tag:theconversation.com,2011:/uk/topics/dodd-frank-financial-reform-act-36098/articlesDodd-Frank Financial Reform Act – The Conversation2023-04-18T12:43:22Ztag:theconversation.com,2011:article/2027092023-04-18T12:43:22Z2023-04-18T12:43:22Z5 policies that could make future bank failures less likely or severe<figure><img src="https://images.theconversation.com/files/521349/original/file-20230417-18-wdwfzm.jpg?ixlib=rb-1.1.0&rect=83%2C83%2C5513%2C2962&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Democratic Sen. Elizabeth Warren of Massachusetts is a big proponent of banking reforms.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/sen-elizabeth-warren-talks-with-reporters-following-the-news-photo/1473759465">Chip Somodevilla/Getty Images</a></span></figcaption></figure><p>The <a href="https://www.fdic.gov/bank/historical/bank/bfb2023.html">abrupt failures of Silicon Valley Bank and Signature Bank</a> and subsequent concerns about the <a href="https://www.npr.org/2023/03/16/1163958533/first-republic-bank-silicon-valley-bank-signature-bank-bank-run">stability of other banks</a> have reignited a fierce <a href="https://www.npr.org/2023/03/28/1166507714/senate-hearing-silicon-valley-bank-signature-bank-failure-collapse">debate among lawmakers</a>, the <a href="https://finance.yahoo.com/news/americas-largest-banks-prepare-to-show-investors-why-theyre-not-like-svb-133532139.html">financial industry</a>, the <a href="https://www.politico.com/news/2023/03/30/biden-fed-regional-banks-svb-00089686">Biden administration</a> and <a href="https://news.yahoo.com/former-fdic-chairman-william-isaac-225504678.html">former government officials</a> about an array of banking reforms and <a href="https://www.marketplace.org/2023/03/14/former-fed-governor-who-implemented-dodd-frank-reflects-on-svb-collapse/">regulatory changes</a>.</p>
<p>The ideas floated within a month of <a href="https://www.axios.com/2023/03/18/silicon-valley-bank-timeline">Silicon Valley Bank’s collapse</a> on March 10, 2023, range from calls to tweak banking regulations to a major overhaul of the government’s oversight of the banking system.</p>
<p>I’m a <a href="https://www.bgendreau.com/">finance professor</a> who previously worked for two major banks and was an economist at the Federal Reserve. Based on what I’ve learned from the <a href="https://theconversation.com/svbs-newfangled-failure-fits-a-century-old-pattern-of-bank-runs-with-a-social-media-twist-202324">banking crises that have occurred in the past 40 years</a>, I’d put all the banking reform proposals under consideration into five categories.</p>
<h2>1. Stronger supervision</h2>
<p>Silicon Valley Bank reportedly <a href="https://www.nytimes.com/2023/03/19/business/economy/fed-silicon-valley-bank.html">ignored six separate warnings</a> from the Federal Reserve Bank of San Francisco that it had too little cash on hand and was engaging in risky practices. So calls for stronger bank supervision and regulation should come as no surprise.</p>
<p>Any such reforms would at least, in part, reverse changes from a <a href="https://www.cnn.com/2023/03/14/politics/facts-on-trump-2018-banking-deregulation/index.html">law Congress passed in 2018</a> that loosened some banking regulations. </p>
<p>Previously, the government had to pay especially close attention to banks with at least US$50 billion in assets. Among other things, it needed to subject them to <a href="https://www.federalreserve.gov/supervisionreg/stress-tests-capital-planning.htm">stress tests</a> – in which the authorities assess whether banks have the ability to respond to hypothetical economic shocks – by having enough cash on hand to meet relatively strict <a href="https://www.federalreserve.gov/publications/large-bank-capital-requirements-20210805.htm">capital requirements</a>.</p>
<p>The 2018 law raised the cutoff for what counts as a “<a href="https://theconversation.com/the-collapse-of-major-us-banks-leads-to-bills-calling-for-more-regulation-201747">systemically important</a>” bank to $250 billion in assets, thus allowing many banks, including SVB, to avoid these more stringent regulations.</p>
<p><a href="https://www.cnbc.com/2023/03/30/silicon-valley-bank-joe-biden-calls-for-new-banking-regulations.html">The White House has already called</a> for new rules similar to what’s listed above for mid-sized banks — those with $100 billion to $250 billion in assets. <a href="https://www.cbsnews.com/news/silicon-valley-bank-signature-bank-collapse-joe-biden-cbs-news-explains/">SVB, which had about $210 billion in assets</a>, fell in this category before its demise.</p>
<p>Sen. Elizabeth Warren of Massachusetts and Rep. Katie Porter of California have introduced legislation in the Senate and the House of Representatives that <a href="https://www.warren.senate.gov/newsroom/press-releases/warren-porter-dozens-of-democratic-lawmakers-introduce-bill-to-repeal-2018-rollback-of-critical-dodd-frank-protections">would simply repeal the 2018 law</a>, returning the threshold to $50 billion.</p>
<p>Major banking trade groups, such as the <a href="https://bpi.com/bpi-statement-on-svb-and-signature-bank/">Bank Policy Institute</a>, which advocates on behalf of its large-bank members, have argued that the 2018 law was not a major factor in the failures of SVB and Signature Bank.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/521350/original/file-20230417-24-17dhk2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="An ATM with the SVB logo" src="https://images.theconversation.com/files/521350/original/file-20230417-24-17dhk2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/521350/original/file-20230417-24-17dhk2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/521350/original/file-20230417-24-17dhk2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/521350/original/file-20230417-24-17dhk2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/521350/original/file-20230417-24-17dhk2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/521350/original/file-20230417-24-17dhk2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/521350/original/file-20230417-24-17dhk2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Silicon Valley Bank’s collapse could lead to tighter regulations.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/the-svb-private-logo-is-displayed-on-an-atm-outside-of-a-news-photo/1248916556">Patrick T. Fallon/AFP via Getty Images</a></span>
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</figure>
<h2>2. Higher deposit insurance threshold</h2>
<p>The role that deposit insurance plays in staving off and alleviating banking crises could also change.</p>
<p>The Federal Deposit Insurance Corp. was only supposed to <a href="https://www.frbsf.org/education/publications/doctor-econ/2007/september/fdic-deposit-insurance/">insure accounts of up to $100,000</a> during the 2008 financial crisis. But instead, it <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/2016/2016-recordkeeping-3064-ae33-c-01.pdf">covered nearly all depositors</a>, uninsured as well as insured, in most bank failures that occurred at that time.</p>
<p>The government subsequently <a href="https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/">raised that limit to $250,000</a> in October 2008. But the FDIC once again <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.html">broke with its official mandate</a> when it protected depositors from losses in excess of that ceiling during the March 2023 bank failures.</p>
<p>Some lawmakers have suggested raising the $250,000 cap on deposit insurance.</p>
<p><a href="https://www.nytimes.com/2023/03/14/business/maxine-waters-fdic.html">Rep. Maxine Waters</a>, the highest-ranking Democrat on the House Financial Services Committee, says she supports that step. And Warren has suggested that she might <a href="https://www.cbsnews.com/news/elizabeth-warren-fdic-insurance-cap-lift-silicon-valley-bank/">support new limits that are in the millions of dollars</a> rather than the hundreds of thousands.</p>
<p>“Is it $2 million? Is it $5 million? Is it 10 million?” she said in a television interview.</p>
<p>But those lawmakers have so far stopped short of calling for the FDIC to commit to always fully covering all losses among customers who experience losses when bank failures cause their deposits to vanish – rather than doing so on a case by case basis.</p>
<p>FDIC Chair Martin J. Gruenberg told the Senate Banking Committee during a recent hearing that the insurer plans to <a href="https://www.fdic.gov/news/speeches/2023/spmar2723.pdf">release its own proposals on May 1</a>.</p>
<h2>3. ‘Modified deposit payoff’</h2>
<p>Other proposals go further.</p>
<p>For example, <a href="https://www.wsj.com/articles/a-proven-way-to-avoid-moral-hazard-receivership-certificate-modified-deposit-payoff-fdic-fed-8b74dc06">William Isaac</a>, who chaired the FDIC from 1978 to 1986, is calling for the government to insure all non-interest-bearing checking accounts, regardless of size. But he also has a recommendation that might potentially discipline banks that run into trouble.</p>
<p>Isaac distinguishes between deposits that are essentially investments, such as <a href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificates of deposit</a> that people use for long-term savings purposes, and, say, a checking account a customer maintains primarily for basic transactions.</p>
<p>Investors with large sums of money held in CDs are generally wealthy individuals who can either assess financial risks on their own or with input from a paid adviser. People with CDs also have an incentive to leave them with the bank, because withdrawing the money tied up in them before maturity can mean paying a penalty or forfeiting <a href="https://www.cnbc.com/select/high-yield-savings-account-vs-a-cd-whats-the-difference/">the high interest rates that make them attractive</a> investments. </p>
<p>Isaac also advocates returning to the way uninsured deposits – currently, those above the $250,000 mark – were treated in the 1980s. He calls this the “modified deposit payoff” model.</p>
<p>In resolving a bank failure, the FDIC would cover the full cost of compensating customers with uninsured deposits that don’t pay any interest, yet give uninsured depositors certificates worth 80% of their uninsured funds.</p>
<p>If the government were to recover at least 80% of its cost of covering the uninsured deposits, often by <a href="https://dx.doi.org/10.2139/ssrn.3983380">selling failed banks to financial institutions</a>, investors with large deposits at a failed bank would get paid more, Isaac explained in a <a href="https://www.wsj.com/articles/a-proven-way-to-avoid-moral-hazard-receivership-certificate-modified-deposit-payoff-fdic-fed-8b74dc06">Wall Street Journal op-ed</a>.</p>
<p>“This reform would protect business accounts that are essential to keeping the economy moving and would reduce substantially the risk of panics,” he wrote.</p>
<h2>4. ‘Ring-fencing’</h2>
<p>The most comprehensive proposals that call for restructuring the banking system would use what’s known as a “ring fence” model.</p>
<p>Ring-fencing segregates a portion of bank assets and liabilities from the rest. The <a href="https://www.bankofengland.co.uk/prudential-regulation/key-initiatives/ring-fencing">United Kingdom already follows this approach</a>. </p>
<p>Since 2019, British banks have had to segregate their retail banking activities from their presumably riskier investment banking and international lending.</p>
<p>The most radical of these proposals would lodge all insured deposits in “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2571000">narrow banks</a>” which would be allowed to hold only cash and U.S. Treasury securities.</p>
<p>All bank lending activity would occur outside of narrow banks, perhaps in finance companylike firms funded with uninsured borrowing and capital instruments such as stocks and bonds.</p>
<p><a href="https://www.brookings.edu/book/what-should-banks-do/">Economist Robert Litan wrote a book about</a> narrow-banking in the 1980s, but the idea can be <a href="https://positivemoney.org/2011/07/what-exactly-is-full-reserve-banking-2/">traced back to Milton Friedman</a> – the late University of Chicago economist and Nobel Prize winner.</p>
<p>Banks are typically required to set aside a portion of their deposits as reserves held either as cash or deposits at their local Federal Reserve bank. However, <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm">the Fed reduced that share to zero</a> in March 2020 – effectively eliminating the requirement altogether.</p>
<p>Some experts question whether ring-fencing, by <a href="https://www.brookings.edu/research/understanding-ring-fencing-and-how-it-could-make-banking-riskier/">preventing the transfer of capital among bank subdivisions</a>, might make banks less flexible in responding to financial shocks – and therefore riskier.</p>
<p>Critics of the narrow-bank model point out that this approach would drastically reduce the amount of money banks could lend. As a result, systemic risks would shift from real banks into “<a href="https://www.investopedia.com/terms/s/shadow-banking-system.asp">shadow banks</a>” – securities firms, hedge funds and other credit intermediaries that face less regulation and supervision. Shadow banks contributed to the <a href="https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Shadow-Banks">2007-2009 global financial crisis</a>, according to the International Monetary Fund.</p>
<h2>5. Compensation clawbacks</h2>
<p>At the heart of the debate about banking reform is “<a href="https://theconversation.com/what-does-moral-hazard-mean-a-scholar-of-financial-regulation-explains-why-its-risky-for-the-government-to-rescue-banks-202091">moral hazard</a>.” That’s a concept regarding how insurance can create an incentive to take bigger risks when people, institutions and <a href="https://dx.doi.org/10.2139/ssrn.3016604">even countries</a> realize they won’t bear the full cost of that risk.</p>
<p>One way to reduce risks in this context is to make bank executives bear some of the costs when the banks they run fail.</p>
<p>A bipartisan group of senators have introduced a bill to do just that. It <a href="https://www.businessinsider.com/elizabeth-warren-josh-hawley-bill-clawback-pay-failed-bank-executives-2023-3">would require regulators to claw back compensation</a>, including the bonuses and stock awards paid to bank executives in the five years preceding a failure.</p>
<p>In my view, it’s too early to tell whether policymakers will make minor adjustments or opt for more significant reforms.</p>
<p>One thing that I hope all policymakers will keep in mind is that there are trade-offs between the financial stability of banks and market discipline. Offering too much government support – such as insuring all liabilities in the event of a bank failure – creates incentives for banks and their customers to ignore risks or to engage in risky behavior.</p>
<p><em>This article was updated to clarify Robert Litan’s contributions to the debate over banking reform.</em></p><img src="https://counter.theconversation.com/content/202709/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brian Gendreau previously served as a staff economist at the Federal Reserve Board and the Federal Reserve Bank of Philadelphia.</span></em></p>Financial crises are inevitably followed by legislation to restructure the banking system, and the ongoing problems with bank stability are likely to be no exception.Brian Gendreau, Director, Latin American Business Environment program, University of FloridaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2023242023-03-29T12:29:05Z2023-03-29T12:29:05ZSVB’s newfangled failure fits a century-old pattern of bank runs, with a social media twist<figure><img src="https://images.theconversation.com/files/517784/original/file-20230327-17-juw7wk.jpg?ixlib=rb-1.1.0&rect=49%2C19%2C3196%2C2318&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Thousands of banks failed in the Great Depression.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/depositors-congregate-outside-the-state-ordered-closed-news-photo/514877484">Bettmann via Getty Images</a></span></figcaption></figure><p>The <a href="https://theconversation.com/silicon-valley-bank-biggest-us-lender-to-fail-since-2008-financial-crisis-a-finance-expert-explains-the-impact-201626">failure of Silicon Valley Bank</a> on March 10, 2023, came as a shock to most Americans. Even people like myself, <a href="https://scholar.google.com/citations?user=RYY7tWEAAAAJ&hl=en&oi=ao">a scholar of the U.S. banking system</a> who has worked at the Federal Reserve, didn’t expect SVB’s collapse.</p>
<p>Usually banks, like all companies, fail after a prolonged period of lackluster performance. But SVB, the nation’s 16th-largest bank, <a href="https://ir.svb.com/financials/annual-reports-and-proxies/default.aspx">had been stable and highly profitable</a> just a few months before, having earned about US$1.5 billion in profits in the last quarter of 2022. </p>
<p>However, <a href="https://americandeposits.com/brief-history-us-bank-failures/">financial history is filled with examples</a> of seemingly stable and profitable banks that unexpectedly failed. </p>
<p>The demise of <a href="https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp">Lehman Brothers and Bear Stearns</a>, two prominent investment banks, and <a href="https://publicintegrity.org/inequality-poverty-opportunity/no-1-of-the-subprime-25-countrywide-financial-corp/">Countrywide Financial Corp.</a>, a subprime mortgage lender, during the 2008-2009 financial crisis; the <a href="https://www.investopedia.com/terms/s/sl-crisis.asp">Savings and Loan banking crisis</a> in the 1980s; and the complete collapse of the U.S. <a href="https://www.federalreservehistory.org/essays/great-depression">banking system during the Great Depression</a> didn’t unfold in exactly the same way. But they had something in common: An unexpected change in economic conditions created an initial bank failure or two, followed by general panic and then large-scale economic distress.</p>
<p>The main difference this time, in my view, is that modern innovations may have hastened SVB’s demise.</p>
<h2>Great Depression</h2>
<p>The Great Depression, which <a href="https://www.investopedia.com/terms/g/great_depression.asp">lasted from 1929 to 1941</a>, epitomized the public harm that bank runs and financial panic can cause.</p>
<p>Following a rapid expansion of the “<a href="https://www.history.com/topics/roaring-twenties">Roaring Twenties</a>,” the U.S. economy began to slow in early 1929. The <a href="https://www.investopedia.com/terms/g/great_depression.asp">stock market crashed on Oct. 24, 1929</a> – a date known as “Black Tuesday.”</p>
<p>The massive losses investors suffered weakened the economy and led to distress at some banks. Fearing that they would lose all their money, customers began to withdraw their funds from the weaker banks. Those banks, in turn, began to rapidly sell their loans and other assets to pay their depositors. These rapid sales pushed prices down further.</p>
<p>As this financial crisis spread, depositors with accounts at nearby banks also began queuing up to withdraw all their money, <a href="https://doi.org/10.1016/j.jfineco.2015.01.006">in a quintessential bank run</a>, culminating in the failure of thousands of banks by early 1933. Soon after President Franklin D. Roosevelt’s first inauguration, the federal government resorted to <a href="https://www.newyorkfed.org/research/epr/09v15n1/0907silb.html">shutting all banks in the country</a> for a whole week.</p>
<p>These failures meant that banks could no longer lend money, which led to more and more problems. The <a href="https://theconversation.com/how-high-will-unemployment-go-during-the-great-depression-1-in-4-americans-were-out-of-work-135508">unemployment rate spiked to around 25%</a>, and the <a href="https://www.federalreservehistory.org/essays/great-depression">economy shrank until the outbreak of World War II</a>.</p>
<p>Determined to avoid a repeat of this debacle, the government tightened banking regulations with the <a href="https://www.investopedia.com/articles/03/071603.asp">Glass-Steagall Act</a> of 1933. It prohibited commercial banks, which serve consumers and small and medium-size businesses, from engaging in investment banking and <a href="https://www.fdic.gov/about/history">created the Federal Deposit Insurance Corporation</a>, which insured deposits up to a certain threshold. That limit has risen sharply over the past 90 years, from <a href="https://www.bankrate.com/banking/fdic-limits-history/">$2,500 in 1933 to $250,000 in 2010</a> – the same limit in place today.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/517797/original/file-20230327-28-tieoq7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="The Federal Deposit Insurance Corporation's round logo on a shiny stone wall" src="https://images.theconversation.com/files/517797/original/file-20230327-28-tieoq7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517797/original/file-20230327-28-tieoq7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517797/original/file-20230327-28-tieoq7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517797/original/file-20230327-28-tieoq7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517797/original/file-20230327-28-tieoq7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517797/original/file-20230327-28-tieoq7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517797/original/file-20230327-28-tieoq7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The government created the FDIC to protect depositors from bank failures.</span>
</figcaption>
</figure>
<h2>S&L crisis</h2>
<p>The nation’s new and improved banking regulations ushered in a period of relative stability in the banking system that lasted about 50 years.</p>
<p>But in the 1980s, <a href="https://www.federalreservehistory.org/essays/savings-and-loan-crisis">hundreds of the small banks known as savings and loan</a> associations failed. Savings and loans, also called “thrifts,” were generally small local banks that mainly made mortgage loans to households and collected deposits from their local communities. </p>
<p>Beginning in 1979, the Federal Reserve began to hike interest rates very aggressively to fight the <a href="https://fred.stlouisfed.org/series/DFF">high inflation rates that had become entrenched</a>.</p>
<p>By the early 1980s, <a href="https://www.presidency.ucsb.edu/documents/remarks-signing-into-law-the-depository-institutions-deregulation-and-monetary-control-act#axzz1mquUfO88">Congress began allowing banks to pay market interest rates</a> on depositers’ accounts. As a result, the interest rate S&Ls had to pay their customers was much higher than the interest income they were earning on the loans they had made in prior years. That imbalance caused many of them to lose money.</p>
<p>Even though about 1 in 3 S&Ls failed from around 1986 through 1992 – somewhere around 750 banks – most depositors at small S&Ls were protected by the <a href="https://americandeposits.com/history-and-timeline-of-changes-to-fdic-coverage-limits/">FDIC’s then-$100,000 insurance limit</a>. Ultimately, resolving that crisis cost taxpayers the equivalent of about <a href="https://www.investopedia.com/terms/s/sl-crisis.asp">$250 billion in today’s dollars</a>.</p>
<p>Because the savings and loans industry was not directly connected to the big banks of that era, their collapse did not cause runs at the bigger institutions. Nevertheless, the S&L collapse and the <a href="https://fraser.stlouisfed.org/title/financial-institutions-reform-recovery-enforcement-act-1989-firrea-1046">government’s regulatory response</a> did reduce the supply of credit to the economy.</p>
<p>As a result, the U.S. economy underwent a mild <a href="https://www.thebalancemoney.com/the-history-of-recessions-in-the-united-states-3306011">recession in the latter half of 1990 and first quarter of 1991</a>. But the banking system escaped further distress for nearly two decades.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/517790/original/file-20230327-14-hky2rp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Black and white photo of people lined up outside a bank." src="https://images.theconversation.com/files/517790/original/file-20230327-14-hky2rp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517790/original/file-20230327-14-hky2rp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=459&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517790/original/file-20230327-14-hky2rp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=459&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517790/original/file-20230327-14-hky2rp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=459&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517790/original/file-20230327-14-hky2rp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=577&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517790/original/file-20230327-14-hky2rp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=577&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517790/original/file-20230327-14-hky2rp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=577&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">High inflation spurred failures of many small savings-and-loan banks in the 1980s.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/depositors-lined-up-for-the-fourth-day-to-withdraw-money-news-photo/515242014">Bettmann via Getty Images</a></span>
</figcaption>
</figure>
<h2>Great Recession</h2>
<p>Against this backdrop of relative stability, Congress <a href="https://www.investopedia.com/terms/g/glba.asp">repealed most of Glass-Steagall in 1999</a> – eliminating Depression-era regulations that restricted the scope of businesses that banks could engage in.</p>
<p>Those changes contributed to what happened when, at the start of a recession that began in December 2007, the <a href="https://fred.stlouisfed.org/series/USRECD">entire financial sector suffered a panic</a>.</p>
<p>At that time, large banks, freed from the Depression-era restrictions on securities trading, as well as investment banks, hedge funds and other institutions outside the traditional banking system, had <a href="https://www.investopedia.com/terms/m/mbs.asp">heavily invested in mortgage-backed securities</a>, a kind of bond backed by pooled mortgage payments from lots of homeowners. These bonds were highly profitable amid the housing boom of that era, and they helped many <a href="https://fred.stlouisfed.org/series/BOGZ1FA796060035Q">financial institutions reap record profits</a>.</p>
<p>But the Federal Reserve had been <a href="https://fred.stlouisfed.org/series/DFF">increasing interest rates since 2004</a> to slow the economy. By 2007, many households with <a href="https://files.consumerfinance.gov/f/201204_CFPB_ARMs-brochure.pdf">adjustable-rate mortgages</a> could no longer afford to make their larger-than-expected home loan payments. That led investors to fear a rash of mortgage defaults, and the values of securities backed by mortgages plunged.</p>
<p>It wasn’t possible to know which investment banks owned a lot of these vulnerable securities. Rather than wait to find out and risk not getting paid, most of the depositors rushed to get their money out by late 2007. This stampede led to cascading failures in 2008 and 2009, and the federal government <a href="https://www.russellsage.org/publications/rethinking-financial-crisis">responded with a series of big bailouts</a>.</p>
<p>The government even <a href="https://www.politico.com/story/2018/12/19/bush-bails-out-us-automakers-dec-19-2008-1066932">bailed out General Motors and Chrysler</a>, two of the country’s three largest automakers, in December 2008 to <a href="https://doi.org/10.1093/qje/qjw031">keep the industry from going bankrupt</a>. That happened because the major car companies relied on the financial system to provide potential car buyers with credit to purchase or lease new cars. But when the financial system collapsed, buyers could no longer obtain credit to finance or lease new vehicles.</p>
<p>The <a href="https://www.federalreservehistory.org/essays/great-recession-of-200709">Great Recession lasted until June 2009</a>. Stock prices <a href="https://www.thebalancemoney.com/stock-market-crash-of-2008-3305535">plummeted by more than 50%</a>, and <a href="https://www.bls.gov/opub/mlr/2018/article/great-recession-great-recovery.htm">unemployment peaked at around 10%</a> – the highest rate since the early 1980s.</p>
<p>As with the Great Depression, the government responded to this financial crisis with significant new regulations, including a new law known as the <a href="https://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm">Dodd-Frank Act of 2010</a>. It imposed stringent new requirements on banks with assets above $50 billion.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/517792/original/file-20230327-19-xsl2ub.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A group of despondent men look aghast." src="https://images.theconversation.com/files/517792/original/file-20230327-19-xsl2ub.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517792/original/file-20230327-19-xsl2ub.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=407&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517792/original/file-20230327-19-xsl2ub.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=407&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517792/original/file-20230327-19-xsl2ub.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=407&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517792/original/file-20230327-19-xsl2ub.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517792/original/file-20230327-19-xsl2ub.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517792/original/file-20230327-19-xsl2ub.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Traders in Chicago watch stock index futures plunge on March 17, 2008.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/traders-watch-prices-in-the-s-p-500-stock-index-futures-pit-news-photo/80276991">Scott Olson/Getty Image</a></span>
</figcaption>
</figure>
<h2>Close-knit customers</h2>
<p>Congress <a href="https://www.cnn.com/2023/03/14/politics/facts-on-trump-2018-banking-deregulation/index.html">rolled back some of Dodd-Frank’s most significant changes</a> only eight years after lawmakers approved the measure. </p>
<p>Notably, the most stringent requirements were now reserved for banks with more than $250 billion in assets, up from $50 billion. That change, which Congress passed in 2018, paved the way for regional banks like SVB to <a href="https://www.govexec.com/oversight/2023/03/regulatory-failure-101-what-collapse-silicon-valley-bank-reveals/384124/">rapidly expand with much less regulatory oversight</a>.</p>
<p>But still, how could SVB collapse so suddenly and without any warning?</p>
<p>Banks take deposits to make loans. But a loan is a long-term contract. Mortgages, for example, can last for 30 years. And deposits can be withdrawn at any time. To reduce their risks, banks can invest in bonds and other securities that they can quickly sell in case they need funds for their customers.</p>
<p>In the case of SVB, the <a href="https://www.reuters.com/business/finance/svb-collapse-unleashes-treasury-volatility-whiplashing-investors-2023-03-14/">bank invested heavily in U.S. Treasury bonds</a>. Those bonds do not have any default risk, as they are debt issued by the federal government. But <a href="https://www.schwab.com/learn/story/what-happens-to-bonds-when-interest-rates-rise">their value declines when interest rates rise</a>, as newer bonds pay higher rates compared with the older bonds.</p>
<p>SVB bought a lot of Treasury bonds it had on hand when interest rates were close to zero, but the <a href="https://fred.stlouisfed.org/series/DFF">Fed has been steadily raising interest rates</a> since March 2022, and the <a href="https://www.cnbc.com/bonds/">yields available for new Treasurys</a> <a href="https://www.usbank.com/investing/financial-perspectives/market-news/interest-rates-affect-bonds.html">sharply increased over the next 12 months</a>. Some depositors became concerned that <a href="https://www.npr.org/2023/03/19/1164531413/bank-fail-how-government-bonds-turned-toxic-for-silicon-valley-bank">SVB might not be able to sell these bonds</a> at a high enough price to repay all its customers.</p>
<p>Unfortunately for SVB, these depositors were very close-knit, with most in the tech sector or startups. They <a href="https://www.washingtonexaminer.com/news/business/svb-collapse-peter-thiel-silicon-valley-">turned to social media</a>, <a href="https://www.marketplace.org/2023/03/17/behind-svbs-collapse-are-a-whole-lot-of-texts-on-messaging-groups/">group text messages</a> and other modern forms of rapid communication to share their fears – which quickly went viral. </p>
<p>Many large depositors all rushed at the same time to get their funds out. Unlike what happened nearly a century earlier during the Great Depression, they generally tried to withdraw their money online – without forming chaotic lines at bank branches.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/517794/original/file-20230327-15-712uah.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="People line up, social distanced, along a wall with the letters s, v and b." src="https://images.theconversation.com/files/517794/original/file-20230327-15-712uah.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517794/original/file-20230327-15-712uah.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517794/original/file-20230327-15-712uah.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517794/original/file-20230327-15-712uah.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517794/original/file-20230327-15-712uah.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517794/original/file-20230327-15-712uah.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517794/original/file-20230327-15-712uah.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Most of the SVB bank failure drama occurred online rather than in person.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/people-wait-for-service-outside-silicon-valley-bank-in-news-photo/1248284116?adppopup=true">John Brecher for The Washington Post via Getty Images</a></span>
</figcaption>
</figure>
<h2>Will more shoes drop?</h2>
<p>The government allowed SVB, which is being <a href="https://www.fdic.gov/news/press-releases/2023/pr23023.html">sold to First Citizens Bank</a>, and <a href="https://www.fdic.gov/bank/historical/bank/bfb2023.html">Signature Bank</a>, a smaller financial institution, to fail. But it agreed to repay all depositors – including those with deposits above the $250,000 limit.</p>
<p>While the authorities have not explicitly guaranteed all deposits in the banking system, I see the bailout of all SVB depositors as a clear signal that the government is prepared to take extraordinary steps to protect deposits in the banking system and prevent an overall panic. </p>
<p>I believe that it is too soon to say whether these measures will work, especially as the Fed is still fighting inflation and raising interest rates. But at this point, major U.S. banks appear safe, though there are growing risks among the smaller regional banks.</p><img src="https://counter.theconversation.com/content/202324/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Ramcharan does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Crises fueled by bank runs, starting with the Great Depression, have had something in common: Unexpected changes spur bank failures, followed by general panic and then large-scale economic distress.Rodney Ramcharan, Professor of Finance and Business Economics, University of Southern CaliforniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/988422018-06-29T10:35:48Z2018-06-29T10:35:48ZMick Mulvaney turned the CFPB from a forceful consumer watchdog into a do-nothing government cog<p>Until last Thanksgiving, the <a href="https://www.consumerfinance.gov/">Consumer Financial Protection Bureau</a> was known for forcefully pursuing its core mission, returning nearly US$12 billion to about 30 million consumers who had been taken advantage of by financial institutions. </p>
<p>But since then, the bureau has been <a href="https://theconversation.com/consumers-are-biggest-losers-of-trumps-ongoing-war-on-regulations-91301">known</a> for … well, not much. After Obama-appointee Richard Cordray stepped down in November, President Donald Trump named as interim director, his budget chief Mick Mulvaney, <a href="https://www.vox.com/policy-and-politics/2017/11/16/16667266/mick-mulvaney-cfpb-cordray-omb-joke">who has long been a foe</a> of the CFPB. </p>
<p>The president <a href="https://www.msn.com/en-us/news/politics/trump-nominates-budget-official-kraninger-to-lead-consumer-bureau/ar-AAyPeeU">recently nominated</a> a new permanent director – who has no consumer finance experience but is one of Mulvaney’s own deputies at the Office of Budget and Management – for a five-year term, with hearings likely to take place later this year. </p>
<p>So what does this mean for the only government agency focused on protecting consumers from financial shenanigans? I’ve been writing about consumer law for more than 30 years and follow the work of the CFPB closely. Let me explain what it used to do, what it’s doing now and what the change means for consumers. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Richard Cordray left the CFPB last year to run for governor Ohio.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Ohio-Governors-Race-Democrats/111b04b4845540898f57e1daf66f6f06/14/0">AP Photo/John Minchillo</a></span>
</figcaption>
</figure>
<h2>The CFPB under Cordray</h2>
<p>The CFPB <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">was launched in 2011</a> in the aftermath of the 2008 financial crisis as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The goal was to protect consumers from deceptive or misleading practices in the financial industry.</p>
<p>So what has the agency accomplished in its short life span? A lot. Here are a few highlights. </p>
<ul>
<li><p>It <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">fined Wells Fargo</a> $100 million and forced it to refund fees it had <a href="https://theconversation.com/how-wells-fargo-encouraged-employees-to-commit-fraud-66615">fraudulently charged customers</a> by <a href="https://dx.doi.org/10.2139/ssrn.2516432">opening millions of fake accounts</a> without their permission. The bank was also required to hire an independent consultant to review its procedures. This probably wouldn’t have happened nationwide without the CFPB.</p></li>
<li><p>It blocked debt collector attorneys from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-halt-illegal-debt-collection-practices-lawsuit-mill-and-debt-buyer/">suing consumers based on false information</a>. </p></li>
<li><p>It discovered systemic problems with consumer credit reports and forced companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-oversight-uncovers-and-corrects-credit-reporting-problems/">correct errors</a>.</p></li>
<li><p>It compelled credit card companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-subprime-credit-card-company-to-refund-2-7-million-for-charging-illegal-credit-card-fees/">refund illegal fees</a>. </p></li>
</ul>
<p>And the list goes on and on. In addition, after the bureau began publishing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">consumer complaints on its website</a>, financial institutions have responded <a href="https://www.consumerfinance.gov/data-research/consumer-complaints">more than 700,000 times</a>, often by providing remedies.</p>
<h2>What the CFPB’s been up to lately</h2>
<p>All that action came to a very sudden stop the day Mulvaney entered the building on Nov. 27. Although there was a <a href="https://www.nytimes.com/2017/11/28/us/politics/mick-mulvaney-leandra-english-consumer-bureau.html">brief tussle</a> over who had the right to run the bureau, Mulvaney quickly took charge and installed his own people. </p>
<p>Since then, Mulvaney has brought only <a href="https://www.consumerfinance.gov/about-us/newsroom/bureau-consumer-financial-protection-settles-security-group-inc/">two cases</a>, one of which was against <a href="https://www.consumerfinance.gov/policy-compliance/enforcement/actions/wells-fargo-bank-na-2018/">Wells Fargo</a> – the <a href="http://money.cnn.com/2017/12/08/investing/trump-twitter-wells-fargo/index.html">target of a Trump tweet</a> – over the bank forcing consumers to pay for car insurance they didn’t need. That contrasts sharply with the work of Cordray, who, for example, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3072545">filed</a> nearly one case a week in 2015 and 2016. </p>
<p>Mulvaney has also sought to protect banks in other ways. After <a href="https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html">saying</a> the bureau should be guided by the number of complaints it receives, Mulvaney <a href="https://www.americanbanker.com/news/mulvaney-to-drop-public-complaints-against-firms-change-cfpb-name">raised</a> the possibility of concealing those complaints from the public, which would lower the complaint database’s profile, and probably reduce the number of complaints it receives. The proposal, which is still under discussion, would also <a href="http://www.nydailynews.com/opinion/cfpb-leaving-consumers-high-dry-article-1.4006220">make it harder</a> for consumers to obtain redress from misbehaving companies. </p>
<p>In June, Mulvaney fired the unpaid members of the bureau’s advisory committees, a move criticized by <a href="https://www.cnn.com/2018/06/08/opinions/mick-mulvaney-doing-the-financial-sectors-dirty-work-by-abolishing-cab/index.html">consumer advocates</a> and <a href="http://pubcit.typepad.com/clpblog/2018/06/where-are-the-defenders-of-mulvaneys-decision-to-fire-the-cab-members-anyone-bueller.html">financial industry figures</a> alike. The advisory committees gave the bureau an opportunity to talk to consumer, financial and scholarly experts about how it should act.</p>
<p><a href="https://www.nytimes.com/2018/06/07/opinion/cfpb-mick-mulvaney-consumer-advisory-board-fired.html">Shifting justifications</a> were offered for the firings in the subsequent days, from <a href="https://www.cnn.com/2018/06/08/opinions/mick-mulvaney-doing-the-financial-sectors-dirty-work-by-abolishing-cab/index.html">citing criticism</a> of the committees to <a href="https://www.americanbanker.com/news/mulvaneys-defense-of-cfpb-board-upheaval-im-trying-to-fix-leaks?brief=00000158-07c7-d3f4-a9f9-37df9bc10000">preventing leaks</a> – all of which didn’t add up or weren’t backed by evidence. Mulvaney’s spokesperson even <a href="https://www.americanbanker.com/news/mulvaney-makes-it-official-fires-cfpb-advisory-board-members">charged</a> that the complaining committee members were more interested in protecting their taxpayer-funded trips to Washington than in protecting consumers, a charge that was belied by the fact that some members <a href="https://www.washingtonpost.com/news/business/wp/2018/06/06/mick-mulvaney-fires-members-of-cfpb-advisory-board/?noredirect=on&utm_term=.89c2c50409a3">offered</a> to pay their own way. </p>
<h2>The next director</h2>
<p>Many are wondering what will change once the president’s nomination to helm the bureau, Kathy Kraninger, is confirmed. We can’t be certain, because Kraninger has never spoken publicly about her views on consumer protection, but, given that she serves as Mulvaney’s deputy, I fear the answer is not much.</p>
<p>Many observers were <a href="http://thehill.com/regulation/finance/392904-trump-surprises-with-consumer-agency-pick">surprised</a> by the pick of Kraninger, who is not known to have any experience with the laws that the bureau enforces and interprets.</p>
<p>You might think that’s not a big deal. After all, how difficult can it be to master consumer law, which ought to be readily understandable by consumers? </p>
<p>But the truth is that consumer law is <a href="https://www.wisbar.org/NewsPublications/WisconsinLawyer/Pages/Article.aspx?Volume=90&Issue=8&ArticleID=25822*">often terribly complex</a>. I still learn new things about consumer law every week, and I’ve been teaching it for 30 years.</p>
<p>Kraininger’s supporters have <a href="https://www.wsj.com/articles/kathy-kraninger-to-be-nominated-to-head-cfpb-1529183308?tesla=y">noted</a> that she acquired considerable managerial experience as an associate director at the Office of Management and Budget and deputy assistant secretary at the Department of Homeland Security. That may help her with management issues, but it’s hard to see how it will help her make decisions about which cases to bring or what protections consumers need. </p>
<p>To make the problem even worse, the CFPB’s jurisdiction is vast. The next director will have to work with laws governing credit cards, bank accounts, mortgages, student loans, car loans, debt collection, consumer leases, payday loans, credit reports, lending discrimination and much more. In short, the director’s work touches the life of nearly every American in multiple ways –which makes it important that the director know what she is doing.</p>
<p>Bureau critics <a href="https://www.consumeraffairs.com/news/cfpb-director-asks-congress-to-reduce-the-agencys-power-040318.html">complain</a> that it is too powerful, making ignorance of the law even more troublesome. In fact, even a conservative commentator has <a href="https://www.wsj.com/articles/kathy-kraninger-to-be-nominated-to-head-cfpb-1529183308?tesla=y">said</a> that Kraninger lacks the needed expertise, <a href="https://www.politico.com/story/2018/06/16/trump-consumer-protection-bureau-kathy-kraninger-650388">comparing</a> her nomination with President George W. Bush’s <a href="https://www.npr.org/2018/03/30/598115811/the-fall-of-harriet-miers-a-cautionary-tale-for-dr-ronny-jackson">ill-fated nomination</a> of Harriet Miers to the Supreme Court in 2005.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=547&fit=crop&dpr=1 754w, https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=547&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=547&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The president isn’t the only one who has cast a long shadow over the fate of the CFPB.</span>
<span class="attribution"><span class="source">AP Photo/Francisco Seco</span></span>
</figcaption>
</figure>
<h2>Casting a shadow</h2>
<p>Meanwhile, Mulvaney continues to run the CFPB, which is facing new threats to its existence, particularly over whether its structure – intended to shield it from interference from the executive branch – is constitutional. </p>
<p>Early this year, a federal appeals court <a href="https://www.cadc.uscourts.gov/internet/opinions.nsf/B7623651686D60D585258226005405AC/%24file/15-1177.pdf">ruled</a> that it was. In mid-June, a federal trial court in New York disagreed and <a href="https://www.citizen.org/sites/default/files/consumer-financial-protection-bureau-et-al-v-rd-legal-funding-llc.pdf">called</a> the CFPB’s design entirely unconstitutional.</p>
<p>While that court’s decision does not bind others, it casts a shadow over the CFPB and could encourage more lawsuits. </p>
<p>As for consumers, for now they will have to seek protection elsewhere than in this once-great consumer protection agency.</p>
<p><em>This article incorporates some material from a <a href="https://theconversation.com/why-we-need-to-save-the-consumer-financial-protection-bureau-80353">2017 article</a> written by the author along with Gina M. Calabrese and Ann L. Goldweber.</em></p><img src="https://counter.theconversation.com/content/98842/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeff Sovern, together with three other then-employees of St. John's University, received a $29,510 grant from the American Association for Justice Robert L. Habush Endowment and a grant from the St. John’s University School of Law Hugh L. Carey Center for Dispute Resolution in 2014 to study arbitration. It resulted in an article. Along with Professor Kate Walton, he received a grant from the National Conference of Bankruptcy Judges Endowment for Education to study debt collection, resulting in another article. He is a member of the National Association of Consumer Advocates.</span></em></p>The president recently nominated a new permanent director to take over the Consumer Financial Protection Bureau. With the CFPB doing a fraction of the work it did under Obama, what kind of agency will she lead?Jeff Sovern, Professor of Law, St. John's UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/971362018-05-23T20:10:11Z2018-05-23T20:10:11ZWall Street regulations need a facelift, not a minor Dodd-Frank makeover<figure><img src="https://images.theconversation.com/files/220213/original/file-20180523-88002-age3at.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Wall Street needs a new face.</span> <span class="attribution"><span class="source">AP Photo/Frank Franklin II</span></span></figcaption></figure><p>Republicans <a href="https://www.nytimes.com/2018/05/22/business/congress-passes-dodd-frank-rollback-for-smaller-banks.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news">finally managed to roll back</a> some of the Wall Street regulations passed by Congress in the wake of the 2008 financial crisis after years of trying. </p>
<p>While it wasn’t a full repeal as some had hoped, it’s the first legislative overhaul since the <a href="http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm">Dodd-Frank Act</a> became law in 2010. </p>
<p>This debate has primarily been framed as a fight over regulation. <a href="http://www.latimes.com/business/la-fi-dodd-frank-demoocrats-20170206-story.html">Democrats generally want more</a> to protect taxpayers and investors from the next crisis; Republicans want less because they argue it <a href="https://www.nytimes.com/2017/02/03/business/dealbook/trump-congress-financial-regulations.html">stifles economic growth</a>. </p>
<p>So who’s right? </p>
<p>Based on our combined <a href="https://scholar.google.com/citations?user=y_ViJ7oAAAAJ&hl=en&oi=ao">35 years of experience</a> with securities markets and the research we’ve done for our book, “<a href="https://rowman.com/ISBN/9780739196052/When-the-Levees-Break-Re-visioning-Regulation-of-the-Securities-Markets">When the Levees Break: Re-visioning Regulation of the Securities Markets</a>,” we think both sides are wrong. The issue isn’t about more or less regulation but about the need for a streamlined system that supports 21st-century investing. </p>
<p>If we had our way, the whole system of financial regulation would be burned to the ground and replaced with something entirely different. </p>
<h2>Of bonds and banks</h2>
<p>When we think of financial markets, we tend to jumble securities markets like stocks, bonds and commodities with conventional bank lending such as checking accounts and lines of credit. </p>
<p>Dodd-Frank, for example, was ostensibly focused on regulation of securities markets, but the rules that got the most attention were those that affect the “too big to fail” banks. That those banks straddled both worlds – securities trading and traditional banking – is what made the 2008 financial crisis life-threatening.</p>
<p>But only securities trading, and in particular derivatives, was at the root of the crisis. So for our purposes, when we talk about financial regulation, our focus is on the securities markets. </p>
<h2>How did we get here?</h2>
<p>The <a href="http://online.wsj.com/mdc/public/page/2_3024-djia_alltime.html">financial markets meltdown</a> in the fall of 2008 devastated the U.S. economy, but it wasn’t nearly as bad as the stock market rout that preceded the Great Depression in October 1929. </p>
<p>After the 1929 crash, lawmakers reacted by passing laws aimed at ensuring investor protection. Two groundbreaking pieces of legislation, passed in 1933 and 1934, <a href="https://www.sec.gov/about/laws/sa33.pdf">required companies</a> to submit quarterly and annual reports and <a href="https://www.sec.gov/about/laws/sea34.pdf">established the Securities and Exchange Commission</a>. These laws form the cornerstone of modern securities markets regulation. </p>
<p>But they were only the beginning. As markets expanded and changed, Congress continued to craft new laws that added more agencies to oversee Wall Street activities. As a result, we have more than two dozen agencies, self-regulatory organizations and exchanges – such as the <a href="https://www.cftc.gov">Commodity Futures Trading Commission</a>, the Treasury, the <a href="https://www.dol.gov/">Department of Labor</a> and the <a href="https://www.justice.gov">Justice Department</a> – not to mention state securities agencies, all with overlapping regulatory jurisdictions. </p>
<p>Moreover, the laws have been reactionary – rather than visionary – resulting in competing concerns and duplicative audit and enforcement procedures. Not surprisingly, there is largely no coordination or communication between them. </p>
<p>Meanwhile, the SEC – as primary regulator – is bogged down with too many directives, many of which are under- or unfunded. For decades, whenever Congress passed a bill to “regulate” big changes in the markets – from market crashes to “advancements” such as mutual funds and investment advisers – the SEC has been required to add oversight of these new practices to their existing responsibilities. Dodd-Frank, for example, expanded the SEC’s role and called for additional internal audits of existing practices but – like past market-related legislation – failed to include funding for those activities.</p>
<p>Amid all the regulation, investor protection seems to have gotten lost. </p>
<h2>Enter Dodd-Frank</h2>
<p>The severity of the 2008 crash and its economic impact – including investment company failures and unprecedented government bailouts – goaded Congress into action. </p>
<p>In 2010 Democratic lawmakers passed the <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">Dodd-Frank Act</a>, <a href="https://corpgov.law.harvard.edu/2010/11/20/the-financial-panic-of-2008-and-financial-regulatory-reform/">the most extensive revision of securities regulation</a> since the 1930s, with the hope that more regulation would prevent another crisis. </p>
<p>Republicans have argued for its repeal ever since, claiming <a href="http://financialservices.house.gov/dodd-frank/">the law</a> and the regulations designed to implement it – <a href="https://www.davispolk.com/Dodd-Frank-Rulemaking-Progress-Report/">some of which have yet to be implemented</a> – inhibit prosperity. </p>
<p>Both parties are missing the point. The current system of financial regulation is built on how stocks were traded in the 1930s – when computers and algorithmic trading had yet to be a glimmer in a <a href="https://www.merriam-webster.com/dictionary/quant">quant’s</a> eye. To paraphrase an <a href="https://godsofadvertising.wordpress.com/2008/10/14/this-is-not-your-fathers-oldsmobile-how-a-portfolio-tarnishing-piece-of-creative-changed-our-culture-forever/">Oldsmobile commercial</a>, it’s not your father’s stock market anymore.</p>
<h2>My, how markets have changed</h2>
<p>Financial markets have undergone a fundamental transformation over the past 80 years. </p>
<p>First of all, there are the investors themselves. The mom and pop investor who the SEC was created to protect has by and large been replaced by institutional investors, including quantitative analysts, or <a href="http://www.nytimes.com/2010/02/21/business/21shelf.html">“quants,”</a> that use complex algorithmic formulas to predict the best trading strategies. In fact, algorithmic trading makes up the <a href="https://www.wired.com/2010/12/ff_ai_flashtrading">majority</a> of volume in today’s markets.</p>
<p>Then there’s the issue of disclosure. Since the dawn of federal securities regulation, lawmakers and regulators have relied on <a href="http://heinonline.org/HOL/Page?handle=hein.journals/wvb118&div=6&g_sent=1&collection=journals">disclosure</a> to protect investors. Public companies are required to disclose volumes of information, from <a href="https://www.sec.gov/news/pressrelease/2015-160.html">financial information</a> to dealings with <a href="https://www.sec.gov/divisions/corpfin/cfannouncements/itr-act2012.htm">Iran</a> and even their <a href="https://www.sec.gov/rules/final/33-8177.htm">code of ethics</a>. As a result, <a href="https://www.transactionadvisors.com/insights/considering-ipo-costs-going-and-being-public-may-surprise-you">a company can spend</a> <a href="https://www.quora.com/How-much-time-does-a-US-company-typically-spend-on-SEC-filing">over a million dollars each year</a> complying with disclosure regulations that few people actually read. Yet every time there’s a new disaster, Congress piles on the disclosure requirements, as happened with Dodd-Frank. </p>
<p>But for all the hundreds of pages of disclosure, at no time in the past 80 years has there been a mandate to review the actual securities products issued by public companies and investment banks. There are no “safety” standards for stocks, like there are for cars or toasters. The products that brought down the house in 2008 – mortgage-backed securities and products derived from them – continue to be offered to the public, including new ones backed by credit card debt and <a href="https://www.theatlantic.com/business/archive/2013/03/dont-panic-wall-sts-going-crazy-for-student-loans-but-this-is-no-bubble/273682/">student loans</a>.</p>
<p>Finally, the SEC and other regulators are unequipped to keep up with the breathtaking changes in technology, let alone anticipate potential advances and challenges. To understand why, one must only consider the breadth of organizations that have fallen victim to hackers, from <a href="https://www.bloomberg.com/news/articles/2014-03-13/target-missed-warnings-in-epic-hack-of-credit-card-data">Target</a> and <a href="https://www.nytimes.com/2017/03/15/technology/yahoo-hack-indictment.html?_r=0">Yahoo</a> to the <a href="http://www.politico.com/story/2013/06/computer-hacking-veterans-affairs-department-092227">Veterans Administration,</a> and the <a href="http://www.reuters.com/article/us-usa-fed-cyber-idUSKCN0YN4AM">Federal Reserve itself</a>.</p>
<p>Unfortunately, however, Congress <a href="https://cup.columbia.edu/book/how-they-got-away-with-it/9780231156912">does not fund the SEC</a> in a way that would allow it to pay for the skills or systems it needs to keep up with technological and other market advances. Following Dodd-Frank, for example, the SEC’s budget was actually reduced, even as its responsibilities multiplied.</p>
<p>In sum, what we have is a regulatory system that fails in its mission to protect investors. The structure used to oversee current investment practices, corporate disclosures, product development and technological advances is based on the market failures of 1929. It’s a bit like trying to surf the internet using a typewriter. </p>
<h2>Preparing for the next crash</h2>
<p>The next “big” crash will likely be bigger than the last one. So how do we prepare for it? </p>
<p>What we’ve done so far won’t protect us in the future. Dodd-Frank is largely an extension of the existing patchwork structure. While the new legislation won’t make things worse – as it’s targeting small and mid-sized banks – Republican hopes to repeal the rest of it and return banks to the pre-crisis period of self-regulation would. After the next crash, institutions will not be too big to fail, they’ll be too big to save.</p>
<p>The answer, in our view, is to move away from a fight about how much regulation toward <a href="https://revisioninginvesting.com/">a complete rethinking of how we regulate investing</a>. Only then will the U.S. begin to prepare for the next big one. </p>
<p><em>This is an updated version of an article published on May 2, 2017.</em></p><img src="https://counter.theconversation.com/content/97136/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In giving Dodd-Frank the Botox treatment, Congress misses the point of what’s wrong with financial regulation: It’s an old mess.Jena Martin, Professor of Law, West Virginia UniversityKaren Kunz, Associate Professor of Public Administration, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/913012018-02-08T11:21:05Z2018-02-08T11:21:05ZConsumers are biggest losers of Trump’s ongoing war on regulations<figure><img src="https://images.theconversation.com/files/205371/original/file-20180207-74476-1tg0ftt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Some worry Mick Mulvaney is putting banks before consumers as head of the CFPB. </span> <span class="attribution"><span class="source">Reuters/Yuri Gripas</span></span></figcaption></figure><p>President Donald Trump has been waging a <a href="https://www.politico.com/agenda/story/2018/01/20/trumps-regulatory-experiment-year-one-000620">war on regulation</a> since he got into office on the ground that government red tape costs the economy billions of dollars a year. </p>
<p>Among the victors in this battle have been energy companies, banks and the president himself, who <a href="https://www.nytimes.com/2017/12/14/us/politics/trump-federal-regulations.html">recently promised</a> he’s “just getting started.” Perhaps the biggest losers, however, have been consumers. </p>
<p>The best illustration of this is the <a href="http://www.latimes.com/opinion/editorials/la-ed-cfpb-mulvaney-payday-20180207-story.html">neutering</a> of the <a href="https://www.consumerfinance.gov/">Consumer Financial Protection Bureau</a>, which began immediately after Mick Mulvaney stepped in as interim director in November.</p>
<p>So how much harm could he do in two short months? As someone who has written about consumer law for more than 30 years, let me count the ways.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Mick Mulvaney is governing the CFPB very differently than his predecessor.</span>
<span class="attribution"><span class="source">AP Photo/Alex Brandon</span></span>
</figcaption>
</figure>
<h2>‘Pushing the envelope’</h2>
<p>The Consumer Financial Protection Bureau may be best known for levying a <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">US$100 million fine</a> against Wells Fargo in 2016 after the bank opened millions of unauthorized accounts. </p>
<p>But the bureau, <a href="https://www.washingtonpost.com/news/wonk/wp/2014/01/11/a-watchdog-grows-up-the-inside-story-of-the-consumer-financial-protection-bureau/">originally conceived</a> by Sen. Elizabeth Warren, has done <a href="https://theconversation.com/why-we-need-to-save-the-consumer-financial-protection-bureau-80353">so much more</a> since Congress created the independent agency in 2010. Under Mulvaney’s predecessor, Richard Cordray, the bureau moved forcefully when it concluded companies had cheated consumers. </p>
<p>Through last summer, the bureau <a href="https://www.consumerfinance.gov/">recovered</a> nearly $12 billion for more than 29 million consumer victims of everything from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-subprime-credit-card-company-to-refund-2-7-million-for-charging-illegal-credit-card-fees/">illegal credit card fees</a> to <a href="https://www.consumerfinance.gov/about-us/blog/ally-to-repay-80-million-to-consumers-it-discriminated-against/">auto lenders that discriminated against people of color</a>. In 2016 alone, the bureau <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3072545">announced</a> 42 new enforcement actions, or nearly four new cases a month.</p>
<p>Mulvaney, who is also Trump’s budget director, <a href="https://www.wsj.com/articles/the-cfpb-has-pushed-its-last-envelope-1516743561">argued</a> his predecessor’s governing philosophy was to “push the envelope” in pursuing the bureau’s mission. Mulvaney, Trump and other Republicans <a href="https://www.bostonglobe.com/news/nation/2017/02/17/the-white-house-wants-fire-consumer-protection-head-but-political-and-legal-hurdles-make-tricky/joh8Y01GNPypcOuCyOhMsN/story.html">argue that the CFPB director</a> – who can’t be easily removed by the president – has too much <a href="https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401752">power</a>, making the bureau a prime target in their goal to eliminate regulation they believe puts a strain on the economy and small businesses. </p>
<p>While Cordray had <a href="https://alliedprogress.org/news/mulvaney-retract-wsj-op-ed-apologize-cfpb-staff/">previously never used</a> the “push the envelope” language in describing his mission, he reacted to Mulvaney’s charge by embracing it, tweeting that he did “push hard to see that people are treated fairly by big banks, debt collectors and payday lenders.” </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"956195528034914304"}"></div></p>
<p>It seems unlikely that the bureau would take on a bank like Wells Fargo for similar fraudulent conduct or pursue many of Cordray’s other actions now that Mulvaney is in charge. His boss has even praised a <a href="https://www.congress.gov/bill/115th-congress/house-bill/10/text">bill</a> passed by the House that would strip the CFPB of the authority to go after banks for doing what Wells Fargo did, while Mulvaney himself has <a href="https://www.congress.gov/bill/114th-congress/house-bill/3118/cosponsors?overview=closed#tabs">co-sponsored legislation</a> aimed at killing the bureau.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=457&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=457&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=457&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=574&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=574&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=574&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Former CFPB Director Richard Cordray, center, embraced the idea that he ‘pushed the envelope’ to protect consumers.</span>
<span class="attribution"><span class="source">AP Photo/Steve Helber</span></span>
</figcaption>
</figure>
<h2>A new governing mission</h2>
<p>While Mulvaney <a href="https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html">agrees</a> that the bureau’s job includes protecting consumers such as credit card users, he says it also works for credit card issuers – despite the fact that its very name states that it exists to protect consumers, not banks. </p>
<p>One reason Congress wanted an agency to protect consumers was because <a href="http://www.nytimes.com/2007/12/18/business/18subprime.html">existing bank regulators</a> in the run-up to the Great Recession had not only failed to prevent predatory lenders from taking advantage of consumers, thus contributing to the subprime fiasco, but at least one <a href="http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html?hpid=opinionsbox1">even protected them</a>. I believe the U.S. already has enough bank protection agencies, from the Federal Reserve to the Office of the Comptroller of the Currency, without adding the bureau to the list.</p>
<p>In January, Mulvaney <a href="https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html">told his staff</a> that the bureau’s actions should be guided by how many complaints it receives on a particular matter. </p>
<p>By that measure, the CFPB wouldn’t have gone after Wells Fargo because <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2961347">few consumers</a> seem to have complained to the bureau about the unauthorized Wells accounts. That may be because consumers often don’t bother to <a href="http://pubcit.typepad.com/clpblog/2017/07/guess-how-many-public-complaints-to-the-cfpb-complaint-database-about-wells-fargo-unauthorized-accou.html">complain</a> when they have suffered only a small loss. And yet collectively the Wells customers had much at stake, as demonstrated by the fact that Wells has agreed to settle the case for <a href="http://www.latimes.com/business/la-fi-wells-settlement-plan-20170421-story.html">$142 million</a>, a number that may yet grow. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Sally Greenberg, with the National Consumers League, is among the groups that have voiced strong opposition to Mulvaney taking over the bureau.</span>
<span class="attribution"><span class="source">AP Photo/Jacquelyn Martin</span></span>
</figcaption>
</figure>
<h2>Enforcement – or lack thereof</h2>
<p>So what has Mulvaney actually done since taking over?</p>
<p>While he <a href="https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html">pledged</a> to be vigorous and consistent in <a href="http://pubcit.typepad.com/clpblog/2017/12/why-did-the-cfpb-eliminate-fair-enforcement-of-the-rules-from-its-description-of-itself.html">enforcement</a> of federal consumer financial law, he has also said that the bureau should bring cases <a href="https://www.wsj.com/articles/the-cfpb-has-pushed-its-last-envelope-1516743561?mod=searchresults&page=1&pos=2">reluctantly</a>. As such, you might wonder how many he is actually filing.</p>
<p>The answer would be none.</p>
<p>The bureau has instead <a href="https://www.bloomberg.com/news/articles/2018-01-18/trump-led-cfpb-signals-shift-by-dropping-payday-lender-lawsuit">dropped</a> a case, without explanation, against a group of payday lenders that charged consumers as much as 950 percent interest a year. </p>
<p>It also terminated at least one investigation, though we can’t know for sure how many it has ended because the bureau usually doesn’t publicly announce such actions. </p>
<p>That investigation was against a <a href="https://alliedprogress.org/news/breaking-mulvaney-drops-cfpb-case-predatory-lender-gave-thousands/">company that had made several campaign donations to Mulvaney</a>. A <a href="https://www.propublica.org/article/high-cost-lender-world-finance-target-of-federal-probe">ProPublica investigation</a> previously reported that the installment lender, World Acceptance Corp., trapped consumers in a cycle of debt with deceptively expensive loans.</p>
<p>We can’t know whether Cordray himself would have eventually ended that investigation anyway and thus determine if its termination was the result of a lack of evidence. But we can be fairly certain that he wouldn’t have done what Mulvaney did around the same time: say, he may <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-statement-payday-rule/">reconsider</a> a rule intended to keep payday customers from falling into endless debt traps. That rule took the unremarkable step of requiring lenders, before extending some loans, to verify that borrowers can repay the debt. </p>
<p>Another noteworthy move by Mulvaney concerns the CFPB’s Fair Lending Office. The law that originally set up the bureau <a href="https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm">tasked this office</a> with enforcing laws prohibiting discriminatory lending. He <a href="https://www.inman.com/2018/02/02/mulvaney-revokes-powers-of-cfpb-fair-lending-office/">has revoked</a> that power, suggesting that preventing discrimination on the basis of race and gender will now be less important at the bureau. </p>
<p>For the next five months – or until the Senate confirms a permanent director – the CFPB is led by someone who once called it a <a href="https://www.bloomberg.com/news/articles/2017-11-16/trump-is-said-to-consider-naming-mulvaney-to-start-cfpb-revamp?utm_content=politics&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social&cmpid%3D=socialflow-twitter-politics">“sad, sick” joke</a>. </p>
<p>What is sad and sick, in my view, is that an agency established to protect consumers may be more eager to protect predatory lenders than consumers. And that is no joke.</p><img src="https://counter.theconversation.com/content/91301/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeff Sovern received a $29,510 grant from the American Association for Justice Robert L. Habush Endowment and by a grant from the St. John’s University School of Law Hugh L. Carey Center for Dispute Resolution in 2014 to study arbitration. It resulted in an article. Along with Professor Kate Walton, he received a grant from the National Conference of Bankruptcy Judges Endowment for Education to study debt collection, resulting in another article. He is a member of the National Association of Consumer Advocates.</span></em></p>Mick Mulvaney has only been in charge of the Consumer Financial Protection Bureau for two months, but he’s already made many decisions that will leave consumers worse off.Jeff Sovern, Professor of Law, St. John's UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/803532017-07-11T01:05:35Z2017-07-11T01:05:35ZWhy we need to save the Consumer Financial Protection Bureau<p>Republicans in <a href="https://www.forbes.com/sites/jimhenry/2017/05/30/congressional-critics-gunning-for-consumer-financial-protection-bureau/#24b1e09167ab">Congress</a> and the <a href="https://consumerist.com/2017/03/20/white-house-wants-authority-to-fire-consumer-protection-chief/">White House</a> have been very blunt about their desire to gut the <a href="https://www.consumerfinance.gov">Consumer Financial Protection Bureau</a> (CFPB). </p>
<p>The agency was launched in 2011 in the aftermath of the financial crisis as part of the <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">Dodd-Frank Wall Street Reform and Consumer Protection Act</a>. The goal was to protect consumers from deceptive or misleading practices in the financial industry. </p>
<p>So what would you miss if the CFPB suddenly disappeared?</p>
<p>In short, a lot, including a <a href="http://thehill.com/policy/finance/341313-consumer-bureau-releases-rule-to-prevent-banks-credit-card-firms-from-blocking">just-issued rule</a> that would prevent financial companies from using arbitration clauses to prevent people from having their day in court. </p>
<p>We base this conclusion on the work the three of us have done in recent decades. One of us (Sovern) has been writing about consumer law for more than 30 years, while the other two direct a <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">legal clinic that represents elderly consumers</a>. We’ve seen the worst of what financial companies can do, and we’ve also witnessed how the CFPB has begun to reverse the tide. </p>
<h2>Life before CFPB</h2>
<p>If you are one of the more than 29 million consumers who have collectively <a href="https://www.consumerfinance.gov/">received nearly US$12 billion</a> back from misbehaving financial institutions because of the CFPB’s efforts, you already know its value. But even if you are not, you have probably benefited from the bureau’s existence.</p>
<p>Before Congress created the bureau, there was no federal agency that made consumer financial protection its sole mission. Rather, consumer protection was rolled into the missions of a bunch of different agencies. And, as we saw during the financial crisis, regulators often gave it a back seat.</p>
<p>Congress, for example, gave the Federal Reserve the <a href="https://www.federalreserve.gov/reportforms/formsreview/RegZ_20080730_ffr.pdf">power to bar unfair and deceptive mortgage lending</a> in 1994. Yet the central bank considered consumer protection a backwater and didn’t use that power until 2008 – too late to prevent the <a href="https://theconversation.com/us/topics/great-recession-13707">Great Recession</a>. Congress took it away two years later when it passed Dodd-Frank.</p>
<p>The Office of the Comptroller of the Currency (OCC) regulates banks but was so preoccupied with ensuring lenders were safe that it failed to protect consumers from their predatory subprime mortgages – so much so that it prevented states from doing so too. And the Federal Trade Commission, which is tasked with fighting deceptive business practices, lacked the power to prevent such <a href="https://www.federalreservehistory.org/essays/subprime_mortgage_crisis">dangerous lending</a>.</p>
<p>This meant consumer protection on financial matters fell through the cracks. </p>
<p><a href="https://theconversation.com/how-wells-fargo-encouraged-employees-to-commit-fraud-66615">Wells Fargo’s recent fraud scandal</a> is a case in point. In the early 2000s, Wells Fargo employees <a href="https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/presentations/2017/board-report.pdf">began opening fake accounts</a> in clients’ names without permission, leading in some cases to <a href="https://www.wsj.com/articles/wells-fargo-is-trying-to-fix-its-rogue-account-scandal-one-grueling-case-at-a-time-1482855852?mg=prod/accounts-wsj%20rt5y7u6">lower credit scores</a> and a variety of fees. The bank <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2961347">ultimately opened millions of fraudulent bank and credit card accounts</a> before the scheme came to an end last year. </p>
<p>But as early as 2010, before the CFPB was set up, regulators at the OCC were increasingly aware of what was happening at Wells Fargo thanks to hundreds of <a href="https://theconversation.com/why-companies-like-wells-fargo-ignore-their-whistleblowers-at-their-peril-67501">whistleblower complaints</a>. The OCC even confronted the bank yet failed to take any action despite many red flags, according to an <a href="https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-wells-fargo-supervision-lessons-learned-41917.pdf">internal audit</a>. </p>
<p>It wasn’t until the <a href="http://freepdfhosting.com/29677883a9.pdf">Los Angeles city attorney</a> and the <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">CFPB became involved</a> years later that Wells Fargo took forceful action to stop the fraud. The regulators <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">fined Wells Fargo a total of $185 million</a> and forced it to refund fees it had charged customers and hire an independent consultant to review its procedures. </p>
<p>More importantly, they sent a clear message to other financial institutions: Cheat consumers and you will face the consequences.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=440&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=440&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=440&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=553&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=553&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=553&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Consumer Financial Protection Bureau Director Richard Cordray testifies on Capitol Hill in 2013.</span>
<span class="attribution"><span class="source">AP Photo/Manuel Balce Ceneta</span></span>
</figcaption>
</figure>
<h2>Protecting consumers</h2>
<p>Since its inception, the bureau has acted repeatedly to stop financial institutions from harming consumers. </p>
<p>It blocked debt collector attorneys from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-halt-illegal-debt-collection-practices-lawsuit-mill-and-debt-buyer/">suing consumers based on false information</a>. It discovered systemic problems with consumer credit reports and forced companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-oversight-uncovers-and-corrects-credit-reporting-problems/">correct errors</a>. It compelled credit card companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-subprime-credit-card-company-to-refund-2-7-million-for-charging-illegal-credit-card-fees/">refund illegal fees</a>. It protected borrowers from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-nations-largest-student-loan-company-navient-failing-borrowers-every-stage-repayment/">unlawful student loan servicing practices</a>. It <a href="https://www.consumerfinance.gov/about-us/blog/ally-to-repay-80-million-to-consumers-it-discriminated-against/">made lenders repay</a> consumers they discriminated against. It <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-recovers-more-than-1-million-for-servicemembers-veterans-and-their-families/">recovered money for veterans</a> who complained of abusive financial practices. </p>
<p>When the bureau began publishing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">consumer complaints on its website</a>, companies that might previously have ignored negative feedback paid attention. Financial institutions have responded to complaints to the CFPB <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">more than 700,000 times</a>, often by providing a remedy to the consumers.</p>
<p>Besides protecting consumers, however, Congress had a second motive in creating the bureau: to help prevent the kind of mortgage lending that helped cause the Great Recession. </p>
<p>To that end, the bureau has adopted <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/">rules</a> that help consumers to understand their mortgages – something that often <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1531781">wasn’t possible</a> under the previously misleading mortgage disclosures. It also issued <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/ability-repay-and-qualified-mortgage-standards-under-truth-lending-act-regulation-z/">regulations</a> to prevent consumers from taking out mortgages that they couldn’t repay. And after borrowers take out a mortgage, <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z-mortgage-servicing-final-rules/">CFPB servicing rules</a> establish the procedures servicers must follow when communicating with borrowers, correcting errors, providing information and dealing with loan modification requests.</p>
<p>Two of us have personal experience with one of the bureau’s new mortgage rules, which powerfully illustrates the value of the CFPB.</p>
<p>In 2014, Alice, a client of our law school clinic, was struggling to pay the mortgage on her home – which she had refinanced a few years earlier – after a stroke forced her into retirement. <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">Our clinic</a> helped her apply for a modification of her loan. </p>
<p>But within weeks, instead of acknowledging Alice’s application, the loan servicer summoned her to court to begin foreclosure proceedings in violation of <a href="https://www.law.cornell.edu/cfr/text/12/1024.41">CFPB servicing rules</a>. Fortunately, our clinic was able to rely on those rules in getting the foreclosure action dismissed. Alice got her loan modified and remains in her home. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=482&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=482&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=482&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=606&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=606&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=606&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Demonstrators tried to draw attention to the subprime mortgage crisis back in early 2008.</span>
<span class="attribution"><span class="source">AP Photo/Matt Rourke</span></span>
</figcaption>
</figure>
<h2>Protecting the vulnerable</h2>
<p>This reveals how the bureau is particularly important to protect vulnerable consumers, like the elderly, who are frequently targeted by fraudsters and predatory lenders because of their cognitive and other impairments and because they often have accumulated substantial assets. The CFPB is the only federal agency with an office <a href="https://www.consumerfinance.gov/educational-resources/resources-for-older-adults/">specifically dedicated</a> to protecting the financial well-being of older adults. </p>
<p>The bureau has brought cases against companies that attempted to take advantage of seniors by, for example, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-and-new-york-department-of-financial-services-sue-pension-advance-companies-for-deceiving-consumers-about-loan-costs/">misrepresenting the interest rates</a> on pension advance loans or <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-reverse-mortgage-companies-deceptive-advertising/">deceptive advertising</a>. In 2015 alone, consumer complaints to the CFPB brought relief to <a href="https://data.consumerfinance.gov/dataset/Consumer-Complaints/s6ew-h6mp">more than 600 older Americans just through debt collection problems</a>.</p>
<p>The bureau has also worked to prevent financial abuse of the elderly, estimated to cost seniors <a href="https://www.truelinkfinancial.com/research">as much as $36 billion annually</a>. The CFPB has educated <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-advisory-and-report-for-financial-institutions-on-preventing-elder-financial-abuse/">financial institutions</a>, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-helps-assisted-living-and-nursing-facilities-protect-seniors-from-financial-abuse/">nursing facilities</a> and <a href="https://www.consumerfinance.gov/about-us/newsroom/director-cordray-remarks-on-money-smart-for-older-adults/">others</a> about recognizing and stopping elder financial abuse and exploitation.</p>
<h2>Consumer protection in peril</h2>
<p>Given Alice’s ill health, the consequences for her might have been disastrous if she had been thrown out of her home. But now she – and all of us – face the loss of the CFPB’s aid. </p>
<p>The CFPB <a href="http://www.latimes.com/business/la-fi-cfpb-cordray-hearing-20170405-story.html">is under attack</a> from Republican members of Congress who <a href="https://banks.house.gov/media/press-releases/banks-votes-choice-act-roll-back-dodd-frank-law">believe more in bank protection</a> than consumer protection. Some members have <a href="http://pubcit.typepad.com/clpblog/2017/02/ratcliffecruz-bill-would-eliminate-the-cfpb.html">proposed eliminating the agency altogether</a>. </p>
<p>The House of Representatives <a href="https://financialservices.house.gov/choice/">has passed a bill</a> that would cripple the CFPB by, for example, taking away the power it used to fine Wells Fargo for opening illegal accounts and concealing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">its complaint database</a> from public view. In other words, it would force the bureau to sit idly by as financial institutions <a href="http://www.newsweek.com/your-bank-lying-you-619814">lie to consumers</a>. </p>
<p>Nearly every American has or will have a loan or bank account, a prepaid card, credit card, a credit report or some combination of those, and so has dealings with a financial institution policed by the CFPB. But <a href="http://press.princeton.edu/titles/10267.html">few of us read the fine print</a> governing these things or <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2516432">can understand it when we do</a>. That gives the companies that write these agreements the ability to draft them to suit their own interests at the expense of consumers. </p>
<p>Similarly, we do not always know when a financial institution takes advantage of us, just as Wells Fargo customers did not always know that it had opened unauthorized accounts that lowered their credit scores. </p>
<p>Consumers need protection from misbehaving companies. If the bureau is eliminated or significantly weakened, all consumers will suffer.</p><img src="https://counter.theconversation.com/content/80353/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Along with three co-authors, Jeff Sovern received a $29,510 grant from the American Association for Justice Robert L. Habush Endowment and by a grant from the St. John’s University School of Law Hugh L. Carey Center for Dispute Resolution in 2014 to study arbitration. It resulted in an article. Along with Professor Kate Walton, he received a grant from the National Conference of Bankruptcy Judges Endowment for Education to study debt collection, resulting in another article. He is a member of the National Association of Consumer Advocates. </span></em></p><p class="fine-print"><em><span>Ann L. Goldweber is affiliated with NACA as a member.</span></em></p><p class="fine-print"><em><span>Gina M. Calabrese is affiliated with the National Association of Consumer Advocates, New Yorkers for Responsible Lending, and the Association of the Bar of the City of New York (Chair, Committee on the Civil Court).</span></em></p>Republicans are hoping to eliminate or at least defang the only federal agency tasked solely with protecting consumers from financial abuses. What would we miss if they succeed?Jeff Sovern, Professor of Law, St. John's UniversityAnn L. Goldweber, Professor of Clinical Education, St. John's UniversityGina M. Calabrese, Professor of Clinical Education, St. John's UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/734172017-05-03T01:14:23Z2017-05-03T01:14:23ZWhy Dodd-Frank – or its repeal – won’t save us from the next crippling Wall Street crash<p>Republicans <a href="http://www.latimes.com/business/la-fi-dodd-frank-20170504-story.html">appear poised to roll back</a> Wall Street regulations passed after the 2008 financial crisis. Democrats <a href="http://www.cnbc.com/2017/02/07/if-trump-repeals-dodd-frank-it-would-be-a-monumental-mistake-bart-chilton-commentary.html">argue doing so</a> would be a “monumental mistake.” </p>
<p>It’s been framed as a typical fight over regulation. <a href="http://www.latimes.com/business/la-fi-dodd-frank-demoocrats-20170206-story.html">Democrats want more</a> to protect taxpayers and investors from the next crisis; Republicans want less because it <a href="https://www.nytimes.com/2017/02/03/business/dealbook/trump-congress-financial-regulations.html">stifles economic growth</a>. </p>
<p>So who’s right? </p>
<p>Based on our combined 35 years of experience with securities markets and the research we’ve done for our new book, “<a href="https://www.amazon.com/When-Levees-Break-Re-visioning-Regulation/dp/0739196049">When the Levees Break: Re-visioning Regulation of the Securities Markets</a>,” we think both sides are wrong. The issue isn’t about more or less regulation but about the need for a streamlined system that supports 21st-century investing. </p>
<p>If we had our way, the whole system of financial regulation would be burned to the ground and replaced with something entirely different. </p>
<h2>Of bonds and banks</h2>
<p>Before we go any further, let’s clarify what we’re talking about. When we think of financial markets, we tend to jumble securities markets like stocks, bonds and commodities with conventional bank lending such as checking accounts and lines of credit. </p>
<p>The <a href="http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm">Dodd-Frank Act</a>, for example, was ostensibly focused on regulation of securities markets, but the rules that got the most attention were those that affect the “too big to fail” banks. That those banks straddled both worlds made the market crash life-threatening. </p>
<p>But securities trading, and in particularly derivatives, were at the root of the 2008 financial crisis. For our purposes, when we talk about financial regulation, our focus is on the securities markets. </p>
<h2>How did we get here?</h2>
<p>The financial markets meltdown in the fall of 2008 devastated our economy, but it still <a href="http://online.wsj.com/mdc/public/page/2_3024-djia_alltime.html">pales in comparison</a> with the stock market rout that preceded the Great Depression in October 1929. The Dow Jones Industrial Average <a href="https://finance.yahoo.com/quote/%5EDJI/history?period1=475822800&period2=1493697600&interval=1d&filter=history&frequency=1d">fell</a> 23 percent from Oct. 28 to Oct. 29 that year, compared with a two-day slide of at most half that throughout the 2008 crisis. </p>
<p>After the 1929 crash, lawmakers reacted by passing laws aimed at ensuring investor protection. Two groundbreaking pieces of legislation, passed in 1933 and 1934, <a href="https://www.sec.gov/about/laws/sa33.pdf">required companies</a> to submit quarterly and annual reports and <a href="https://www.sec.gov/about/laws/sea34.pdf">established the Securities and Exchange Commission</a>. These laws form the cornerstone of modern securities markets regulation. </p>
<p>But they were only the beginning. As markets expanded and changed, Congress continued to craft new laws that added more agencies to oversee Wall Street activities. As a result, we have more than two dozen agencies, self-regulatory organizations and exchanges (including the <a href="https://www.cftc.gov">Commodities & Futures Trading Commission</a>, the Treasury and the <a href="https://www.dol.gov/">Departments of Labor</a> and <a href="https://www.justice.gov">Justice</a>), not to mention state securities agencies, all with overlapping regulatory jurisdictions. </p>
<p>Moreover, the laws have been reactionary – rather than visionary – resulting in competing concerns and duplicative audit and enforcement procedures. Not surprisingly, there is largely no coordination or communication between them. </p>
<p>Meanwhile, the SEC – as primary regulator – is bogged down with too many directives, many of which are under- or unfunded. For decades, whenever Congress passed a bill to “regulate” big changes in the markets – from market crashes to “advancements” such as mutual funds and investment advisors – the SEC has been required to add oversight of these new practices to their existing responsibilities. Dodd-Frank, for example, expanded the SEC’s role and called for additional internal audits of existing practices but – like past market-related legislation – failed to include funding for those activities.</p>
<p>Amid all the regulation, investor protection seems to have gotten lost. </p>
<h2>Enter Dodd-Frank</h2>
<p>The severity of the 2008 crash and its economic impact (including investment company failures and unprecedented government bailouts) goaded Congress into action. </p>
<p>In 2010 Democratic lawmakers passed the <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">Dodd-Frank Act</a>, <a href="https://corpgov.law.harvard.edu/2010/11/20/the-financial-panic-of-2008-and-financial-regulatory-reform/">the most extensive revision of securities regulation</a> since the 1930s, with the hope that more regulation would prevent another crisis. </p>
<p>Republicans have argued for its repeal ever since, claiming <a href="http://financialservices.house.gov/dodd-frank/">the law</a> and the regulations designed to implement it (<a href="https://www.davispolk.com/Dodd-Frank-Rulemaking-Progress-Report/">many of which are behind schedule</a>) inhibit prosperity. </p>
<p>Both parties are missing the point. The current system of financial regulation is built on how stocks were traded in the 1930s – when computers and algorithmic trading had yet to be a glimmer in a <a href="https://www.merriam-webster.com/dictionary/quant">quant’s</a> eye. To paraphrase the <a href="https://www.youtube.com/watch?v=bAJ3-mbP1pY">Oldsmobile commercial</a>, it’s not your father’s stock market anymore.</p>
<h2>My, how markets have changed</h2>
<p>Financial markets have undergone a fundamental transformation over the past 80 years. </p>
<p>First of all, there are the investors themselves. The mom and pop investor that the SEC was created to protect has by and large been replaced by institutional investors, including quantitative analysts or <a href="http://www.nytimes.com/2010/02/21/business/21shelf.html">“quants”</a> that use complex algorithmic formulas to predict the best trading strategies. In fact, algorithmic trading makes up the <a href="https://www.wired.com/2010/12/ff_ai_flashtrading">majority</a> of volume in today’s markets.</p>
<p>Then there’s the issue of disclosure. Since the dawn of federal securities regulation, lawmakers and regulators have relied on <a href="http://heinonline.org/HOL/Page?handle=hein.journals/wvb118&div=6&g_sent=1&collection=journals">disclosure</a> to protect investors. Public companies are required to disclose volumes of information, from <a href="https://www.sec.gov/news/pressrelease/2015-160.html">financial information</a> to dealings with <a href="https://www.sec.gov/divisions/corpfin/cfannouncements/itr-act2012.htm">Iran</a> and even their <a href="https://www.sec.gov/rules/final/33-8177.htm">Code of Ethics</a>. As a result, <a href="https://www.transactionadvisors.com/insights/considering-ipo-costs-going-and-being-public-may-surprise-you">a company can spend</a> <a href="https://www.quora.com/How-much-time-does-a-US-company-typically-spend-on-SEC-filing">over a million dollars each year</a> complying with disclosure regulations that few people actually read. Yet every time there’s a new disaster, Congress piles on the disclosure requirements, as happened with Dodd-Frank. </p>
<p>But for all the hundreds of pages of disclosure, at no time in the past 80 years has there been a mandate to review the actual securities products issued by public companies and investment banks. There are no “safety” standards for stocks, like there are for cars or toasters. The products that brought down the house in 2008 – mortgage-backed securities and products derived from them – continue to be offered to the public, including new ones backed by credit card debt and <a href="https://www.theatlantic.com/business/archive/2013/03/dont-panic-wall-sts-going-crazy-for-student-loans-but-this-is-no-bubble/273682/">student loans</a>.</p>
<p>Finally, the SEC and other regulators are unequipped to keep up with the breathtaking changes in technology, let alone anticipate potential advances and challenges. To understand why, one must only consider the breadth of organizations that have fallen victim to hackers, from <a href="https://www.bloomberg.com/news/articles/2014-03-13/target-missed-warnings-in-epic-hack-of-credit-card-data">Target</a> and <a href="https://www.nytimes.com/2017/03/15/technology/yahoo-hack-indictment.html?_r=0">Yahoo</a> to the <a href="http://www.politico.com/story/2013/06/computer-hacking-veterans-affairs-department-092227">Veterans Administration,</a> and the <a href="http://www.reuters.com/article/us-usa-fed-cyber-idUSKCN0YN4AM">Federal Reserve itself</a>.</p>
<p>Unfortunately, however, Congress <a href="https://cup.columbia.edu/book/how-they-got-away-with-it/9780231156912">does not fund the SEC</a> in a way that would allow it to pay for the skills or systems it needs to keep up with technological and other market advances. Following Dodd-Frank, for example, the SEC’s budget was actually reduced, even as its responsibilities multiplied.</p>
<p>In sum, what we have is a regulatory system that fails in its mission to protect investors. The structure used to oversee current investment practices, corporate disclosures, product development and technological advances is based on the market failures of 1929. It’s a bit like trying to surf the internet using a typewriter. </p>
<h2>Preparing for the next crash</h2>
<p>The next “big” crash will likely be bigger than the last one. So how do we prepare for it? </p>
<p>Dodd-Frank is largely an extension of the patchwork structure and won’t protect us in the future. Yet the Republican answer, to repeal it and let markets self-regulate, won’t stop the proliferation of products that nearly brought the house down in 2008. After the next crash, institutions will not be too big to fail, they’ll be too big to save.</p>
<p>The answer, in our view, is <a href="https://revisioninginvesting.com/">a complete rethinking of how we regulate investing</a>. As the White House moves to dismantle Dodd-Frank, this is the perfect time to do exactly that. Let’s get rid of what doesn’t work – which is pretty much everything – and replace it with a system that does. </p>
<p>What we envision is a contemporary, 21st-century holistic structure built on proactive, thoughtful and streamlined laws that takes into account markets that are technology-driven and move in nanoseconds. </p>
<p>Think of it this way: Our regulatory structure is like the dike that keeps springing leaks – the makeshift plugs we’ve used are so ineffective that the dike isn’t leaking – it’s crumbling. We need to build a new dike, using all available technology, before the next tidal wave hits. </p>
<p>We don’t claim to have all the answers. But we want to get the conversation started. We invite you to join in.</p><img src="https://counter.theconversation.com/content/73417/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Instead, we need to burn the entire system of financial regulation to the ground and replace it with something that supports investing the way it’s done today.Jena Martin, Professor of Law, West Virginia UniversityKaren Kunz, Associate Professor of Public Administration, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/733202017-02-22T14:34:26Z2017-02-22T14:34:26ZTrump is right on Congo’s minerals, but for all the wrong reasons<figure><img src="https://images.theconversation.com/files/157711/original/image-20170221-18633-19k0nqz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A prospector prepares to pan for gold in South Kivu in 2014. Many informal miners faced tough choices as US regulations turned life upside down.</span> <span class="attribution"><span class="source">Reuters/Kenny Katombe </span></span></figcaption></figure><p>A few weeks ago a British newspaper <a href="https://www.theguardian.com/us-news/2017/feb/08/trump-administration-order-conflict-mineral-regulations">leaked</a> the draft of an executive order proposing the suspension of a US law that imposes tight controls over the trade in Congolese gold, tin, coltan and tungsten. </p>
<p><a href="https://www.sec.gov/spotlight/dodd-frank/speccorpdisclosure.shtml">Section 1502</a> of the Dodd-Frank Financial Reform Act requires US companies to carry out due diligence to ensure their products do not contain minerals sourced in conflict-affected areas in this central African country. Its main objective was to cut the financing of armed groups operating in the country.</p>
<p>But this objective was not entirely achieved. To be sure, armed group involvement decreased in some certified mines, but at the same time it shifted to gold which is not yet certified. Besides armed groups found other sources of revenue. </p>
<p>Dodd-Frank went into effect in July 2010 and immediately created a de facto <a href="http://www.swedwatch.org/sites/default/files/Conflictminerals_report.pdf">boycott</a> of mineral exports from the Congo and neighbouring countries. Companies found it easier to just stop sourcing from this region, instead of facing the high compliance costs for setting up and monitoring supply chain due diligence. </p>
<p>As such, the move by the Trump administration to repeal this section of the law sparked a wave of indignation and protest on social media and in the <a href="https://theintercept.com/2017/02/08/leaked-memo-trump-conflict-minerals/">press</a>. <a href="https://www.globalwitness.org/fr/press-releases/executive-order-suspending-us-conflict-minerals-law-would-be-gift-warlords-and-corrupt-businesses-says-global-witness/">Global Witness</a> called the decision </p>
<blockquote>
<p>a gift to predatory armed groups seeking to profit from Congo’s minerals as well as a gift to companies wanting to do business with the criminal and the corrupt.</p>
</blockquote>
<p>But some have <a href="http://www.estellelevin.com/dodd-frank-1502-future-due-diligence/">downplayed</a> the gravity of the order. They have argued that a repeal will not have much effect since similar European law, soft law and corporate codes of conduct remain in place. Two online news sites <a href="https://www.irinnews.org/investigations/2017/02/14/who-pays-hidden-price-congo%E2%80%99s-conflict-free-minerals">IRIN</a> and <a href="http://www.mo.be/nieuws/trump-en-congo">Mo</a> are now reporting that Trump may have a point.</p>
<h2>Fact check</h2>
<p>The explanatory statement to the Trump draft executive order highlights the unintended consequences of Dodd-Frank. Top of these are job losses and lost livelihoods. On this point, Trump is right. In the age of “alternative facts”, this calls for evidence.</p>
<p>Research has documented the effects of Dodd-Frank in the eastern Congo, the area that was most affected by the policy. Here a virtual boycott on exports had a number of socioeconomic consequences, as well as an impact on the organisation of supply chains.</p>
<p>First, there was a negative effect on incomes. This can be attributed to the de facto ban itself, but also to the accompanying certification programmes that were rolled out. In South Kivu, a certification system set up by International Tin Research Initiative created a <a href="https://s3.amazonaws.com/ssrc-cdn1/crmuploads/new_publication_3/%7B57858126-EF65-E411-9403-005056AB4B80%7D.pdf">monopoly</a> for one export office and reduced prices on the local market. A similar <a href="http://ipisresearch.be/wp-content/uploads/2011/12/201011_Kivuhinterlands.pdf">monopoly</a> was created by Mining Mineral Resources in Katanga, resulting in falling prices and ultimately <a href="https://www.irinnews.org/investigations/2017/02/14/who-pays-hidden-price-congo%E2%80%99s-conflict-free-minerals">miners’ protests</a>.</p>
<p>Second, an indirect effect on health care and child mortality has been documented. Researchers from the United Nations University <a href="https://www.wider.unu.edu/publication/unintended-consequences-economic-sanctions-human-rights">conclude</a> that the probability of infant deaths near the policy-targeted mines increased by at least 143%. This they attributed to mothers’ reduced access to infant health care. </p>
<p>As Congolese miners struggled to sell their minerals, not to mention receiving a good price, their household incomes dropped. This had knock-on effects on the incomes of petty traders, shop and restaurant owners, taxi drivers and others operating in and around the mines. All this has affected people’s ability to afford health care.</p>
<p>Third, the stricter regulations allowed non-Western companies to take more control over mineral exports from the region. In Bukavu, for example, two <a href="http://repository.un.org/bitstream/handle/11176/17767/S_2012_843-EN.pdf?sequence=3&isAllowed=y">export offices</a> trading with Chinese buyers remained active after the de facto ban.</p>
<p>Fourth, the creation of “islands” of certified mining sites has pushed more actors into illegality and smuggling. In eastern Congo, this means a move to <a href="http://sarageenen.net/?page_id=15">gold mining</a>. Thanks to its material characteristics – a small amount of gold is worth a lot of money – gold is easy to smuggle. On the other hand, the 3T minerals (tungsten, tin and coltan) are bulky and require more sophisticated processing. </p>
<p>Not surprisingly, most policy efforts so far have focused on 3T, while gold has for now largely remained below the radar. But, it’s not just artisanal miners that have moved into gold, as documented by the <a href="http://repository.un.org/handle/11176/9/discover?rpp=10&filtertype_0=spatial&filtertype_1=contentType&filter_0=DEMOCRATIC+REPUBLIC+OF+THE+CONGO&filter_relational_operator_1=equals&filter_1=Reports&filter_relational_operator_0=equals&filtertype=agenda&filter_relational_operator=equals&filter=UN+ORGANIZATION+STABILIZATION+MISSION+IN+THE+DEMOCRATIC+REPUBLIC+OF+THE+CONGO">UN</a> and the Belgian research institute <a href="http://ipisresearch.be/wp-content/uploads/2014/04/20141031-Promines_analysis.pdf">International Peace Information Service (IPIS)</a> the same was true for armed groups. Dominic P. Parker and Bryan Vadheim, in a study under the title <a href="http://www.journals.uchicago.edu/doi/full/10.1086/689865">“Resource Cursed or Policy Cursed?”</a> find that</p>
<blockquote>
<p>the legislation increased looting of civilians and shifted militia battles toward unregulated gold-mining territories.</p>
</blockquote>
<p>On the positive side, the “regulated” 3T mines saw an <a href="http://www.enoughproject.org/files/Dodd-Frank1502ImpactUpdate022016.pdf">improvement</a> in health and safety standards, a <a href="http://ipisresearch.be/wp-content/uploads/2016/10/Mapping-minerals-in-eastern-DR-Congo_v005.pdf">reduction</a> in armed group control, and increased security for civilians. Some observers have also applauded the increased international attention for living and working conditions in Congolese mines.</p>
<p>Although these consequences were unintended, they were anticipated by local stakeholders as well as by some researchers and academics working in the region. A six-month <a href="https://www.researchgate.net/publication/257125920_A_Dangerous_Bet_The_Challenges_of_Formalizing_Artisanal_Mining_in_the_Democratic_Republic_of_Congo">presidential ban</a> on artisanal mining activities issued by Joseph Kabila had already revealed some of the likely consequences. The ban was framed as an attempt to combat militarisation and “reinstall order” in the mines. </p>
<p>At the lifting of the presidential ban in March 2011, miners and traders in the Congo feared what a de facto ban created by Dodd-Frank would mean for them. They asked for more support in order for them to be able to comply with the requirements. Yet, in the campaign running up to Dodd-Frank the voices of local stakeholders were not heard. This case was well argued in an <a href="https://ethuin.files.wordpress.com/2014/09/09092014-open-letter-final-and-list.pdf">open letter</a> signed by 70 (mainly) academics and researchers in 2014 and is persuasively demonstrated in the documentary <a href="http://www.wewillwinpeace.com/">We Will Win Peace</a>.</p>
<h2>All the wrong reasons</h2>
<p>So the ensuing question is: Would Trump have listened to the Congolese miners?</p>
<p>The answer is, very unlikely. Section 1502 is just a small part of the Dodd-Frank Financial Reform Act, which was passed after the 2008 financial crisis to tighten oversight of banks and protect consumers. Under the influence of powerful corporate lobbying groups, the Trump administration is now looking into repealing several sections, including a <a href="http://www.politico.com/story/2017/02/trump-sec-rule-foreign-governments-235013">disclosure rule</a> requiring US oil, gas and mining companies to be transparent on the payments they make to foreign governments.</p>
<p>So despite the rhetoric of Dodd-Frank’s unintended consequences on local livelihoods and the convenient use of – in this case – scientific evidence, concerns about Congolese stakeholders are not what motivates the Trump administration. Rather, as the explanatory statement explains, it is the fact that,</p>
<blockquote>
<p>Compliance costs are estimated at 3 to 4 billion USD upfront, and 200 million USD per year thereafter. </p>
</blockquote>
<p>These are evidently the wrong reasons.</p>
<p>The explanatory statement does include something else of interest. It says that a more effective way of addressing the problems of the Congo and adjoining countries will be sought. Talking about artisanal mining sector reform specifically, here are <a href="https://www.researchgate.net/publication/259505314_In_the_face_of_reform_What_future_for_ASM_in_the_eastern_DRC">some ideas</a> that emanate from the miners themselves:</p>
<ul>
<li><p>creating more and viable artisanal mining zones where they can legally work;</p></li>
<li><p>providing them with technical and material assistance so as to increase their productivity; </p></li>
<li><p>facilitating access to credit;</p></li>
<li><p>supporting the empowerment of bottom-up miners’ organisations instead of top-down <a href="https://www.uantwerpen.be/images/uantwerpen/container2143/files/Publications/PolicyBriefs/APB/14-DeHaan-Geenen.pdf">cooperatives</a> captured by elites. </p></li>
</ul>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/157675/original/image-20170221-18640-193ane7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/157675/original/image-20170221-18640-193ane7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=800&fit=crop&dpr=1 600w, https://images.theconversation.com/files/157675/original/image-20170221-18640-193ane7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=800&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/157675/original/image-20170221-18640-193ane7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=800&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/157675/original/image-20170221-18640-193ane7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1005&fit=crop&dpr=1 754w, https://images.theconversation.com/files/157675/original/image-20170221-18640-193ane7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1005&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/157675/original/image-20170221-18640-193ane7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1005&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Artisanal miner in eastern Congo.</span>
</figcaption>
</figure>
<p>But when it comes to addressing the problems of the Congo the more effective way is complex and politically messy. It involves more than just mining sector reform, but also <a href="http://www.mo.be/nieuws/trump-en-congo">political negotiations and peacebuilding efforts</a>.</p>
<p>A mineral trader in Bukavu put it this way to me: </p>
<blockquote>
<p>We are tired of all these decisions on our lives, being taken elsewhere. How can you refuse to buy the minerals that we export, but at the same time sell weapons to our armed groups? In both cases you are denying us a chance to live. </p>
</blockquote>
<p>Will anyone listen to him now?</p><img src="https://counter.theconversation.com/content/73320/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sara Geenen receives funding from FWO (Research Fund Flanders) and VLIR-UOS (Interuniversity Cooperation Flanders). She is affiliated with CREAC (Belgian Expertise Centre for Central Africa). She thanks Marijke Verpoorten and Mollie Gleiberman for editing this piece</span></em></p>The US wants to repeal controls imposed seven years ago on the trade of some Congolese minerals. The president’s reasons might be all wrong. But the law was badly put together in the first place.Sara Geenen, Lecturer in Globalisation, International Development and Poverty, University of AntwerpLicensed as Creative Commons – attribution, no derivatives.