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.”
The Journal, for instance, hinted that the OCC was a do-nothing agency in a good August 2005 story that introduced Dugan as the new comptroller, headlined “Bank Regulator Cleans House”
WASHINGTON — IN RECENT YEARS, the Office of the Comptroller of the Currency, the federal regulator of national banks, has developed a reputation as the watchdog that doesn’t bark — protecting the interests of banks over those of consumers. (4)
The story noted that the OCC had given the Riggs National Corp. favorable ratings for years;—until federal prosecutors in 2004 revealed the bank to be a money-laundering haven for corrupt foreign leaders. Riggs later pleaded guilty to a criminal count and was sold.
Good, post-crash explanatory reporting has finally confirmed that the OCC’s “reputation” was, in fact, well-earned. It was a do-nothing agency.
The best piece I’ve seen on regulators was by Greg Ip and Damian Paletta, of The Wall Street Journal, who back in March (5) made the smart and necessary point that half of subprime mortgages were issued by nonbanks, such as Countrywide Financial Corp. and Ameriquest Mortgage Co., whose perfidy was so vast it overwhelmed state regulators.
It goes on wisely:
Yet even where federal regulators have jurisdiction, they sometimes have been slow to grapple with the explosive growth in especially risky practices and quick to shield federally regulated banks from states and private litigants.
The story reveals the OCC’s fecklessness, illustrating it with the case of sixty-seven-year-old Dorothy Smith, of East St. Louis, Illinois, who lost her house after her crooked mortgage broker stated her income as $1,500 a month, three times her actual monthly government benefits, to support a $36,000 loan with a balloon payment of $30,000—when she was about to be eighty-three. The OCC wrote her: “We cannot intercede,” etc., etc.
One fault is that this and other post-crisis stories tend to pin blame on an easy target, the regulatory system itself (usually called a “hodgepodge,” or an “outdated” “patchwork,”) rather than on the errors and ommissions of individual officials, and, it must be said, on the policy choices of political parties and their intellectual supporters.
There is widespread agreement that the biggest shortcoming in the regulation of mortgages is the patchwork of state and federal oversight. Amid rapid evolution in industry practice…
USA Today offered the same formula:
To many critics, one big culprit is the loose patchwork of federal and state regulatory agencies that failed to do their jobs, abetted by a Congress that only now has called for reforms. (6)
We own real estate and have paid off loans and then refinanced several times over the past 20 years. Our credit rating has always been above 700 and we have a substantial net worth. In spite of these factors, we have always felt harassed by lenders always wanting more information, then additional supporting documentation, and then further information on top of the additional documentation. Typically, we have submitted our income tax documents only to have brokers ask for verification of income using pay checks. Seemingly unaccounted for cash assets required documentation where it came from. If we obtained funds from parents for down payments, lenders wanted proof. I'm baffled that anyone could obtain a home loan without jumping through myriad hoops...unless loan officers or mortgage brokers were unethical or crooked. What is perhaps more astonishing is that purportedly competent government officials placed in charge of regulating banking express outrage that those involved in lending could possibly place the prospect of making short term profits over the welfare of their clients/customers.
This begs the question what will it take before Americans realize that as difficult and unfair as government can be, its behavior pales in comparison to that of the general business community. Late 19th century and pre Depression history teaches us that if given the opportunity, American business will always opt for short term profit even if it means cheating their clients, patrons, or customers, and, even it means hurting society as a whole, which is why America needs strong government regulations. Americans understand that government doesn't always act in the public's interests but many forget that it is therefore necessary to pay attention to the actions of elected representatives.
As long as business interests can purchase political favors, America will have the best government money can buy. Therefore, even before we consider business re-regulation, we must remove business from the political process. Several Supreme Court justices claim to be strict constructionists who believe the Constitution immutable. If these justices aren't merely hypocritical, if they aren't merely the paid mouth pieces of corporations, they should lead efforts to end the practice of treating corporations like individuals, which is non-Constitutional, since this is the key to getting businesses out of politics. Unless this occurs, any efforts at re-regulation are likely to prove short term: The business class never fully acquiesced to regulation before 1912 and during the administration of FDR, and, they won't do it today.
Posted by RogerHWerner
on Wed 26 Dec 2007 at 09:06 PM
God forbid a lender who risks thousands of dollars should have the nerve to ask personal questions of lenders!... GASP!... WHERE is the government to fend off these capitalist selfish pigs?!....
Government regulaton just doesn't work.. Fines and sanctions simply become the cost of doing business... Whether it's a utility in violation of the Clean Air Act to make a profit, or a local trucker running overweight to earn money for groceries...
Subsidies, on the other hand, work great... And that is what we have... Subsidies disguised as "regualtion" of industry...
You guarantee solvency on the credit of the taxpayers (like the FSLIC did in the '80s and like the FDIC is doing now) and you'll have businesses tripping over themselves to get "regulated"...
I worked for the federal government (in three different agencies) for years.. And my own learned opinion is that it doesn't make ANYTHING better...
As our founders knew... Government is a necessary evil... And it should be restricted and regarded with suspicion by any free society. A careful reading of the powers expressly granted to the government by the Constitution shows just how smart our founders were.
The Department of Education doesn't educate anyone... The Department of Transportation doesn't transport anybody.... And the Department of Housing and Urban Development doesn't house anyone...
All the government can do is to throw money at problems without solving any of them (remember that with a national debt of $9 TRILLION, every new American born faces a per capita $30,000 debt from they day he or she enters the world).
Posted by padikiller
on Thu 27 Dec 2007 at 11:17 PM