A CFPB Story, Geithner, Preemption

I don’t get people who downplay the sheer volume of consumer fraud that went on in the subprime mortgage market, and the fact that the market decided to reward this fraud. Take Household Finance in the early 2000s. Their aggressive lending practices where people would learn after the fact that they were mislead to how much their total monthly payments were (as well as many other problems) led to successful settlements in Colorado, Georgia as well as a $484 million in fines joint settlement with a group of attorney generals, the largest consumer fraud settlement in U.S. history. (Both ACORN and AARP led the class-action suits.) That’s a lot of money, until you divide it among the amount of households that were ripped off. Even after legal fees, its hard to image it wasn’t a profitable experience.

So Household Finance has to pay the largest consumer fraud fines in history. I bet you think that the investment community and elite financial institutions wouldn’t look twice at it. Well, you’d be wrong. One month later Household was acquired by HSBC, the London financial giant, for $16.4 billion. The New York Times columnist Floyd Norris called this “the deal that fueled subprime.” This story is one of many told in Gary Rivlin’s Broke, USA, which is a must-read on this topic.

Notice what happened: Instead of driving out fraud, the market realized, correctly, that there is a ton of money in consumer fraud, and it rewards it handsomely. I don’t know why conservatives, who love thinking criminality is just around the corner, won’t just say this. Perhaps they like the idea of shifting risks from corporations to consumers with a “buyer beware” mentality. A government reaction in the form of a CFPB is needed to protect the sanctity of making contracts – the market’s desire is to drive it in the complete opposite direction.


Oh Tim. Shahien Nasiripour writes a headline designed to give the Treasury department a well-deserved headache, Tim Geithner Opposes Nominating Elizabeth Warren To Lead New Consumer Agency:

Treasury Secretary Timothy Geithner has expressed opposition to the possible nomination of Elizabeth Warren to head the Consumer Financial Protection Bureau, according to a source with knowledge of Geithner’s views.

Warren, a professor at Harvard Law School whose 2007 journal article advocating the creation of such an agency inspired policymakers to enact it into law, has rocketed to prominence since the onset of the financial crisis as one of the leading reform advocates fighting on behalf of American taxpayers.

Warren has been an aggressive proponent for the bureau in public and behind the scenes, working regularly with President Barack Obama’s top advisers and the Democratic leadership in Congress. Since 2008, she has overseen the Congressional Oversight Panel, a bailout watchdog created to keep tabs on how two administrations spent hundreds of billions of taxpayer dollars to bail out Wall Street while struggling to keep distressed homeowners out of foreclosure and small businesses from collapsing.

Yet while her work on behalf of a federal unit designed solely to protect borrowers from abusive lenders has been embraced by the administration, Warren’s role as a bailout watchdog led to strained relations with the agency her panel has taken to task with brutal reports every month since Obama took office: Geithner’s Treasury Department.

It’s no secret the watchdog and the Treasury Secretary have had a tenuous relationship. Geithner’s critics have enjoyed watching Warren question him during his four appearances before her panel. Her tough, probing questions on the Wall Street bailout and his role in it — often delivered with a smile — are featured on YouTube. One video is headlined “Elizabeth Warren Makes Timmy Geithner Squirm.”

Warren has been notable in demanding hard answers for the performance of HAMP, a project with major consequences for households and the greater economy and one that has turned out to be a major failure. If Treasury is seriously blocking Warren then they are probably blocking most people who aren’t Treasury insiders, which bodes poorly for the future of reform.


One battlefield to watch for as this gets going, and the one question I’d advise asking potential candidates: Where do they come down on the role of preemption in the subprime crisis? We talked about preemption here and this 2008 Businessweek article They Warned Us About the Mortgage Crisis covers the topic. The “they” in that title are State Attorney Generals, who saw the preemption of state consumer protections laws in real time. If Warren didn’t head the CFPB, a strong State Attorney General like Lisa Madigan would be a good fit.

Because if I wanted to corrupt the CFPB into a crony enterprise, the first thing I’d do is use it to mess around with state laws. John D. Hawke Jr., Comptroller of the OCC, gets a 2003 call from the largest national banks and the ratings agencies, who tell him that Georgia is giving them a problem. Hawke goes to the Federalist Society and tells them “The OCC will, of course, continue to defend the right of national banks to be free from state efforts to regulate their business…” If the director of the CFPB agrees with Hawke’s decision, that’s a problem for everyone who isn’t a servicer or a ratings agency, notably investors and consumers.

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2 Responses to A CFPB Story, Geithner, Preemption

  1. Pingback: Disagreeing With Gary Becker « Chasing Fat Tails

  2. Pingback: How Federal Reserve’s Failed Consumer Protection Alone Makes Elizabeth Warren The Only Choice « Rortybomb

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