WASHINGTON — Consumer advocates and financial industry lobbyists are locked in battle for the hearts and minds of senators as the time nears for them to put up or shut up on the most sweeping revamp of financial regulation in generations.
A reworked Restoring American Financial Stability Act of 2010 passed the Senate Banking Committee on a party-line vote without amendment on March 22, leaving the fight over details to come on the Senate floor soon after lawmakers return next week from their spring recess.
The two political parties disagree on plenty, despite the obvious need to fix what led to a near-collapse of the global financial system in September 2008. However, banks are spending a lot of last year's record profits to influence the debate.
Larry Summers, the president's chief economic adviser, said recently on ABC News that "you got a million dollars being spent, per congressman, in lobbying expenses on this issue; industry has four lobbyists per member of the House and Senate working on this."
Fighting back, consumer groups allied under the banner Americans for Financial Reform are taking the issue to the streets, planning protests in front of banks and the offices of lawmakers who voted against the legislation in committees.
Lawmakers disagree on how to address two principal causes of the financial crisis: policing the extension of credit to consumers, and whether to require lenders to retain portions of the risks they take on.
The lack of any real policing of mortgage lenders and brokers allowed for an explosion of credit to borrowers who took on unsuitable loans. Because lenders didn't retain the loans on their books, but instead sold them to financiers who packed them into pools of mortgage-backed bonds, they had no skin in the game. Lending standards weakened considerably. A joke at the height of the housing boom bragged that "a rolling loan gathers no loss."
Eight million lost American jobs and a tidal wave of foreclosures later, that joke proved to be wrong. Now lawmakers must try to make things right.
One area that's slated to change is securitization, the process of selling mortgages, car loans and other forms of consumer credit into a secondary market, where they're pooled and sold to investors as bonds that pay monthly income streams. "Securitizers" didn't retain any risk, instead bundling bad loans for sale to investors and blaming poor underwriting for later problems.
The Senate bill would force "securitizers" to retain 5 percent of whatever they issue for sale into the secondary market. That's only half of what Europe requires, but the U.S. industry sees it as too much.
"We don't think this is going to help better align incentives," said Tom Deutsch, the executive director of the American Securitization Forum in New York.
His group is lobbying instead to require buyback provisions so that when loans go bad, banks must buy them back. Something like this was in place during the housing boom, but when boom turned to bust the provisions proved to be largely unenforceable.
"I should have to buy that whole product back, not just 5 percent. The industry's view is that's a better form of risk retention than 5 percent," Deutsch said.
Consumer groups are wary, pointing to a lack of regulatory enforcement in the run-up to the crisis.
"Every special interest is making its own argument," said Heather Booth, who heads Americans for Financial Reform. "If they listen to the American public, it should be very easy to reach an agreement. They want not just a watchdog, but a watchdog with teeth for American consumers."
That's why the biggest battle ahead will be over an independent Consumer Finance Protection Agency. Senate Banking Committee Chairman Christopher Dodd, D-Conn., wants this new agency to establish and enforce rules for consumer credit products, such as mortgages, credit cards and payday loans. The agency's leader would be appointed by the president and confirmed by the Senate.
The financial sector and the U.S. Chamber of Commerce are spending buckets of money on ads and lobbying, however, hoping to ensure that at worst, the agency won't be able to enforce the rules it writes and will rely instead on existing bank regulators for that.
"If you have safety and soundness (of banks) separate from consumer protection ... you create additional jockeying for turf between regulators," said Tom Quaadman, the executive director of the U.S. Chamber of Commerce's Center for Capital Markets. "We have called for increased consumer protection, a council of existing regulators who have existing authority, who engage in the novel practice of sharing information and coordinated action."
That approach has been discredited, warned Simon Johnson, a former chief economist of the International Monetary Fund and the author of the new book "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown."
"That's a complete non sequitur," Johnson said in a speech Thursday, scoffing at the notion that current regulators are up to the task. "That is not what the history has been over the past 30 years."
Existing regulators would get new powers and mandates under the industry's preferred approach, countered Scott Talbott, the chief lobbyist for the Financial Services Roundtable, a trade group for big financial firms.
"What we're doing is modernizing the regulatory framework, elevating consumer protection to a core mission for the banking regulators," he said. "Up to now, consumer protection has not been a core mission."
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