CNBC’s Maria Bartiromo had a very interesting interview lineup yesterday including Treasury Secretary Timothy Geithner, SEC Chairwoman Mary Schapiro, FDIC Chairwoman Sheila Bair, and Elizabeth Warren, Chair of the Congressional Oversight Panel for the federal TARP program (troubled asset relief program).

The top two takeaways:  The administration isn’t going to break up the bank holding companies, and the administration is working on plans to overhaul Fannie Mae, Freddie Mac and even the Federal Home Administration. 

There’s been a lot of pressure, both from the left and the right, to break up the too big to fail (TBTF) banks.  But Secy. Geithner made it clear that the administration is going to stick to its proposals of stricter capital standards, stronger oversight and developing an estimated $50 billion bailout warchest (paid for by the banks themselves) that will be used to fund a bankruptcy type wind down of any part of the largest banks that fails.

Geithner said the regulations are aimed at making the largest banks financially stronger while allowing the government to set up what he described as “a firewall” around any part of these banks that fails.

What comes after that may have best been described by Bair, head of  the FDIC and probably the person with the most experience in shutting down failed banks.  Bair essentially described the process used by FDIC.  You separate the good assets from the bad, bundle the good ones and sell them off–usually to another bank.  The bad assets are also worked off, over time, and sold for what they can fetch.

Both Bair and Geithner made it clear that bank investors in the failed banks, or portions of a holding company containing bank units, will no longer be protected as was done in the recent bailouts.  The same will be true for large financial but non bank institutions such as credit units within large manufacturing companies.  An example of these would be GMAC, or GE Credit–or an insurance company such as AIG that  decide to form financial product units.

As for credit default swaps, both Geithner and Schapiro said reform will put sunlight on who holds what swaps, and in what amounts, so that regulators won’t be caught off guard not knowing how much leverage is being used.

In terms of the recommendation for a Consumer Financial Products Agency, Warren said one problem now is that there are seven different regulatory agencies that have responsibility for consumer protection, in one form or another, and they haven’t been able to protect consumers from abusive sales practices and unfair contracts.  Putting these employees at one agency, Warren said,  will “concentrate them on one clear mission.”  Such an agency will be “strong, viable and can get the job done,” Warren said.

Warren, a Harvard Law professor who has long championed stronger consumer protection regulation, has been publicly mentioned as a possible chairman for this yet to be formed agency, but she declined to respond when asked if she’d take the job.  What she wasn’t asked by Bartiromo, unfortunately, was whether such an agency could be effective while housed with the Federal Reserve, one of the seven regulators that is supposed to protect consumers now.  Early betting is that the agency will be under the Federal Reserve, an organization whose membership is made up of banks.  And banks don’t like the idea of even having such an agency.

The Freddie, Fannie and FHA reform was not described in any real detail.  But Geithner made it clear there would be major changes proposed by the administration.  The Secretary repeated his assurance that current investors will be protected, but the implication is that reform may change that in some way.

Right now Fannie and Freddie are the biggest recipients of government support–more than $1.5 trillion–in one way or another.  Called GSE’s or government sponsored enterprises, they are hybrids that are investor owned, but charged with a public mission.  In this case a mission to make home mortgages as affordable as possible.

They are two of the least popular organizations in Washington DC because they’ve garnered almost as much taxpayer support between them as all the too big to fail banks combined.   At this point, no one has proposed how the government can safely extricate itself from the relationship.

Warren was the clearest in her opinion of the two.  “I don’t like the public/private” concept, she said, adding that “It’s time to pull the plug.”

So it’s pretty much “middle of the road,” for the Obama administration right now.  They want more effective regulation that will prohibit a repeat of the 2008-09 financial collapse, but they are apparently willing to maintain the concentrated TBTF business model many believe is the root cause of the collapse.

Politically, this will be very interesting.  Will financial regulatory reform turn out to be a bi-partisan effort in contrast to the partisan, and often ugly health care debate?

Probably, if for no other reason that big banks are the bad boys in the minds of most Americans.  Neither party wants to be seen as a lackey for TBTF banks.  But there will be disagreements.  A likely one is that Republicans seem to be positioning themselves as supporters of eliminating the TBTF business model entirely and returning to some form of Glass Steagall where Investment Banks and Commercial Banks were kept separate. 

If this turns out to be a popular position, and it could be considering that both the Democact left wing (Obama’s base support) and the Republican right wing want the banks dismembered, then the administration may have to re-design their proposal radically.  Or at least convince the public that their proposals essentially do effectively separate investment banks and commercial banks, even if they are under the same corporate holding company structure.  That might be a very tough sell, if for no other reason that doing so is a complicated process that most people may not at all understand.

TBTF banks may be the only group more unpopular than Congress.  Kicking this group is an almost no lose position.

The second issue may involve the consumer protection idea.  Here, the Democrats may have the upper hand because it is strongly favored by them.  The progressive wing will want a separate, independent agency, not beholden to anyone who actually produces and sells financial products.  Republicans on the other hand aren’t likely to take on the entire banking industry.  They’ll smack TBTF banks forever, but banks of all sizes depend upon mortgage and credit products–the very core of what this new agency will investigate–and that is probably simply a too populist message for even a Tea Bagger Republican party.

And it is probably a too populist one for Obama too.  He’ll do the agency, but probably cave in on it being truly independent.   Which, from Beezer’s perspective, is too bad.  Obama needs to show his foundation that he too, is progressive.

Republican Senators have already said they won’t support any legislation creating a Consumer Finance Protection Agency.

Which is consistent with the GOPs ideology.  Anything that hampers private corporate interests in making a buck is bad.  Even if the buck is made off the backs of working people by using incredibly hard to understand contracts. 

Obama says he supports having an agency focused on making consumer financial products easily understandable.  So does Treasury Secy. Tim Geithner.

So does Harvard professor Elizabeth Warren, who literally wrote the book on the need for protecting the consumer from the legaleeze and other shenanigans that have been used to pull the wool over unsuspecting consumers who use credit cards or sign tricky mortgage contracts.

Warren, who now chairs the Congressional Oversight Panel created to investigate the US Banking bailout, would be an excellent first chairman for the proposed consumer protection agency.  She and her daughter, Amelia Tyagi, have co-authored two best selling books:  “All Your Worth: The Ultimate Lifetime Money Plan,” and “The Two Income Trap:  Why Middle Class Mothers and Fathers Are Going Broke.”

The second book pointed out that a fully employed worker today earns less money, adjusted for inflation, than did a worker 30 years ago.   The growing gap between the wealthy and the rest of us (called income inequality) is thought by many to be a main cause of our current financial woes.

Warren also played an important role in discovering that the majority of personal bankruptcies came from overwhelming medical bills. 

From Wikipedia:

“In 2005, Dr. David Himmelstein and Warren published a study on bankruptcy and medical bills,^[6] which claimed that half of all families filing for bankruptcy did so in the aftermath of a serious medical problem. The finding was particularly noteworthy because 75% of those who fit that description had medical insurance.^[7] This study was widely cited, although critics from the insurance industry argued that the criteria used were too loose.^[8]. In 2007, the team repeated the study, using more robust criteria. They concluded that the proportion of medical bankruptcies had increased to 62% of personal bankruptcies and that, once again, about three-quarters of those families had health insurance at the onset of their medical problems..”

Warren is not intimidated by large corporation powers.  She regularly lambasts them for using shady practices against consumers and is a popular guest on television when the subject of protecting consumers comes up.

But the GOP knows the drill and knows where the easy money always is:  With large trans-national corporations.  Protecting consumers doesn’t get one dollar into the campaign till.  So among Republicans it won’t get one vote either.

Harvard Law professor, Elizabeth Warren, has written a strong article entitled “Real Change: Turning up the heat on non-bank lenders” published in the website New Deal 2.0, which is funded by the Franklin and Eleanor Roosevelt Institute.  Prof. Warren is currently chair of the Congressional Oversight Panel created to oversee bank bailouts and first proposed a new federal agency for consumer financial products in 2007.  President Obama is currently recommending the creation of such an agency, The Consumer Financial Products Agency (CFPA).

Professor Warren has been like a breath of fresh air since she arrived in Washington D.C. to chair the Congressional panel.  She’s well spoken (and the article linked here) shows she’s well written as well.  As always thanks to economist’s view and professor Mark Thoma for discovering the article.

“The big banks are storming Washington, determined to kill the Consumer Financial Protection Agency (CFPA). They understand that a regulator who actually cares about consumers would cause a seismic change in their business model: No more burying the terms of the agreement in the fine print, no more tricks and traps. If the big banks lose the protection of their friendly regulators, the business model that produces hundreds of billions of dollars in revenue — and monopoly-size profits that exist only in non-competitive markets — will be at risk. That’s a big change.

But there is an even bigger change in the wind: regulating the non-banks. Democrats and Republicans alike agree that the proliferation of unregulated, non-bank lenders contributed significantly to the financial crisis by feeding millions of dangerous financial products into the economic system. Non-bank institutions were active participants in the race to the bottom among lenders. From subprime mortgage loans to small dollar loans, they showed how to wring high fees and staggering interest rates out of consumer lending. Their fine-print contracts, and new tricks and traps, transformed the market.

Despite widespread agreement about the problem, the U.S. has never made a sustained, systemic effort to regulate non-bank lenders. As lending abuses became more obvious, there was no effort to close regulatory gaps and loopholes or to devote federal resources toward the oversight of non-bank institutions. The reasons are many, but one of the most benign explanations is that policymakers for too long assumed that states could deal with the non-banks because the non-bank lenders are often small and often operate locally (although Countrywide showed that state-based organizations can metastasize rapidly). As it turns out, the states actually faced several limitations in reining in these lenders.

States, just like the federal government, were subject to intense lobbying by creditors. In short order, many states changed their rules to undercut basic protections. For example, the consumer finance industry succeeded in rewriting state interest rate regulation to allow for massive increases in allowable effective rates — even when the advertised rate looks far lower and obscures the true cost of credit. In many states, making an end run around local usury laws is now as easy as running around a single fencepost. At the same time, state legislatures face the perpetual lag-behind problem. They are unable to adjust to a rapidly changing financial services market, too slow to identify problems and not capable of changing the laws quickly enough to head off serious problems.

Moreover, resources are always constrained at the state level, and the enforcement of consumer credit laws competes with a wide variety of other state obligations. When consumer credit laws were violated, states often lacked the capacity to undertake serious investigations or to prosecute offenders. Some states made heroic efforts, but others left consumer financial issues far down their priority list.

The problem of enforcement has been exacerbated by a serious structural problem. When an abuse surfaced-for example, a local paper ran a news story about an unfair practice or a consumer group assembled evidence of sharp practices-local officials often responded by jumping on small banks. The non-banks were often scattered and difficult to find, while the biggest financial institutions were typically protected from local prosecution through pre-emption. That left the small banks holding the bag. These small banks, often those with state charters, were the easiest institutions to locate and the cheapest to prosecute — even if they were only tangentially involved in deceptive practices. The result was that the worst offenders slipped away. Non-banks could shut down for a while, and then reappear when the heat was off. In effect, the state enforcement structure benefitted the big banks and the non-banks.

The CFPA presents the first real opportunity to change that harmful structure.

First, the CFPA will regulate consumer financial products across the board-using the same rules for all mortgages or for all small dollar loans, regardless of whether the mortgage or the loan is issued by a national bank, a state bank or a non-bank. The old practice of different sets of rules and different regulatory structures for the same products would disappear. Instead, the CFPA would create a coordinated set of baseline rules applicable across the board.

Consolidated rule-making will also stop the practice of lenders shopping around for the regulator with the weakest rules. Bank holding companies have enjoyed an enormous advantage by having the freedom to structure their many business divisions to exploit regulatory weakness. They can operate a federally chartered bank when preemption is valuable to them. At the same time, they can purchase the products of non-banks in bulk, creating informal partnerships that exploit gaps in the state regulatory system. In fact, the Center for Public Integrity found that 21 of the 25 largest subprime issuers leading up to the crisis were financed by large banks. (Remember this the next time you hear a lobbyist blaming the crisis on non-banks and denying the role of the bank holding companies.) With consistent rules across the board, the CFPA would put an end to these practices.

Consistent rules are important, but, as we now know, it isn’t enough to have good rules on the books. There must also be a serious effort to enforce those rules. With the right sources of funding and some smart strategic thinking about how to force non-banks to follow the same rules as other lenders, the entire landscape of consumer lending would change.

From history, we have learned that an agency’s source of funding is critical to its success. By allowing the Agency to tax lenders directly — perhaps a dime for every open credit card account, a quarter for every open mortgage, etc. — Congress can make sure that the CFPA stays well-funded in the years ahead. The right funding structure will allow the Agency to develop the capacity to go after the non-banks and the dangerous products they originate, and it will insulate the Agency from political efforts to starve-the-regulators into inaction. Moreover, as we now know, the cost of even a well-funded agency is dwarfed by the cost to the government and the economy as a whole of bank failures. The cost of the failure of just one thrift – IndyMac — was almost ten times the annual budget of the Securities and Exchange Commission.

New forms of strategic thinking will also be needed. By creating a system for mandatory lender registration, for example, CFPA will be able to keep track of the consumer lenders out there — something that no current regulators have the tools to do. To encourage compliance, the CFPA can work with other federal agencies — like the Treasury Department or the Internal Revenue Service — to identify unregistered lenders. In states that already register certain non-bank lenders, the CFPA can work off those registrations and collaborate with state officials. This is tough work, but a consumer agency with expertise and resources will rise to the challenge.

The CFPA can also get smarter with enforcement by exploiting concentration points, places where small players are effectively grouped together. In the case of mortgage brokers, for example, without the large bank holding companies and their subsidiaries as customers for the loans they place, many would be out of business. Focusing regulatory attention on the buyers would create substantial leverage over the brokers as well. If the sponsors and funding mechanisms for the worst practices go away, so will the worst practices.

There is more that we can do to deal with non-bank lenders, but only if Congress creates a strong CFPA. If we stick with the status quo — which treats loans differently depending on who issues them and places consumer protection in agencies that consider it an afterthought – we know what will happen because we have seen it happen before. Lenders will continue their tricks and traps business model, the mega-banks will exploit regulatory loopholes, and the non-banks will continue to sell deceptive products. In that world, small banks will need to choose between lowering standards or losing market share, and they will still get too much attention from regulators while the non-banks and big banks get too little. Dangerous loans will destabilize both families and the economy, and we’ll all remain at risk for the next trillion-dollar bailout.

Regulating the non-banks hasn’t been tried in any serious way. The CFPA offers a real chance to level the playing field, to add balance to the system, and to change the consumer lending landscape forever.”

Prof. Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard University and currently chair of the Congressional Oversight Panel, is a longstanding champion of consumer protection.  She’d be a perfect choice to head up President Obama’s proposed Consumer Finance Protection Agency (CFPA).

She’s just written an excellent post about the CFPA for Baseline Scenario, a popular economics and politics blog.  The title of the post is “Three Myths About The Consumer Financial Product Agency.”

Here’s a sample of the post.  As with all her writing, Prof. Warren is straightforward, logical and brief.  Just like consumer financial products should be–so everyone can understand them!  The post isn’t long.  I recommend you hit the link and read it all.

MYTH #1:  CFPA Will Limit Consumer Choice and Hinder Innovation

“At a recent hearing on the CFPA, Rep. Brad Miller challenged an industry representative to identify one consumer who chose double-cycle billing to be included within the terms and conditions of his or her credit card contract.  It was a great moment.  If the status quo is about choice, then explain why half of those with subprime mortgages chose high-risk, high-cost loans when they qualified for prime mortgages.  If the status quo is about choice, then explain why Citibank declared itself consumer friendly, dropped universal default, then quietly picked it up again the following year because they said consumers couldn’t tell whether they had the term or not.

The truth, of course, is that no consumer “chooses” to accept the tricks and traps buried within the legalese of financial products.  Rather, consumers must choose among various products with one feature in common: dozens of pages of incomprehensible fine print.”

Among President Obama’s recommendations for comprehensive regulatory reform of the financial industry  is one for establishing the Consumer Financial Protection Agency (CFPA).

Harvard Prof. Elizabeth Warren, currently the head of a Congressional Committee charged with overseeing Treasury’s Troubled Asset Relief Program (TARP), would be a terrific choice to run CFPA.  She’s a lawyer with strong consumer protection inclinations and she’s an expert on issues involving debt and the middle class.

Here’s what the administration wrote about this recommendation.

“Prior to the current financial crisis a number of federal and state regulations were in place to protect consumers against fraud and to promote understanding of financial products like credit cards and mortgages.  But as abusive practices spread, particularly in the markets for sub prime and non traditional mortgages, our regulatory framework proved inadequate in many important ways.  Multiple agencies have authority over consumer protection in financial products, but for historical reasons, the supervisory framework for enforcing these regulations had significant gaps and weaknesses.  Banking regulators at the state and federal level had a potentially conflicting mission to promote safe and sound banking practices, while other agencies had a clear mission but limited tools and jurisdiction.  Most critically in the run-up to the financial crisis, mortgage companies and other firms outside of the purview of bank regulation exploited that lack of clear accountability by selling mortgages and other products that were overly complicated and unsuited to borrowers’ financial situation.  Banks and thrifts followed suit, with disastrous results for consumers and the financial system.

“This year Congress, the Administration, and financial regulators have taken significant measures to address some of the most obvious inadequacies in our consumer protection framework.  But these steps have focused on just two, albeit very important, product markets–credit cards and mortgages.  We need comprehensive reform.

“For that reason we propose the creation of a single regulatory agency, a Consumer Financial Protection Agency (CFPA), with the authority and accountability to make sure that consumer protection regulations are written fairly and enforced vigorously.  The CFPA should reduce gaps in federal supervision and enforcement, improve coordination with the states; set higher standards for financial intermediaries; and promote consistent regulation of similar products…….

“The CFPA should give consumer protection an independent seat at the table in our financial regulatory system.”

You know when a recommendation is well targeted by the level of whining and shrillness it stirs up.  Financial industry players are upset that someone might actually come in and stop the profitable rip offs of consumers (and business, by the way) they’ve enjoyed for so long.

Here’s the good professor in a recent PBS interview. 

“Every credit card for a credit card company is like a lottery ticket. They’re just waiting to see who’s going to maybe stumble a little. Maybe get into trouble on a car loan. Maybe nothing at all except they just look vulnerable. They’re just in the right zip code. They’re just the right profile for people who won’t be able to run any place else. And those are the ones you slam. Those are the ones you hit with the 29 percent interest rate, the 35 percent interest rate, the new fees. And then, because of course if you can’t pay it, then you get hit with a fee for not paying or for paying late, for going over limit. And the game is afoot. With any luck at all from the credit card company’s perspective, these people will become little annuities that will just keep generating profits for the credit card companies for months, for years, maybe forever.”

An edited transcript of a recent PBS Warren interview is here: http://www.pbs.org/now/shows/501/credit-traps.html

And it isn’t just consumers.
“I was bowled over by a figure in The Home Depot’s presentation at the Chicago Fed’s 2009 Payment Systems Conference this week: The Home Depot paid more in interchange than for employee health care last year. That’s astounding. Interchange is The Home Depot’s third largest operating cost. And this is from a company that gets comparatively low interchange rates just by being large. Interchange is costing large, sophisticated merchants more than health care. And the value it gives is questionable: The Home Depot’s interchange costs have risen 16% in recent years, while purchase volume has increased 10%.”
That from credit slips blog here: http://www.creditslips.org/creditslips/credit_debit_cards/.

Of course that also speaks to the big box technique of hiring a lot of low paid workers as temps with no health care benefits. Another plus for globalization and the destruction of labor unions!

In addition to her knowledge and experience, there are several characteristics Prof. Warren exhibits that should recommend her for the job.  One, she’s not political.  Two, she’s deeply suspicious of complexity and she demands transparency.  Just ask Treasury Secretary Tim Geithner.  At a recent appearance by Geithner before her committee, Warren gave Geithner’s Treasury a “gold star” for being the most transparent Treasury on record.  And then with barely a moment’s pause, she requested more transparency so that Treasury’s stress test of big banks could be independently verified by outside parties.  A third characteristic of Warren is her style.  She’s at all times polite and non-threatening.  She’s persistent certainly, but she isn’t one to demean or bully someone before her committee, character traits much too rare in Washington’s “take no prisoners” environment.

If President Obama puts Warren in this job consumers should rejoice.