Maybe it’s a seasonal thing.
We carve pumpkins at Halloween.
We carve turkeys at Thanksgiving.
So why shouldn’t Congress carve out its own legislation in mid-October.
You may not be familiar with the term “carve out.” I wasn’t until this round of action in the U.S. Congress.
A carve out is when you write really strong regulations–regulations that voters think will do the job that needs to be done–and then gut them in a way that you hope nobody will notice by making sure that they apply to almost nobody.
Lobbyists, I’d note, love carve outs.
The House Financial Services Committee delivered a big carve out to the banking industry on October 15.
The pumpkin on the table was a bill to set up a new consumer financial protection agency to prevent banks from writing confusing or just plain deceptive mortgages, from hiding all the important details of a credit card in dozens of pages of fine print so that no consumer without the patience of Job could be expected to know what the fees and charges were, or from piling fees on top of fees until a consumer wound up paying hundreds of dollars for bouncing a $25 check.
No consumers don’t need anything like that. The sub-prime, alt-A, and prime mortgage meltdown shows that banks can be trusted to do the best for their customers. And the aftermath of the global financial crisis, a period when banks are attempting to plug the holes in their balance sheets with the flesh of their customers, shows that banks never overcharge for their services or try to hide the full extent of the fees that come with a checking account or credit card.
As you might imagine the banks aren’t overjoyed with the idea of creating a new regulator charged with making sure they don’t rip off their customers. And they’ve pulled out all the stops to prevent it, sending an army of lobbyists to the House Financial Services Committee where chairman Barney Frank (D-MA.) was cobbling together both a bill and the political coalition to pass it.
It’s never a good idea to watch sausage being made, the saying goes, because if you see what goes into it, you won’t want to eat. It’s always a good idea to watch how Congress puts together legislation because then, at least, you won’t have any illusions about what’s being forced down voters’ throats.
The key moment to watch with this legislation, to date anyway, came on October 15 when Representative Brad Miller and Representative Dennis Moore, Democrats from North Carolina and Kansas, respectively, offered their carve out amendment. Using exactly the arguments of lobbyists for the Independent Community Bankers of America, which represents 5,000 smaller financial institutions, Representatives Miller and Moore, proposed exempting any bank with less than $10 billion in assets and any credit union with less than $1.5 billion in assets from regular examinations by the new consumer protection agency. Such exams, they argued, would be excessively disruptive and costly for small banks and credit unions.
The result of this carve out? About 98% of U.S. banks will be exempt from visits by the new regulator. These “carved out” financial institutions will still be required to meet the requirements of the new law but the new consumer protection agency won’t be able to conduct the kind of detailed, on site examination needed to make sure the bank is following the rules. That will be left up to the examiners employed by existing regulators. You know, the folks who did such a great job of protecting consumers during this financial debacle.
Who will be covered? The 150 largest banks in the country. Nobody else. Now it’s certainly worth putingt these banks under tougher scrutiny since they committed some of the worst offenses in the run up to the meltdown.
But exempt everybody smaller than the top 150 from regular onsite scrutiny by an agency with the mission of protecting consumers? That doesn’t make any sense.
I wonder if the lobbyists understand the incentive they’ve just created for consumers: Bank at one of the big boys and get at least a chance at more consumer protection or bank at the little guys where it’s business as usual.
That’s not a tough choice.
Serve ’em right if consumers carved these financial institutions right out of the market.
@romingerd: Totally Agree! While I am for the language to be simpler to understand. At the end of the day, it is MY responsibility to know what I CAN AFFORD and it should be everyone elses as well. Government is not here to protect the public from stupidity or a lack of concern for each individual’s well being if they themselves don’t want to take that responsibility.
I regulate the banks I do business with just fine without the government’s help. I pay attention to my statements and question charges that are not what I agreed to. Rarely, I am caught off guard by something and am forced to contact the bank. If they are not flexible I close my account.
It would not take too many years for some loop-hole to appear in any regulation that the government might pass. Then banks would exploit this loop-hole and bubbles would form (in a different way) all over again. Can’t anyone see these bubbles are the result of government attempts to manipulate markets!?
I believe the government’s role should be primarily, to deregulate to the point that TRUE competition is allowed to work its magic, and then allow competition to work. Sure, some consumers would suffer. Sure, economic inequalities would exist. Sure, some institutions would “game” any system. But, how is that any different from what we have now? At least then, people who worked hard, played fair, and used their brain, would prosper. That would be a refreshing change.
Jim- there are a few steps WE can take:
First- the voters of NC and KS, respectively, can save themselves and the rest of us from Mssrs. Miller and Moore, repsectively, the next time they get a chance;
Second- we can all vote with our scissors and do our own bit of carving out, by carving up our credit cards- those of us that can, anyway;
Third- we can also “vote with our feet”- run, don’t walk, to the nearest local credit union. OK, they will be exempt under this new PT Barney law too- but as you point out, so will everyone else except your grandma. Credit Unions not only tend to be non-profits (sort of) but also tend to treat their local customers a bit better- frequently even recognizing the importance to their financial health of those “most desirable [of] assets” (well put DCM)…US.
The scenario you are describing would give a guarantee that biggest banks wouldn’t abuse the little guy. Kinda like $100,000 FDIC insurance but on the $100-$500 scale.
I may be wrong on this but hasn’t deleveraging made small depositors like me one of the most desireable assets for banks right now?
Seems like the unintended consequence here would make the “too big to fail” banks even bigger.
Bravo, glad to see you covering the regulatory reform fights. As much as Healthcare this will determine the path for the next 20 years and might even have more influence on investment success than paying attention to trends. It’s even refreshing to see you get a little hot about it, as we all should. That said, let’s raise three things to consider:
1. you should always consider the pragmatics of policy implementation….what kind of inspection staff would be required to create a duplicate regulatory supervisor for all the little banks? if it can be piggybacked on top of existing inspections and limit the burden on banks and the gov’t all to the good
2. the biggest offenders (the ol 80/20, or actually 90/10) in credit cards, mortgages, consumer finance, etc. are the big guys by far..go where the problem is and scale your efforts to the seriousness…again the carve out is not such a bad idea
3. as you point out competitive pressures should further induce more emphasis on service…in fact given the local advantage of the small banks you’d think they’d want to do this voluntarily
4. which leads to the major point – why is this necessary at all? what you’re describing is deliberate, conscious abuse of customers in the most shady and unethical ways…which violates every principal of good business practice there is (Nightly Business Report had an interesting segment Th on how important surcharges are to bank profits). This is the gov’t having to step in and fix problems the banks created and ones which should never have come up.
There are a lot of angry people out there, me included, so please keep covering this general area.
The financial industry owns Washington. What do you expect? We the people are screwed.