Who Will Chair the Consumer Protection Agency?

Includes: KBE, KRE, XLF
by: John Lounsbury

There have been numerous reports that Democrats favor Elizabeth Warren, Harvard professor and chair of the COP (Congressional Oversight Panel) created to investigate the U.S. banking bailout (formally known as the Troubled Assets Relief Program or TARP). Warren is the first name mentioned in a Wall Street Journal article in early July by Sudeep Reddy. Reddy goes on to mention other possible names:

Other potential candidates include Michael Barr, a Treasury assistant secretary and University of Michigan law professor with a longstanding interest in consumer finance; Democratic state attorneys general Martha Coakley of Massachusetts, Lisa Madigan of Illinois and Lori Swanson of Minnesota; Susan Wachter of the University of Pennsylvania's Wharton School, who served in the Clinton Department of Housing and Urban Development; and Nicolas Retsinas of Harvard's Joint Center for Housing studies, a former bank regulator and a low-income housing specialist.

Warren has been a leading advocate for the formation of the CPA and seems would be a leading candidate since she is widely recognized as the nation's foremost consumer protection expert. This past week reports have surfaced that Treasury Secretary Timothy Geithner is opposed to her nomination.

It might seem that Geithner's natural instincts to protect the interests of his banking buddies from an aggressive attack from a consumer advocate on some of their less than friendly to consumer profit centers, such as 30% interest on credit cards and numerous obscure fees hidden in document fine print. The opposition might also stem from tough questioning of Geithner by Warren when he appeared before hearings of the COP. Also, Warren has been quite outspoken on the inadvisability of not addressing the TBTF (too big to fail) nature of the largest banks, which Geithner has soft-peddled as a problem. All of these possible reasons have been discussed by Shahien Nasiripour in an article in the Huffington Post.

John R. Talbott (Huffington Post article) suggests a very specific reason for Geithner's opposition: Warren would support counter-strategic actions. Talbott writes:

I believe Geithner sees the appointment of Elizabeth Warren as a threat to the very scheme he has utilized to date to hide bank losses, thus keeping the banks solvent and out of bankruptcy court and their existing management teams employed and well-paid.

In the current financial crisis, the Federal Reserve has lowered interest rates to almost zero percent per annum thus assuring that the banks can profit enormously by doing almost nothing, not lending and sitting on risk free Treasury investments. While good for the banks, one can see how damaging this lack of credit extension can be to an economy trying to recover from an economic crisis.

What is most damaging about this approach to an economy attempting to recover from a recession is that it ensures that the policy of tight money from the banks will continue for some time. Time is needed for the banks to earn their way out of their loan losses and insolvency problems if they decide not to quickly write off the bad loans. In Japan, after their banking crisis of 1994, it took more than a decade for the banks to repair their balance sheets and resume normal lending thus retarding economic growth for decades.

In other words, Warren would be a distinct threat to the Geithner/Bernanke/Summers strategy of using government and Fed provided liquidity to resolve bank balance sheet problems over years of workout.

Warren would be a distinct threat to extend and pretend. The articulate and plain spoken Warren would be impossible to marginalize in such a high profile position as head of the CPA. The Brooksley Born experience would not be repeated.

Talbott explains how the conflict would develop:

And this is where defeat of the nomination of Elizabeth Warren becomes critical for Geithner. For Geithner's strategy to work, the banks have to find increasing sources of profitability in their business segments to balance out their annual loan loss recognition from their existing bad loans in an environment in which they continue to recognize new losses in prime residential mortgages, commercial real estate lending, sovereign debt investments, bridge loans to private equity groups, leverage buyout lending and credit card defaults.

The banks have made no secret as to where they will find this increase in cash flow. They intend to soak their small retail customers, their consumer and small business borrowers, their credit card holders and their small depositors with increased costs and fees and are continuing many of the bad mortgage practices that led to the crisis (ARM's, option pay deals, zero down payments, second mortgages, teaser rates, etc). American and Banking Market News reports this week that the rule changes in the financial reform bill may lead banks to start implementing fees that had essentially disappeared from the industry early in the new millennium, such as fees for not meeting minimum balance requirements on a checking account, or reinstituting fees for certain online banking transactions that are currently free or charging to receive a paper statement or to talk to a live teller as Bank of America's CEO has recently proposed.

It is exactly these types of unwarranted fees on small consumers and poorly designed products that Elizabeth Warren will fight against as head of the new consumer finance protection group. And it is why Geithner sees her as so threatening. Unless the banks are allowed to raise fees and charges on their smaller consumer customers, Geithner's and Summers' scheme for dealing with the banking crisis by hiding problem loans permanently on the banks' balance sheets will be exposed for what it is, an attempt at preserving the jobs of current bank executives at the cost of dragging out this recovery needlessly for years in the future. For the investment banks without small consumers and depositors to soak, Geithner and Summers have offered an environment with fewer competitors, more dominant market shares for the surviving firms and near monopoly pricing of their investment banking and derivative products to corporate clients and institutional investors to ensure continued and increasing profitability and growth.

Talbott points out that the other most prominently mentioned name for the CPA post is Michael Barr (mentioned early in this article) who is currently a Geithner assistant and a former assistant Treasury Secretary under Robert Rubin in the Clinton Administration. Talbott is not impressed with Barr's potential to be a string CPA head.

The Talbott article ends with plea for action:

If you want to help make sure Elizabeth Warren is appointed to head the new consumer finance protection agency, please take a minute and sign this online petition that will be presented to the President and then use the accompanying email opportunity to invite your friends to do the same.

Disclosure: No positions.