No problem. But just as lenders, rating agencies, and regulators should draw lessons from the mortgage calamity, so, too, should business journalists. Is the lesson that only muckraking investigations have merit? No. But to move beyond its current role of financial coroner, drawing chalk lines around a financial system that has already hit the pavement, the business press must change its thinking: It must take regulators as seriously as it takes the institutions they regulate. This means sustained, active beat coverage of the OCC, FDIC, and the Fed’s regulatory function and other regulators.
The business press has for years treated regulators, I believe, with the soft bigotry of low expectations. I think I know why, and I’ll get to it. The point for now is that so little has been expected of bureaucracies that, by law, and in theory, have enormous power—power for good, by the way—that reporters and editors have treated them as an afterthought.
And yet, think of it this way: bad or compromised regulation helps explain the subprime story. And effective regulation could have prevented it.
The Times says watchdogs missed clues:
Had officials bothered to look, frightening clues of the coming crisis were available.
I would add that frightening clues of regulatory dysfunction also “were available,” in spades.
It’s not just that this lending bubble occurred in the context of a decades-long rollback of financial and banking regulation, something that is hardly a secret.
No, this particular regulatory collapse was preceded by the spectacle of federal regulators publicly fighting not banks or their affiliates over lending practices, but state banking regulators who were trying to come to grips with the very lending abuses that haunt the financial system today.
It started—who remembers?—when acting comptroller and potential Medal of Freedom recipient Julie Williams, siding with a group that includes J.P. Morgan Chase and other big banks, went to court to block then-New York Attorney General Eliot Spitzer’s attempts to enforce New York’s anti-predatory lending laws on nationally chartered banks. The OCC argued that national banks should be exempt from state lending laws.
The OCC is part of the Treasury Department, which Paulson now oversees:
This, Audit readers, started in early 2003. Nearly Five. Years. Ago.
As The New York Times reported in December of that year:
State officials and consumer groups have opposed the [OCC’s] move to override state laws aimed at protecting consumers, including those to curb ‘predatory’ lending practices.
These lending abuses include exorbitant fees and interest rates and
payments for undisclosed insurance products.
But the comptroller has the power to override state banking laws.
‘Federal pre-emption is not unprecedented,’ a spokesman, Bob Garsson, said.
And remember, the OCC wasn’t just fighting Spitzer. Actually, it was Michigan that challenged OCC preemption in a case that went to the U.S. Supreme Court, and attorneys general from all fifty states filed amicus briefs in support.
Business-news organizations covered the dispute between federal and state officials as a power struggle, a tit-for-tat fight. But something must have seemed odd even at the time. For one thing, The Wall Street Journal editorial page threw its federalist principles overboard and became a champion of federal regulation—seriously. In retrospect, the editorials are howlers.
The OCC has a large staff of economists whose only job is to perform the sort of sophisticated statistical modeling needed to discover relevant disparities between loan approvals and denials or in pricing. Any red flags are followed up with in-depth examinations of loan files. The agency also has staff members on-site at large banks to monitor lending practices.
And get this:
If the OCC hasn’t had a huge number of enforcement actions, one reason is because it has a chance to monitor behavior before it becomes a problem.
And the punch line:
It’s a shame more federal agencies haven’t taken their responsibilities as seriously as the OCC. (3)
That’s an embarrassment.
The states lost in the end. The administration’s legal argument was upheld just this year by liberal justices, led by Ruth Bader Ginsberg.
Whatever the legal arguments, does anyone who is not a WSJ editorial writer really think this fight was about who would regulate predatory practices? Wasn’t the fight really about whether the practices would be regulated in any meaningful way? Were state regulators usurping federal prerogatives? Or filling a vacuum?
My point is, these are questions business editors should have asked themselves. I don’t believe they did.
“Frightening clues” of the OCC’s dysfunction at the worst possible time “were available.”