Federal regulators have been heavily challenged in the past year by an array of tragedies and regulatory failures: miners killed in a methane gas explosion, the largest oil spill in history, failure to discover a $50 billion Ponzi scheme and the global meltdown of financial markets. In each case, both industry and regulators could have done more to prevent loss of life, environmental disaster and financial ruin. But they didn’t, and therein lies the fundamental challenge facing Congress before it adjourns: ensuring that regulators have the power and the will to provide effective government oversight of the industries they regulate.
I’ll focus on the financial industry, which has enjoyed, to the detriment of consumers, lax or nonexistent regulation. Under Christopher Cox, chairman of the Securities and Exchange Commission during the most recent Bush administration, enforcement actions against investment and banking interests dropped a staggering 80 percent. The SEC ignored repeated warnings about Bernie Madoff’s Ponzi scheme for more than 10 years. Most recently, it was discovered that a number of SEC regulators spent more time watching porn than the industry they oversee.
Financial regulation appears to have morphed into a self-policing relationship where banking regulators protect the banks’ bottom line and no one looks out for the consumer. Let’s be clear — existing regulators could have stopped the liar loans, subprime steering, prepayment penalties, option adjustable-rate mortgages and other mortgage products that nearly brought our economy down. The status quo could have jumped in at any time. But it didn’t.
Regulators stood by while credit card companies used clever tricks to draw customers into ever-deeper debt with teaser rates, balance transfers and “convenience checks,” all while burying the real credit terms in 30 pages of fine print.
They watched while banks used ever-larger over-limit and late fees to increase their bottom line at the expense of the most vulnerable consumers. Now more than 50 million American families can’t pay off their credit cards each month.
Over the past decade, and with Congress’ help, the rules for Wall Street only got weaker:
The Gramm-Leach-Bliley Act repealed the Glass-Steagall Act in 1999, allowing banks to own insurance companies, investment banks, brokers and anything else and leading to the creation of “too big to fail” financial institutions.
The Commodity Futures Modernization Act of 2000 prohibited the regulation of derivatives. The notional value of outstanding derivatives rapidly increased sixfold to almost $700 trillion by the market’s peak in 2008. These secret, “untransparent” and hugely undercapitalized derivatives transactions increased systemic risk, decreased the ability of regulators to intervene to protect the public in a crisis, and increased the likelihood that a challenge to one part of the economic system would result in a crisis across the whole system.
The SEC, at the urging of the investment banks it regulated, in 2004 eliminated its 12-1 leverage limit. Those banks — including Lehman Brothers, Bear Stearns and Merrill Lynch — immediately increased their leverage to more than 30-to-1. That means that for every $30 they gambled, they made more money but only had $1 on hand if the bet failed. They failed, and they nearly brought everyone else down with them.
Financial institutions will say that they cannot possibly function if there is an independent consumer protection agency or if they are forced to trade derivatives on open exchanges and post margin.
The industry has cried wolf too many times when reasonable regulatory changes have been proposed. Now we’ve spent hundreds of billions of dollars taking care of some of the biggest banks in this country. It is time to do something for the 117 million American families who don’t have anyone to bail them out.
If we make it safer to take out a mortgage or use a credit card with a strong pro-consumer regulator, then we will have accomplished something truly significant. If we bring sunlight to the shadow world of unregulated derivatives, we will help guard against the chance that another American International Group or Lehman Brothers can almost bring down our economy.
The best way for Congress to continue the economy’s upward trajectory is to outlaw the very dangers that caused its downfall: regulators who didn’t do their jobs and were asleep at the switch. Financial regulatory reform will establish new rules of the road to ensure regulators have the powers they need. It will be up to Congress to ensure the regulators use that power to protect the American public.
Rep. Jackie Speier (D-Calif.) is a member of the Financial Services Committee.