In her 2012 book, Bull By The Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself, former FDIC chairwoman Sheila Bair offers dozens of recommendations for reforming our regulatory system to do what it was meant to do. We’ve excerpted three of our favorites.
1. Keep the Consumer Agency
I don’t know how anyone can say that we have done a good job of protecting consumers in financial services. Payment shock mortgages with abusive prepayment penalties, fee-laden credit cards, excessive overdraft fees — these are three examples of the types of products where disclosures have been inadequate and the products too complex for consumers to understand what they were getting themselves into. Moreover, the situation is worse with regard to nonbank financial providers, for example, payday lenders and money remitters, who charge fees and interest equivalent to several hundred percent. Similarly, the most abusive subprime loans were typically made by nonbank mortgage originators.
Pre-Dodd-Frank, the Federal Reserve Board had the job of writing the consumer rules for financial products, and its efforts were woefully inadequate. The core problem, I believe, was that the Fed’s responsibilities for monetary policy and safety and soundness supervision always came first. Insufficient attention was given to what was happening to consumers. What’s more, when the Fed did write consumer rules, they were generally lengthy and highly complex, making it difficult for consumers to understand their rights. The complexity and cost of complying with the rules also forced many community banks out of the business of consumer lending.
It is a very good thing that Congress has now created an agency devoted exclusively to consumer protection. I have high hopes that this new agency will work hard to simplify and strengthen consumer protections, while bringing much-needed enforcement of consumer rules to the nonbank sector. People of goodwill can differ on the structure of the new agency. I prefer that a regulatory agency have a board instead of a single director. A board brings a diversity of viewpoints that can help guard against regulatory capture, which is one of the reasons why I believe the OCC — if we keep it — should also be headed by a board. But the continuing debate about the structure of the consumer agency should not impede its ability to carry out its important functions. The agency deserves to have a Senate-confirmed head to lead it.
2. End the Revolving Door
When things go wrong, it’s usually the presidentially appointed heads of the agencies who take the heat. But in reality, the vigor with which rules are interpreted and enforced relies heavily on career staff. I have always been an advocate and supporter of career staff. While other agencies hired legions of advisers from the industry during the crisis, I pretty much relied on the FDIC’s career staff to carry out the FDIC’s vital mission.
If we want good people in government, we need to treat them with respect and let them know we value their work. If we signal through our hiring policies that we value industry professionals more than those who have chosen government as a career, we hurt morale and make it less likely that examiners and others will assert themselves against the industry when necessary. That is not to say that all career staff are perfect. I have seen many instances when career staff have been too deferential to industry wishes. At the FDIC, I did not want our examiners to be combative with the banks. But I did want them to exercise independent judgment and to understand that their job was to protect the public interest, not the banks.
It’s not just the examiners who can fall captive to industry viewpoints. The lawyers and economists who work at agencies can also be far too accommodating, if not gullible, when it comes to industry arguments. Lawyers in particular can become too focused on maintaining an agency’s jurisdiction, its “turf,” at the expense of good regulatory policy. For instance, for years, the SEC and >CFTC fought over which of them should regulate over-the-counter derivatives. With the agencies divided, the industry went to Congress and secured legislation banning both of them from regulating the industry.
I would like to see financial regulators, particularly examiners, develop a stronger esprit de corps. I would like to see financial regulation be viewed as a lifelong career choice — similar to the Foreign Service — rather than a revolving door to a better-paying job in the private sector. There should be a lifetime ban on regulators working for financial institutions they have regulated. We should impose higher educational and professional experience requirements for examiners and other staff when they enter government service, but also stronger training programs, ongoing educational support, and better pay. To be sure, industry experience can be helpful to a financial regulator, but that should be provided through government-paid industry tours of duty instead of an endless stream of staff moving back and forth between regulatory agencies and financial firms.
One area where a revolving door does make sense would be a requirement that federal regulatory staff accept rotations to other agencies. The financial regulators are not the only agencies where squabbling and infighting impede effective performance. We experienced tragic intelligence failures prior to the 9/11 terrorist attacks because of a lack of coordination and information sharing among law enforcement agencies. To promote better cooperation, the intelligence community has undertaken a mandatory rotation program for senior staff. This “joint duty” program requires all senior intelligence officials, as a condition of promotion, to undertake a duty rotation at another intelligence agency. Senators Joseph Lieberman, Susan Collins and Daniel Akaka have introduced legislation to expand this program to include more agencies, and the Partnership for Public Service has recommended a similar program for the entire civil service. Just as it is doing for the intelligence community, requiring rotations of senior staff among the various financial regulators could help guard against regulatory capture and improve coordination and collaboration among the various financial agencies.
At the end of the day, we can pass all the laws and write all the rules that we want, but if we don’t have good-quality people interpreting and enforcing them, our efforts at reform are destined to fail. Too often, media scrutiny and public interest are focused on the legislative battles and high-profile rule writings and not enough on the nuts and bolts of enforcing the rules. We have a number of good people in government, and we need to recruit more. Better policies to promote independence of judgment and breadth of perspective among career staff are essential if financial reform efforts are to succeed.
3. Reform the Senate Confirmation Process
By statute, the heads of all of the major financial regulatory agencies are appointed by the president and confirmed by the Senate. When the president and Senate are unable to agree on a nominee to head an agency, an acting head is named. As I write this in mid-2012, three of the seven major financial agencies do not have Senate-confirmed heads: the FDIC, the Federal Housing Finance Agency (or FHFA, the GSE regulator), and the Consumer Finance Protection Bureau (CFPB). In addition, the Office of Financial Research — which was created by Dodd-Frank for the important task of centrally collecting and analyzing financial data to identify systemic issues before they become problems — does not have a Senate-confirmed head.*
Responsibility for this rests with both the president and the Senate. Amazingly, notwithstanding the role of the GSEs in contributing to the financial crisis, it was not until late 2010 that President Obama submitted to the Senate a nominee to head FHFA. Similarly, notwithstanding the importance of ensuring effective supervision of the nation’s big national banks, it was not until 2011 that he submitted his own nominee to take charge of the OCC.
But the Senate has not behaved well either. It inexplicably blocked a Nobel laureate to serve on the Federal Reserve Board and a well-regarded state bank supervisor to head the FHFA. Well-qualified nominees to head the FDIC and OCC and to serve on the FDIC and Federal Reserve boards have had their confirmations held up for months. It is very difficult for the leadership of those agencies to function with Senate confirmations hanging over their heads. Every decision, of course, ends up being weighed against whether it will antagonize anyone in the Senate. Under Senate rules, a single senator can hold up a nomination for months.
Financial regulators are not the only ones who have been held hostage to the Senate’s confirmation processes. Virtually all other agencies of government have had their leadership held up at one time or another because of the vagaries of Senate rules. Judicial vacancies can languish for months or years as senators wrangle over whether to confirm nominees. Typically, the delay has nothing to do with the candidate. Rather, senators use nominations as leverage. For instance, when I was nominated to serve in the Bush Treasury Department in 2001, my nomination was quickly confirmed by the Senate, but the nominations of several of my Treasury colleagues were held up for months by a member of President Bush’s own party, Republican Senator Jesse Helms of North Carolina. Helms had no objections to any of the nominees; rather, he wanted the Treasury Department to change one of its trade policies related to textile imports.
Regardless of which party is in control of the Senate, nominations are frequently held up to extract concessions from the administration. Indeed, the current Senate leadership has been known to call them “high-value targets.” The unpredictable nature of the Senate confirmation process deters good people from entering government service. We want administrations to draw from Main Street talent throughout the country in recruiting people to accept senior government jobs. Yet what person in his or her right mind would willingly submit to a highly public and unpredictable Senate confirmation process, with no certainty about when he or she will be able to start the new jobs? Moving to Washington is a huge undertaking for the average Main Street American. You have to sell or rent your house, find a new house, find new schools for your kids, and if your spouse works outside of the home, he or she will want to find a new job. To undertake a career opportunity that risks being held up for months or longer is a burden many qualified individuals and their families are unable to accept.
Nominees should be guaranteed an up‑or-down vote on their confirmations once the Senate committee with jurisdiction has approved their nomination. Senate committees have functioned pretty well in processing nominations; the holdups have really occurred on the Senate floor. The occasional unqualified candidate can be screened out in the committee. But once the committee has acted, the nominee should have an up‑or-down vote within thirty days. If we want high-quality people of integrity to serve in government, we need to treat them with courtesy and respect, not as potential hostages in a high-stakes game of political cat and mouse. The Senate needs to reform the confirmation process. Otherwise, the only people left willing to take those jobs will be politically connected Washington lobbyists.
* Note: Since publication of Bair’s book, the directors of two of the agencies she mentions have been confirmed by the Senate. Martin Gruenberg was confirmed as Chairman of the FDIC in November, 2012. He had been serving as acting director since the summer of 2011. And in January, Richard Berner was confirmed as director of the Office of Financial Research. President Obama nominated Berner for the position in December, 2011.