush to Fix.

Aug 05 04:09 PM

[farmer448:]

And these are the folks that said it wa OK for credit card companies to ignore states consumer protection usury laws.

It is so nice to know the comptroller of the currency considers outlandish fees and 26% interest on credit cards as in the consumer interest.

Aug 05 05:32 PM

[derryl:]

John Dugan is looking at and describing his fantasy world, blinded by the antiregulation ideology that "didn't see this coming". If he seems to be talking about banking in a parallel universe it is because he is blind to facts that can't exist in his ideological world.

William James called this "conceptual realism", where people take their ideas and the world of their ideas to be real; as opposed to perceptual realism, where you first look at reality and then form ideas about it. Conceptual realists literally are 'seeing' a different world than the real world. This is why it is not possible even to agree with them about the facts of the matter. They are seeing 'facts' that don't exist and they are blind to facts that do exist.

People fall into conceptual realism because it serves their purposes to see a reality other than the real one. But once they are inside a conceptual reality it can be impossible to make them see outside it. Blind ideologues suffer this foible. Bought and paid for regulators, clearly, are prone to it also.

Aug 06 12:14 AM

[Moon Kil Woong:]

I can say that the existing regulatory structure is well grounded only when comparing it to what it would be like run by the SEC or the Fed. Any other rational person would declare them a miserable failure and expel the SEC and the Federal Reserve from even talking about regulation. How about this for the Fed, "Judge not other before you judge yourself." They have yet to own up to their continued contribution to the dollars decline, the US' economic decline, or the incessant financial failures that occur every decade on que.

Next up, the great crash of 2012 or 2013. If QE, Goldman, HFT, and derivatives plays a part it is going to be a doosey!

Aug 08 03:03 AM