The Fine Print on Financial Reform

On Monday, President Barack Obama released a complimentary statement about Sen. Chris Dodd's latest proposal for financial reform, singling out its creation of "a new consumer financial protection agency to set and enforce clear rules of the road."

This is notable largely because it is not, in fact, true. What the bill actually creates is a Bureau of Consumer Financial Protection within the Federal Reserve, a move that has raised great concern among consumer advocates who note, with more accuracy, that the Fed's numerous consumer-protection failures played a large role in the recent crisis. But the rhetoric around the creation of a new consumer-protection agency illustrates the central pitfall of financial regulatory reform: telling real reform from the cosmetic.

Dodd told reporters that he expects to pass a regulatory-reform bill this year, and the administration has similar hopes. This should be no surprise: The Democratic Party recognizes (along with everyone else) that going after the bankers is remarkably popular and demonstrates the governing competence that the party of Roosevelt loves to claim as its own. Whatever happens with health care, Dems want to hit the hustings come September with news that they fixed the financial system.

Will they be right? It's hard to say. Take the new Consumer Protection Bureau as an example. It was proposed to fix a simple structural problem: The lack of a single point of accountability for consumer protection in our current system. Seven different agencies share responsibility for making sure consumer-credit markets are fair, transparent, and safe. Most of these agencies, notably the Fed itself, put these responsibilities on the back burner to focus on prudential regulation, in essence, making sure banks' short-term profits are high.

The solution -- combing these authorities into one empowered stand-alone entity -- was quickly adopted by reformers and just as quickly opposed by the business community and its allies in Congress, who feared that the new agency might limit the profitable but predatory practices common in the consumer-credit industry. Republicans objected to new consumer protections completely, and even moderate Democrats were leery. The always scrappy Rep. Barney Frank, managing the financial-reform bill in the House, drove a stand-alone agency through the legislative process, albeit with several glaring, but not fatal, exceptions in its jurisdiction and authority.

In the Senate things fell apart, because Democrats quickly concluded at least one Republican would be needed to pass the final bill. Report after report came out of committee as Dodd played shell games with the new consumer-protection office to lure a conservative on board, first offering to house it in the Treasury Department (no, too political) then inside the Fed. Supporters of a stand-alone agency wondered what would be next -- tuck the thing inside the Agriculture Department?

And though no Republicans ultimately agreed to support the Dodd bill, the Fed compromise stayed. Dodd, presumably, is hoping to lure more moderate Republicans on board when the bill leaves committee; more disappointingly, moderate Democrats on the Banking Committee, such as Mark Warner, Evan Bayh and Tim Johnson, likely wouldn't support an independent agency either. But there's no particularly good policy justification to house a Consumer Financial Protection Bureau in the Federal Reserve, as Dodd revealed tersely after reporters badgered him with questions at Monday's unveiling: "You guys know the problem was in terms of votes."

This isn't the first regulatory body to be housed inside an existing institution: The Food and Drug Administration, a laudable regulator, lives in the Department of Health and Human Services; the Office of the Comptroller of Currency, less praiseworthy but certainly capable of taking action if it deems, lives in Treasury. But the Fed is different; it is dangerously close to the same banks that oppose any extension of consumer regulation at all.

On the other hand, the director of this new bureau will be a presidential appointee, not part of the Fed bureaucracy. The bureau's budget is set by the director, although it is drawn from the Fed. The bureau has broad rule-making authority, although in some cases -- we're not entirely sure how the standard will work -- other regulators could overrule it. The legislation also gives greater latitude to state regulators and attorneys general who want to pursue crimes against consumers, though not so much as reformers want. The Obama administration did, to its credit, make clear that it would not support industry-specific exemptions, potentially costing it the support of key Republican negotiators like Sen. Bob Corker, who hopes to exempt the predatory payday-lending industry. Provisions like these, though, buried deep in a 1,336-page bill, will mean the difference between success and failure.

So we will have to watch the fine print in the weeks ahead. That's the message coming from the reform community (Americans for Financial Reform: "We remain concerned about aspects of the bill and believe that it must be strengthened as it moves through the legislative process"), Frank ("We will be able to work constructively together to meet the public need for a tough, comprehensive bill"), and even the Treasury ("We will take every opportunity to work with Chairman Dodd and his colleagues to strengthen the bill and will fight against efforts to weaken it").

Consumer protection is just one of many important issues in this bill, ranging from derivatives reform to solving the problem of "too big to fail." While cries that the bill is moving too fast are disingenuous, the bill is moving fast enough that the chance to change the system could pass us by, just as the Obama administration's rhetorical slip might have gone unnoticed. We'll be watching.

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