In making the decision, the president may want to keep in mind that those two organizations, the SEC. and the new bureau, will be largely responsible for the actions that will make the Dodd-Frank law visible to most Americans by the 2012 election.
Other provisions of the law—creation of a financial stability panel, a more transparent derivatives market, limits on bank risk-taking through proprietary trading, a new way to liquidate big banks—will be really noticed only if they fail and we get a new financial crisis. But the bureau and the commission could change the way financial products are sold and make it easier for those who are cheated to get compensation.
Molded by its First Boss
The bureau, more than most new agencies, is likely to be molded by its first boss.
While the average new agency is created by a law that gives it a bunch of duties no one had before, this agency is supposed to enforce laws long on the books that were enforced poorly, if at all, by the bank regulatory agencies. It will also establish new rules.
Never has the Biblical adage of “No man can serve two masters” been better proved than in bank regulation. The first duty of bank regulators is to protect the safety and soundness of banks, and it is easy to see why protecting consumers from hidden fees and unfair practices might seem to threaten bank profits and be contrary to the goal of healthy banks. To say the bank regulators neglected consumer protection is to be kind.
Logically, the belated discovery that financial consumer protection needs to be increased might have led to increased powers for the SEC, which was created to protect investors. But it stumbled badly in recent years, and that idea does not seem to have occurred to anyone.
Schapiro’s move this week was to do something that sounds just like what Warren would propose for banks: Bring fees out into the open, so everyone can see them.
The SEC proposed rules to change the cozy system that lets “no load” mutual funds charge sales fees, known in the business as 12b-1 fees, that are taken from an investor’s profits year after year. Under the proposal, the fees would be above board, and differing brokers selling funds could discount them if they chose to compete that way.
The commission will soon move to consider the issue of whether to require brokers to have a “fiduciary duty” to investors, meaning they would have to offer advice they believed to be in the customer’s best interest. Such consideration is required by the new law, and how far the commission goes could help to determine just how consumer-oriented it is.
The most notable enforcement case of Schapiro’s tenure can be read as an indication that she cares deeply about such issues.
"Such Sophistry Must End"
Under current law, brokers serving retail investors are held to a limited standard requiring that investments be “suitable” to the buyer. But brokers for institutional investors have not faced even that minimal rule. That freed brokers to let clients view them as trusted advisers when pitching an investment. If and when the product blows up, the broker disclaims any responsibility for the bad investment decision made by the customer. The broker was simply a “counterparty” who took the other side of a trade that the customer wanted to do.
That essentially was Goldman Sachs’s defense when the commission filed suit against it over a disastrous mortgage-backed securities deal that Goldman sold without telling customers that it had been partly created by the firm that wanted to bet it would fail. Goldman’s settlement helps to establish a precedent that such sophistry must end. The history between the banks and Warren goes back for many years. In their first epic battle, which lasted for nearly a decade, the banks scored a decisive victory. Their win, alas, was a pyrrhic one that led to hubris, bad lending practices and big losses.
In 1994, the Congress established the National Bankruptcy Review Commission, which was to suggest changes in the law. Warren, whose detailed research into why people file for bankruptcy is respected even among some of her critics, became the principal staff member for the commission, and soon ran afoul of the banks.
The banks wanted legal changes to make it harder for bankrupt people to escape credit card debt. The commission decided not to back most of what the banks wanted and to suggest a few things the banks hated.
Audits of Some Claims by Lenders
The commission suggested weaker protection for mortgage lenders who lent out more than a home was worth. To combat what it saw as abuses by both debtors and creditors, the commission proposed changes like requiring audits of some claims by lenders and limiting the ability of banks to get borrowers to voluntarily reaffirm debts.