The CFPB – Spawn of Frankendodd

FrankendoddIt is no secret that my regard for the Consumer Finance Protection Bureau (“the CFPB”) is akin to my regard for Bubonic Plague; they both grow exponentially, can be difficult to eradicate – and they both come from rats.  For background about this regulatory Leviathon, see my rants posts here and here.

A day does not go by without the CFPB announcing some new bright idea, program, or plan, which, they claim, will save consumers from themselves, by making laws and regulations so simple even a caveman can understand them.  Before I discuss their latest venture, let me climb up on my soapbox and engage in a public rant, just to get my creative juices flowing. The CFPB is the spawn of the Dodd-Frank Act, or as it should more correctly be called: “Frankendodd,” a nightmarish concoction of disparate limbs and organs, stitched together in the mistaken belief that the whole will be better than the sum of its parts.

One cannot read any CFPB announcement without first having to read a preamble, reminding us of our near-death experience during the crisis years of 2008-2009, which, the authors would have us believe, was solely attributable to Wall Street financial abuses of the Little Guy; that if only loan programs and disclosures were clearer – perhaps with bigger print and monosyllabic words – everything would have been fine, and the credit, housing, and foreclosure bubbles would have been averted.  Accordingly, the CFPB has embarked upon a mission of becoming the ubiquitous Protector Of All Things, running from crisis to crisis with the apparent skill of the Sorcerer’s Apprentice.

I don’t buy this for a minute. It is true that the easy credit years, circa 2005 – 2008, allowed almost anyone to get a home loan, which, in turn, fueled the housing boom. It is also true that once the house of cards created by rampant securitization collapsed, many of the Big Banks came perilously close to ruin.  And it is true that the government’s infusion of billions of dollars into the financial sector was likely necessary to save it.

But the occurrence of these events does not mean that if we would have had better “consumer protection,” they would never have occurred.  It was not the absence of consumer protection that caused the problem; it was the absence of enforcement of laws already on the books.  At virtually every level of our government, there were agencies, regulators, and politicians that turned a blind eye to what was happening. Here are two infamous examples:

  • Allan Greenspan, the Chairman of the Federal Reserve through 2006, stood by while banks, such as Countrywide, were making loans to anyone who could fog a mirror.  As reported in the online Wall Street Journal, here’s what was said during a 2008 Congressional hearing:

You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,” said Representative Henry A. Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”[1]

Barney Frank was one of Fannie Mae’s pimps supporters, a ranking member of the House Financial Services Committee, and one of the biggest piglets sucking on financial teat of the financial services industry he oversaw. He strenuously opposed increased oversight of Fannie and Freddie – the two government supported enterprises, or “GSEs”, that consumed subprime loans like M&Ms – even though they were already going toxic[2] – and ultimately collapsed under their own weight in October, 2008.  According to a September 8, 2008 Boston Globe op-ed piece, Mr. Frank:

… had his fingerprints are all over this fiasco. Time and time again, Frank insisted that Fannie Mae and Freddie Mac were in good shape. Five years ago, for example, when the Bush administration proposed much tighter regulation of the two companies, Frank was adamant that “these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis.” When the White House warned of “systemic risk for our financial system” unless the mortgage giants were curbed, Frank complained that the administration was more concerned about financial safety than about housing.

Now that the bubble has burst and the “systemic risk” is apparent to all, Frank blithely declares: “The private sector got us into this mess.”[3] Well, give the congressman points for gall.

Here’s my point:  The financial crisis was, in part, at least, the result of lax, inconsistent – nay, nonexistent – enforcement. The regulations were there.  We had RESPA, TILA, HOEPA, the Equal Credit Opportunity Act, and on and on ad infinitum, but they were not enforced.  The regulators and the politicians lacked the attention, will, and moral fortitude, to act.  The Wall Street excesses were occurring in plain sight – they were not the product of back room machinations.

Whew! I feel better already.  Now I’ll climb down from my soapbox to discuss the CFPB’s latest venture.

To be continued~PCQ

[1] “Found a flaw?!” “Found a flaw?!”  This has to the understatement of the decade.  It’s like the Titanic’s captain calling the looming iceberg a “flaw.”

[2] For a short discussion of Fannie’s perilous journey through uncharted waters, go to the Washington Post article here.  When the subprime market collapsed, so did the GSE’s sizeable investment, costing the American taxpayer billions.

[3] Some might say that the genesis of the entire financial crisis dates back to 1999, when the Glass-Steagall Act was repealed.  Glass-Stegall was a 1933 Depression-era law that prohibited banks, i.e.  those that engaged  in savings and lending services, from also engaging in risky investments – other than buying government backed bonds.  Once repealed, Pandora was out of the box, and the Big Banks visited a parade of horribles on the American public.  My point here is that it was the politicians who unleashed this by repealing Glass Steagall.  Had that law been in existence in 2005+ the risky proprietary bets that Citi, B of A, Chase, WAMU, Wells Fargo, and others were taking with their money and their depositors’ money, could not have occurred.