The FSOC’s Veto over Consumer Finance

I’ll continue to talk the rest of this week about the Dodd Bill – I’m working on approaching it a few different ways. But Kevin wants answers. First off:

But healthcare is (pretty much) a done deal now, so what about financial reform? Is Dodd’s bill as bad as I thought? My tentative answer is yes even though it has some good things in it: a Consumer Financial Protection Bureau that has a reasonable amount of power and independence; regulation of derivatives; resolution authority for large banks; and streamlined bank supervision. None of these are as strong as they should be, but they’re better than nothing….

[quoting the bill]The Financial Stability Oversight Council

Expert Members: A 9 member council of federal financial regulators and an independent member will be Chaired by the Treasury Secretary and made up of regulators including: Federal Reserve Board, SEC, CFTC, OCC, FDIC, FHFA, the new Consumer Financial Protection Bureau. The council will have the sole job to identify and respond to emerging risks throughout the financial system.

[Kevin Drum]Unless I’m badly mistaken — which is always a possibility — this is nearly meaningless. We get a new board that will “identify and respond” to systemic risk.

It’s not meaningless – regulators at the Federal Reserve will have resolution authority over large financial firms, with a prompt corrective action regime applied to them. He’s right that it’ll require a lot for regulators to detect problems and show the political will to pull the plug while the company is still net positive value if they are allowed to write the rules themselves, for them to actually do the resolution authority well. We are putting a lot of stress on the Federal Reserve and resolution authority, and giving it a fair amount of discretion. Some might have pointed out that some supplemental measures may make this more credible (*cough* size caps *cough* financial transaction tax *cough*), but here we are.

But I do want to talk about consumer financial reform and the Financial Stability Oversight Council (FSOC). For thinking about how independent the Bureau would be, it is important to remember that the FSOC can veto the CFPA with a 2/3rd vote. I mentioned that the FSOC was incredibly pro-banking. Raj Date noticed all this as well, and he just put out a report: Losing the Last War: Evaluating “Veto” Powers on Consumer Financial Protection. If Kevin was depressed about the FSOC, check out this chart to see if they would have vetoed a CFPA Bureau trying to regulate subprime lenders in 2005 (click through for bigger image, especially to read the rationale):

CFPA wants to regulate subprime mortgages in 2005? VETO! *sigh*. I find the very idea that consumer protection would be systemically risky, and thus need the FSOC to stomp on it, beyond stupid. I get the arguments that a CFPA would deter innovation or be a headache of paperwork, but the idea that it would increase the likelihood of meltdown, contagion, etc. I’ve never heard before.

John Dugan would be on this FSOC panel. I always like when I see that John Dugan would be given extra powers as a result of financial reform, because I just saw this FOIA document from politico where he has 6 unidentified banking CEOs sharing talking points that they’ll be giving to Geithner. Preemption is one. Good times.

UPDATE: For those interested, here’s a link to my thoughts on the current stage of financial reform.