The Obama Administration’s Proposed Bank Plan; the “Volcker Rule”

Am l-o-v-i-n-g the headlines this morning.

“Asian Markets Drop after Wall Street Reacts to President Obama’s Bank Limits”

“FOREX – Dollar Falls on Obama Bank Plans, Yen Pares Gains”

“India Rupee Has Worst Week Since October on Obama Bank Plan”

Overreact much? For months now, think tanks and paid consultancies have identified several core reasons for the Fall 2008 economic meltdown. Ubiquitously crucial among which has been the ideas: that large organizations which threaten systemic failure with their own should be avoided, and that excessive risk-taking carries costs not immediately identifiable and therefore also should be limited. So yesterday the Obama Administration revealed - an albeit ambitious plan - to address both of those issues, and the market drops to the floor like a petulant toddler. Give me a break already; we have all known that change would come to market mechanisms. The banking industry is a vital and innovative engine for capital generation in this country and around the world; but this also makes it a key member of our shared community, and the hissy fit being thrown in response to being called to responsibility is a little much.

A look at what the bank plan in fact entails. The Administration, purportedly purposely, has left a wide berth for Congress to determine how to effectuate the plan. The core principles are quite clear, however: banking actors are made to choose between traditional banking activities or trading. The choice is forced as, under the plan, any bank that either takes consumer deposits that are federally insured, or otherwise has access to Federal Reserve funds, is prohibited from owning or investing or sponsoring a hedge fund or private equity firm. Banks will be prohibited from trading with their own money; proprietary trading. Administration officials yesterday did say, however, that banks would be able to use their capital to hedge a client’s trade. The intent of the bank plan is to prohibit any trading that is not in the pursuit of servicing a client. There is some ambiguity in the plan as to what “proprietary trading” entails (expect to see a variety of different definitions – and costs to the banking sector – pop up in the news over the next several days).

Separately, the bank plan also tweaks existing rules limiting how large any bank can grow. Currently, no bank can merge or acquire a second bank if the transaction produces an entity that has more than 10% of American deposits. Under the bank plan, deposits would only be one type of funding considered in reaching the 10% ceiling (Ie., short term funding acquired through the market is also proposed as a consideration).

It is expected foreign banks with significant American operations will be pulled into compliance.

Nothing is really ever as simple as all of that, but to boil the plan to the core, you basically have it. The market understands this – hence the hissy fit – because limiting activities is reasonably suspected to seriously constrict profits. (And while the safety afforded by a federal funding buttress is attractive, the real money in banking is in the trading.)

Smells like Glass-Steagall though, right? (Over simplified explanation: different market rules are enforced for different types of investment vehicles [collectively creating a number of different “buckets”], and buckets are not to be mixed.) “No” was the official buzzword from Administration officials throughout the day in response to that question. To be frank, I am too unfamiliar with the Glass-Steagall provisions to speculate, but I am certain there will (also) be plenty of punditry in the next several days that will make analogies and comparisons.

Early analysis has identified some risks to the proposal. The first, that the risky behavior prohibited will be eliminated from the banking industry, but will re-appear in non-financial institutions. Thus eliminating banking risk, but not eliminating the systemic risk. Another risk suggested is that banks, in an effort to make-up for the lost profit, will expand their lending guidelines and threaten the federal funding buttress with too many risky debtors. Relatedly, one of the bigger criticisms has been that the bank plan would not have prevented the Fall 2008 crisis: IBanks Bear Stearns and Lehman Brothers were not commercial banks.

The bank plan now goes to Congress for the House and Senate to pass their own draft legislation. The President's remarks are available here. The plan is in the news everywhere, including Bloomberg, the NYTimes, and the WSJ.

Photo credit: Klip at Wikimedia.

Consumer Financial Protection Agency ("CFPA") – what's inside?

So the Consumer Financial Protection Agency ("CFPA") made it out of two House Committees last week: the Financial Services Committee and the Energy and Commerce Committee. I have blawgged before about what the legislation entailed, but that was when it was first proposed by the Administration over the summer. I wanted to follow-up with a review of what the bill looks like coming out of the Committees (and onto the House floor for a vote) (though note, early Senate sentiment is not looking too keen).

No plain vanilla provision. Let's review. At its most basic level, the vanilla provision required private financial companies to offer a standard version of whatever financial product they offered. So if for example, a private company offered consumers credit cards: the federal government would create a very basic, easily understood credit card product that the private financial company would be required to offer alongside any sophisticated credit card product.

Actors exempt from CFPA oversight include: banks with assets of $10 billion or less; insurers (ie. mortgage or title insurance); attorneys, accountants, real estate brokers, cable companies, and auto dealers. So the last few make sense, keep in mind that the intent of the CFPA is to rein in predatory credit lending and credit related products.

Watt-Moore Amendment. Recall that the legislation was originally going to allow co-regulation by federal and state regulators over the private financial actors. The battle has been lost, however: current language allows for the Comptroller of the Currency to override state laws if they interfere with federal regulation. Your guess is as good as mine as to what that means (though my money is on federal pre-emption continuing unabated).

Also recall that over the summer the CFPA was proposed as an enormous umbrella capacity for regulating all things related to consumer financial products >> taking regulatory authority from existing federal agencies, and pooling it under the auspices of the CFPA. Some of that made it out of Committee: the Federal Trade Commission (FTC) has lost oversight of the consumer credit rating agencies to the CFPA.

BREAKING: Treasury released rules on compensation rules

I was - literally - just writing a post on how overblown the last 24 hours in the news has been over a rumour about Feinberg's rulings. And then voila: a Treasury document containing proposals and Q & A transcript pops up on my handheld. Comments are of course being solicited by the Federal Reserve.

Will make an effort to digest through the day >> more posts coming.

Hat-tip: WSJ.

BREAKING NEWS: Feinberg cuts salaries by 90%, on average

Breaking news, sort of: maybe? Several large business media outlets are reporting that Feinberg has made several ambitious rulings in regard to the compensation proposals submitted to him. I am tepid to qualify this as "breaking" or as "news," since the source cited is vague at best: CNN cites the WSJ and the NYTimes as sources, and Bloomberg merely cites "people familiar with the matter." Okay ... Here's the gossip:

- total compensation for 175 employees is lowered by 50%;
- on average, salaries themselves drop 90%;
- corporate governance changes are demanded, including: disallowing the Chairman of the Board to also be CEO, requiring a Board committee to assess risk, and eliminating staggered boards;
- no one (really? what about Benmosche?) at AIG will receive more than $200,000 in compensation

FWIW (though am more eager for Treasury Department documents or media attention to Feinberg's own statements). This blawg's discussion of Feinberg is available here. Todays news was reported by Bloomberg, CNN, NYTimes, Reuters, and the WSJ.

"Chasm" between Wall St. and Main St. perception of pay; Compensation Czar Feinberg comments

I've learned about the incredible gap, the chasm between Wall Street perceptions and Main Street perceptions. It is a formidable chasm that I'm not sure can be bridged, although the law requires me to attempt to bridge that gap. Kenneth Feinberg, National Conference of Directors, 10/20/2009.

Feinberg's comments accompany the expectation that he will publicly release his rulings on the compensation packages submitted to him. Brief recap: Feinberg is the Special Master ("Compensation Czar") under TARP for all issues related to executive compensation. Part of his duties are to review and approve compensation for senior executives at companies that received substantial federal monies. This includes AIG, BofA, Citigroup, GM, GMAC, Chrysler, and Chrysler Financial. Blawg discussion about Feinberg and his role as Compensation Czar can be found here.

Some of Feinberg's public comments at the Conference are worth repeating here. Principally, he described the various methods he has used to deal with executive compensation contracts concluded prior to the distribution of the federal monies (and therefore largely beyond his simple approval of disapproval). He suggests in alternate order:

- that although he could in theory attempt to invalidate contracts, he has not;

- that he could, and frequently has, renegotiated contracts;

- or that if the contract must remain intact, he then reviews the compensation of that executive moving forward, and considers how he might adjust future compensation to ameliorate for current pay.

Further, when asked about Occidental's recent purchase of Phibro (or alternatively put, Citigroup's clever avoidance of the drama Andrew Hall's $100 million bonus would cause), Feinberg responded: "Go talk to Citigroup" and "[T]he result speaks for itself."

Feinberg also indicated that statutorily, his office does not have an expiration date and that: "We'll finish 2009 and we'll see where we go from there."

Although there is some indication that the business community is eager to see Feinberg's rulings released, potentially as a "blueprint" for acceptable executive compensation practices moving forward, there is also anecdotal evidence that companies are finding alternative methods of compensating senior executives (for instance, perks such as car service and driver, as well as personal tax and accounting services).

What if Bank of America had acquired Lehman, instead?

It's a question loosely floated by author Andrew Ross Sorkin in his new book, Too Big To Fail: the Inside Story of How Wall Street and Washington Fought to Save the Financial System - and Themselves. In an excerpt published on Dealbreaker today:

As the dinner was ending, Mr. Geithner, approached Mr. Lewis and, leaning close, whispered, “I believe you have a meeting with Dick.” “Yeah, I do,” Mr. Lewis replied.

Mr. Geithner gave him directions to a side room where the two could speak in private. He had apparently already given Mr. Fuld the same instructions, because Mr. Lewis noticed him across the room looking back at them like a nervous date.

* * * * * * * * * * * * *

Seeing Mr. Fuld start to walk in one direction, Mr. Lewis headed in the other; with half of Wall Street looking on, the last thing either of them needed was to have word of their meeting get out. The two men eventually doubled back and found the room. Mr. Fuld explained that he would want at least $25 a share from Bank of America to buy Lehman; Lehman’s shares had closed that day at $18.32. Mr. Lewis thought the number was far too high and couldn’t see the strategic rationale. Unless he could buy the firm for next to nothing, the deal wasn’t worth it. But he held his tongue.

Two days later, he called Mr. Fuld back.

“I don’t think this is going to work for us,” Mr. Lewis said as diplomatically as he could, while leaving open the possibility that they could discuss the matter again.

Hat-tip: Dealbreaker.

Consumer Financial Protection Agency (“CFPA”) moves forward today: to pre-empt or not to pre-empt?

The House Financial Services Committee meets again today to mark-up draft legislation on the Consumer Financial Protection Agency (“CFPA”). The hearing is scheduled at 2pm EST and a live webcast is available here. I have blawgged about the CFPA here and arguing for allowing continued pre-emption; here’s a public policy paper arguing against continued pre-emption.

Recall last week the Committee created significant news for having adopted the Miller-Moore Amendment, which exempts “small” banks and credit unions from CFPA annual examinations. (Where “small” is defined as banks with assets less than $10 billion and credit unions with assets less than $1.5 billion). The Miller-Moore exemption actually eliminates the annual examination for 8,000 of 8,200 banks (or, 98% of American banks). Per the American dream, however, that big bank 2% actually holds 80% of national banks assets, or $11.2 trillion. Bottomline: CFPA would still write rules for all banking institutions, and could investigate a consumer complaint against any bank of any size. (The headlines last week indicating the Committee had caved to special interests were largely overdone - shocker ... The amendment only exempts small banks and credit unions from annual examinations).

Photo credit: Brendan Smialowski via NYTimes.

Pay Czar UPDATE: Deferred Equity Compensation expected across the board; AIG Benmosche Compensation Approved

Ken Feinberg has been reviewing the compensation proposals at a number of significant federally bailed-out companies; notably AIG, BofA, Citigroup, GM (and GMAC), and Chrysler (and Chrysler Financial). It was widely expected he will lean heavily towards cutting salary compensation in favor of deferred equity compensation. It is now being reported that AIG's CEO Robert Benmosche's compensation for 2009 has formally been approved by Feinberg. Feinberg wrote to AIG's compensation committee that Benmosche's $3 million in salary and $4 million in deferred equity compensation was "appropriate" when compared to peer executives.

Kenneth Feinberg more appropriately carries the title of Special Master under the Treasury Department, but is frequently referred to as the Compensation Czar. The Obama Administration anticipates Feinberg's decisions to be a model "best practices" moving forward, but it is apparent the Federal Reserve may move in a slightly different direction when it announces its pay re-regulation as regards the banking industry. The bottom-line across the board in both instances, however, is to effecitvely incentivize workers to forgo undue short-term risks so as to concentrate on long-term financial profitability and stability.

Previous blawg discussion by either Allen or myself regarding Kenneth Feinberg can be found here. All blawg discussion regarding executive compensation can be found here.

Photo credit: Associated Press via WSJ.

Whoopi Goldberg on drugs again? “Rape-rape.”

I have zero interest in the practice of criminal law and so originally had no intention of discussing the Roman Polanski matter here. But then The View and Whoopi Goldberg popped-up on the radar. Goldberg’s participation in the program’s Polanski discussion yesterday included:

“I know it wasn’t rape-rape … All I’m trying to get you to understand, is when we’re talking about what someone did, and what they were charged with, we have to say what it actually was not what we think it was … Initially he was charged with rape, and then he plead guilty to having sex with a minor, okay … We’re a different kind of society. We see things differently. The world sees thirteen year olds and fourteen year olds in the rest of Europe … not everybody agrees with the way we see things.”

A video and transcript of the show is available here. The transcript of the victim's grand jury testimony is available here. Summarized briefly, the incident involved: a 44 year-old man, a 13 year-old girl, lots of “no(s),” alcohol, drugs, and sex including oral, vaginal, and anal.

I think the characterization of “rape-rape” is tremendously irresponsible and dangerously flippant. I do not think Goldberg was referencing various degrees of rape (ie., rape with a weapon might be considered first degree rape in some jurisdictions). Her comments suggests to me a rape that is actionable and rape that is not. In light of some of the frightening statistics of our modern society – one in four college women report surviving a rape or attempted rape - I am frustrated and disappointed by such a cavalier reference. Wth? WTH???!!

Let’s be real on two points. First: Polanski was charged, inter alia, with rape, but ultimately plead-out to engaging in unlawful sexual intercourse with a minor. He was under psychiatric evaluation at a California state prison for 42 days, but was granted a 90 day stay to complete a work project. It was after his evaluation but during this stay period that Polanski fled the jurisdiction. Second (and from someone who has lived in Europe a number of different times and in a number of different locations): Europeans do have a healthier perspective on teenage sex, but Europeans do not condone the drugging and forcible rape of a teenager.

Also allow me to point out that I can appreciate people’s hesitance at accelerating the Polanski matter: it has been over three decades since the crime, the California budget is strained as it is, and significant political chips will be spent to successfully extradite the fugitive from Switzerland. This is what I also appreciate: there was a law, it was broken, a plea was agreed to that included a sentencing hearing, and anticipating a sentence he did not have the courage to face, Polanski fled the jurisdiction.

Just so that I can keep pace with my more liberal and apparently enlightened West Coast peers: smoking is bad, meat is bad, fur is bad, but non-consensual sex with an intoxicated child is okay?

Navel Gazing and UPDATE: Executive Compensation and Financial Markets

So I’ll admit my own distraction for the last week, but was surprised that when I tuned-in again, the issues of executive compensation and market regulation had been subject to significant movement. Seriously: this is why people are afraid to take vacations.

The Consumer Financial Protection Agency (“CFPA”) being proposed by the Obama Administration (discussed earlier here) has taken some serious heat >> members of the President’s own party are offering competing proposals that in fact contain no mention of CFPA at all. Well, sort of … in place of creating a new federal regulatory structure for financial products marketed to consumers, Representative Walt Minnick (D – Idaho) has proposed having existing state and federal regulators work with one another under a Consumer Financial Protection Council (“CFPC”). Rumor also has it that once supportive House Financial Services Committee Chairman Barney Frank (D – Mass.) has indicated that the final bill will not contain the “plain vanilla mandate;” recall, under the CFPA, the government would create standard financial products that would be required to be offered in tandem with specialty products banks and firms offered to consumers. The House Committee meets today at 10am to continue hearings on the matter; a webcast is available from the House site here.

The SEC is creating a new division of Risk, Strategy and Financial Innovation. The new division will advise the commission on how new developments, products, and trends may affect the financial market and systemic risk. The division actually pulls together functions across existing Commission divisions, including the Office of Economic Analysis and the Office of Risk Assessment.

Microsoft’s Board of Directors approved a shareholder say-on-pay proposal, giving its shareholders an advisory vote on executive compensation. The first vote will happen at this year’s shareholder meeting on November 19th, and then occur again every three years after.

The Federal Reserve itself is moving to amend compensation practices, and is seeking to expand its regulatory reach regarding the compensation of nearly all bank employees. Caps are not being sought, but evidently the Fed is toying with different methods of how to curtail the amount of risk-taking employees throughout the bank take on behalf of consumers.

Glad the Fed thinks it can fix something, because every time you hear a bell ring, another American bank fails.

And our favourite main-man – Kenneth Feinberg the Pay Czar – has announced that within the next several weeks he will be disclosing some of the compensation revealed to him and approved by him. Rumour is Feinberg is looking to set some manner of precedent.

And precedent seems to be all we will be getting out of the recent G-20 meeting on the issue of executive compensation. Each of the world leaders in attendance affirmed their intent to reform executive compensation and capital requirements at banks, and then they each exchanged promise rings and caught the next flight home.

FWIW – a few of the headlines I found in my inbox over the course of last week. My continued obsession with Bank of America (“BofA”) of course continues, and has also been hot lately. BofA warrants its own post, though, so see you at lunch!

Photo credit: Anne Geddes, as portrayed by Pauline Kaill on Playle's Online Auction.

The Future of the Clean Water Act

Passed by Congress in 1972, the Clean Water Act (“CWA”) was designed to fill the perceived void in state and local protection of the nation’s waters. It has had two major amendments, the Clean Water Act of 1977 and the Water Quality Act of 1987 and is primarily enforced through regulatory authority granted to the Environmental Protection Agency (“EPA”) and Army Corp of Engineers (“ACE”). The CWA is somewhat unique in that its implementation is achieved through partnerships with the states; many of which are responsible for, among other examples, development of pollution control standards and total maximum daily load allowances – the levels of pollutants that a given water system can contain but still meet water quality standards. Further, EPA has authorized 46 states to directly issue National Pollution Discharge Elimination System (“NPDES”) permits to discharging facilities within their borders.

The scope of federal legislation and regulation and systematic partnership with the states has created a structure whereby the CWA is the primary and in some instances the only method of protecting water quality and integrity in the United States. The strength of the CWA has been weakened dramatically this decade, in large part because of two Supreme Court decisions that narrow applicability of the Act. These decisions have created uncertainty as to scope of federal jurisdiction and the ability of federal and state agencies to utilize their legal and regulatory tools to protect the nation’s waters.

In Solid Waste Agency of Northern Cook County (SWANCC) v. Army Corps of Engineers, 121 S. Ct. 675 (2001), the Supreme Court limited ACE’s authority to regulate discharges into “isolated waters” and dramatically redefined the extent of CWA jurisdiction over “navigable waters.” In denying CWA section 404 jurisdiction over these “isolated waters,” Chief Justice Rehnquist, writing for the majority, suggested that congressional intent as to the scope of federal jurisdiction was unclear and that ACE’s interpretation invoked “the outer limit of Congress’s power” and was not within the text of the CWA.

Rapanos v. United States, 126 S. Ct. 2208 (2006) took another bite out of federal regulation, severely reducing federal jurisdiction over wetlands by limiting the definition of “waters of the United States.” Most troubling, Rapanos provides little in the way of precedent to guide both regulators and the regulated community on the reach of the CWA as applied to wetlands and other smaller bodies of water such as intermittent and ephemeral streams. Five justices denied federal jurisdiction over the Michigan wetland, but only four joined the majority opinion – leading to a 4-4-1 decision with Justice Kennedy and his concurring opinion proposing a “significant nexus” test forming a majority decision.

In the aftermath of these two decisions challenges by the regulated community abound and the federal courts are confused as to how to apply the Rapanos opinion; with a split among the Eleventh, Seventh, and First and Eighth Circuits. These decisions have caused the federal agencies to expend massive resources to address court challenges and to wrestle internally and among each other as to the scope of federal jurisdiction. Countless projects are delayed and by one estimate, more than 40% of facilities (14,800) with current NPDES permits to discharge into small or intermittent streams are arguing that because of the Supreme Court decisions they are no longer subject to limits on their pollution levels. The Department of Justice estimates that in the Eleventh Circuit alone, compliance with Justice Kennedy’s “significant nexus” test would require the federal government to allocate an additional 28,000 employee hours to complete the intense factual and evidentiary analysis required to determine whether there is CWA jurisdiction over projects and facilities.

The massive scope of the CWA and its structure of federal / state partnerships mean that many bodies of water may be left completely unprotected; re-creating the problem that CWA was specifically designed to address. EPA estimates that up to 20 million acres of isolated wetlands are no longer subject to their protection and approximately 60% of stream miles that lead to watersheds may no longer be protected. According to the National Wildlife Federation, these decisions have left surface waters in many western states almost completely unprotected because intermittent streams and related wetlands make up most of their surface water supply. Before Congress, the Arizona Department of Environmental Quality testified that nearly 90% of their water is likely unprotected after these two decisions. In a Texas oil spill case, US v. Chevron, a U.S. District Court ruled that a seasonal creek was not protected by CWA and there was no enforcement jurisdiction to require clean-up even though the creek (and its pollution) flows into larger, navigable waters.

More than just wildlife issues are at stake. Dredging or filling streams, and draining and filling wetlands, can cause or exacerbate flooding downstream with significant public safety and economic implications. According to the non-profit American Rivers a single acre of wetland can store 1 to 1.5 million gallons of flood water and it is estimated that wetlands in the continental United States save over $30 billion in annual flood damage costs. The Sierra Club estimates that no longer protected waters supply drinking water to over 5,000 public water systems, serving over 100 million Americans. Many groups and the EPA recognize that given these recent decisions there may be little that can be done to enforce water quality and integrity provisions of these waters.

The current situation requires Congressional action. Further litigation, although increasing significantly, is unlikely to efficiently or accurately give effect to Congresses original intent. There are two measures currently in Congress. Representative Frank Pallone introduced the Clean Water Protection Act in March 2009 with the primary purpose being the return of some pre-2001 protections with a focus on restricting the incredibly destructive, unsustainable, and polluting practice of mountaintop removal mining. The other and more comprehensive bill is the Clean Water Restoration Act, approved by the Senate Environment and Public Works Committee on June 18, 2009.

The Clean Water Restoration Act (the “Act”) seeks to restore the protections of the CWA to those that existed before 2001. It accomplishes this by clarifying and defining waters of the United States and clearly providing the scope and jurisdiction of the CWA. By detailing CWA jurisdiction, the Act also re-establishes, and provides strong support, for state programs. This is evidenced by the more than 40 states that support the Act. If implemented thoughtfully, the Act can clarify the pre-SWANCC status of water protection. As suggested by the SWANCC case and other litigation matters, there was disagreement and conflict over jurisdiction of the CWA and no one piece of legislation will be a panacea of clarity avoiding all future ambiguity. However, a strong statement of legislative intent and scope can provide the agencies with the necessary legal structure to add more clarity than existed even in 2001. By incorporating the concerns of the regulated community and the federal courts, the agencies can seek to minimize vagueness and uncertainty. The Act presents a real opportunity for federal resources to be spent protecting the nation’s waters instead of litigating about it. This can ultimately benefit all parties involved; should eliminate delay; and should restore water quality, environmental protection, and economic predictability to the management of the country’s water supply.

Executive Compensation Update: Guaranteed Bonuses and the Compensation Czar

(Again, mini-posts this morning in light of time constraints - thanks!).

Compensation Czar Feinberg's August 13th deadline for submission of compensation proposals is fast closing. Subject to the deadline are seven firms that received federal funds earlier this year, including Citigroup. In light of this deadline, I found it really interesting that guaranteed bonuses - uncommon during the worst of the economic crisis - have made a noticeable comeback.

Feinberg's 8/13 deadline is not the only government impetus to try and chain down executive compensation ... but a cynic might say both sides - firms vs. public outrage (proxy government) - of this argument are operating blind to the other's actions. So who is in real need of the reality check? FWIW.

Consumer Financial Protection Agency (“CFPA”): the re-regulation has begun

Olga wrote me last week, bringing my attention to a discussion of whether the U.S. is re-regulating itself out of competition for global business and capital. I kept her note in my inbox, and over the course of the week a number of other articles and blawgers caught my attention on the same topic; Richard Posner among them. My motivation for discussing re-regulation here is not so much the broader perspective of – are the regulators in the best position to tell consumers and businesses how and what they should be doing, and where will that structure lead us in ten years – as much as it is what this re-regulation practically entails to those businesses and consumers immediately subject to it. And I think plenty of folks will be subject to it: in total, as of last week, there are 32 government czars. That’s a lot of administrative law (as a side note for another post: is there an issue of executive vs. legislative power here?).

The Obama Administration has proposed the Consumer Financial Protection Agency (“CFPA”) Act of 2009 (the “Act”), intending a number of things. First, it seeks to bring under federal supervision non-regulated financial bodies that act as banks. This includes mortgage brokers and consumer-credit companies. Second, it will “consolidate[e] responsibility for consumer protection under one agency.” Third, FCPA “market-wide jurisdiction” will focus solely on how banking products and practices affect consumers. And Fourth, the FCPA will have “consolidated authority” to write, supervise, and enforce rules. For example, financial products and services that would come under this jurisdiction include but are not limited to: deposit-taking services, various forms of credit extension and loan servicing rights, as well as real property services (Ie., settlement services, title insurance services, and matters of leasing). The FCPA will have a board of five members serving terms of five years, including: the National Bank Supervisor and four additional members proposed by the President with consent of the Senate. The agency will also have a consumer advisory board (similar to the role of the Investor Advisory Board to the SEC).

The Act does have some teeth, however. Similar to the SEC’s ever-useful §10b and Rule 10b-5 violation of the Exchange Act, the FCPA would be empowered with a similar enforcement provision over similar-such fraud. This includes, among other things, fraud as regards public disclosures of consumer financial products and services, as well as sales practices. One of the most interesting provisions of the Act, however, is the CFPA responsibility to create “standard consumer product[s] or service[s].” Essentially, the CFPA will create bare-bone versions of financial products and service, and these bare-bone versions must be offered for sale alongside the other, privately-created financial products and services. Just a guess, but this “standard” product discussion is going to get pretty lively in the next several months.


Also, as part of the second intent of the FCPA - as described above, consolidating consumer protection – the Act proposes removing consumer-related functions and responsibilities from existing administrative agencies. As the Act stands now, this would affect: the Federal Reserve Board (“Fed”), the Office of the Comptroller of the Currency (“OCC”), the Office of Thrift Supervision (“OTS”), the Federal Deposit Insurance Corporation (“FDIC”), the Federal Trade Commission (“FTC”), and the National Credit Union Administration (“NCUA”). This has raised some eyebrows as the Act was introduced earlier this summer, and is also likely to create drama throughout the next several months.

The House has absorbed much of the Act in the form of bill H.R. 3126. However, the House bill does not contain reference to either the creation of a National Bank Supervisor, or removing consumer-related enforcement as delegated by the Community Reinvestment Act (“CRA”) (as regards depository institutions engaging in fair lending, overseen by the OCC, the Fed, the FDIC, and the OTS). Discussion of the bill is pending the Congressional summer adjournment (Washington reconvenes after Labor Day). Additionally, there are Senate and House bills for a Financial Product Safety Commission (S. 566 and H.R. 1705, respectively). Both bills are yet in Committee, so am unsure at the time of this post if their provisions will be absorbed by the FCPA, or forfeited altogether.

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Healthcare Reform

I listened with great interest to President Obama’s health care speech tonight. No domestic issue more concerns me at this time. Economic recovery, education, and mass transit are all very important, but now is the time to focus on meaningful change to our health care system.

Any reform, however, should address coverage qualities currently lacking, particularly accessibility to all, portability, and economic viability. First, universal accessibility should be achieved. Health care should not be rationed based purely on ability to pay. Objections of fairness aside, most Americans could easily find themselves one bad day away from being cut off from essential medical care. This is a utilitarian argument. Second, our access to health care should not be contingent upon employment. Keeping my health care even if I lose or change my job would greatly enhance my ability to choose from a greater variety of employment opportunities. It would be easier for people to choose to work at small firms or non-profits if medical plans were independent of employment, adding much needed flexibility to our economy. Finally, it should be economically viable. What I mean by this is that the overall proportion of our GDP dedicated to health care should fall. Spending up to 18% of our national income on health care is far too much. Every 1% drop in that proportion frees up more than $140 billion to be reallocated to other (assumed) more productive uses. That’s more than $450 in savings for every U.S. citizen. If we spent in proportion to what Germany spends, that amount increases to more than $2,800 for every American.

Critics of the public option are again talking up the prospect of introducing more market based competition to drive value for U.S. consumers. Professors Michael Porter and Elizabeth Olmsted Tiesberg argued persuasively for a renewed effort in creating health care competition in their 2004 HBR article “Redefining Competition in Health care.” As one who believes in the power of the free market to drive better living standards, I find this position ideologically attractive. But the history of healthcare reform suggests otherwise. Attempts to introduce market based incentives have ended in dismal failure. How competitive a market is is a matter of national importance. Health care, for a variety of reasons, is not competitive. Because of this, we need government intervention and action in the form of a public plan.

I am willing to pay a higher share of my income in taxes in return for a health care system with the qualities outlined above. I am heartened by President Obama’s strong push towards health care reform. Let’s hope that he is successful in achieving his twin goals of reducing cost and increasing coverage. That would be forward movement indeed.