Consumer Law

 A year and a half after the collapse of Lehman Brothers and Wall Street's subsequent implosion - and amidst the worst recession of the last 70 years - Congress has failed to adopt a financial reform package to rein in Wall Street and prevent a recurrence of the crisis. 

There is a single overriding reason for this state of affairs: Wall Street and the big banks continue to exert overwhelming and improper influence over the policymaking process.

That is one reason why breaking up the big banks is arguably the most important reform needed. We need to break up concentrations of financial power to rescue our democracy, diminish excessive risk-taking by large institutions that expect to be bailed out in case of failure, improve service for consumers and communities, and preserve financial stability.

Unfortunately, the new Senate proposal, like the already approved House bill, fails to meet this challenge.

Senate banking committee Chair Christopher Dodd?s new draft financial reform bill is the product of a drawn-out and apparently still ongoing negotiation. The bill is long and complicated, and it will take some time to digest all of its provisions. It contains some important positive reforms but also some gaps and areas of concern. 

On the contentious issue of the Consumer Financial Protection Agency -- downgraded to a Bureau of Consumer Financial Protection in the Dodd bill -- the story is mixed. Rather than being created as a standalone agency, the bureau is lodged at the Federal Reserve, an agency that utterly failed to exercise its consumer protection duties during the run-up to the financial crash. On the positive side for consumers, it does appear that the bill gives the bureau substantial autonomy, rulemaking and enforcement power. Had a strong agency been in place at the turn of the century, the worst lending abuses that followed would have been avoided, and the financial crisis would have been noticeably less severe. 

The bill also gives the bureau authority to prohibit the practice of forced arbitration, in which companies force consumers to resolve disputes before private, secretive, company-chosen tribunals instead of public courts.

The bill purports to take on the problem of too-big-to-fail institutions by creating a ?liquidation authority? that will wind down failing institutions that pose a threat to the overall financial system, and by creating a process for regulators to break up large financial institutions if they threaten national financial stability. In failing to affirmatively break up the large banks that right now threaten our democracy and economy, these measures presume that, in times of crisis, regulators will choose tough action against bailout and Band-aids. But it is in times of crisis when regulators will be least likely to take such aggressive action; and so the measures included in the bill are likely to have limited or no impact on the too-big-to-fail problem.

There are countless details in this bill of enormous importance. For example, thanks to the work of Sens. Dodd and Jeff Merkley (D-Ore.), the bill includes strong protections for financial sector workers who blow the whistle on wrongdoing. On the other hand, it includes a measure that appears to give a new federal insurance regulatory office authority to pre-empt state insurance consumer protection measures. 

Robert Weissman is president of Public Citizen.

Full post as published by CL&P Blog on March 15, 2010 (boomark / email).