Home House Financial Bill Is Mostly a Sham

The House of Representatives just passed the Administration's Financial Overhaul Bill. It includes the creation of a Consumer Financial Protection Agency. This is real progress. The rest seems a real sham and a real shame.

Re the Consumer Financial Protection Agency, unwary consumers continue to be fleeced left, right, and center by the financial industry. A new study by economists Susan Woodward and Robert Hall (see the report here.) shows just how badly low income households with little financial acumen are routinely taken to the cleaners by "reputable" financial companies.

Two personal experiences in the past couple of months confirm this.

I manage my mother's finances. She's mentally going strong, but is 90 and doesn't need the hassle of paying bills. Anyway, I managed to misplace her credit card bill and pay it a couple of weeks late. This is the first time I missed a payment. And it was not a large bill -- around $500. Anyway, yesterday I get a letter from her credit card company -- Bank of America, that they are raising her credit card interest rate to 27 percent. Lovely company. I'll be switching her to another bank next week.

My other experience, also with the Bank of America, comes closer to fraud. In the Fall, I went into their Lexington, MA office. I've been a customer of this bank for decades since I opened up a Bay Bank account in the early 1980s. Bay Bank was purchased by Fleet, which was gobbled up by B of A. The bank official, of course, knew me from Adam. I explained that I wanted to refinance with no points and no closing costs for X years in amount Z. What was their rate? The official plugged me into his computer and said he estimated it would be 5.0 percent. I said that sounds high because I'd received a 4.875 percent quote from another bank -- Citizens.

But I asked "Why do you mean by an estimate?" I'd like to get a firm quote. "Oh, you have to pay $700 to get a firm quote and that will take a couple of days." I said, "You mean I have to pay you $700 to learn what your price is?" He said, "Yes, that's the procedure." I got up to go at which point he handed me a card and said, "Call this person. He works for B of A and may be able to give you a quote and waive the fee." So I called the person, who said, "B of A doesn't have the best rates. Call my friend Bill at Met Life." So I called Bill who said he could do the deal at 4.5 percent. I then said "Great," and called Citizens to say I was going with Met Life. The person at Citizen said, "No way Met Life is able to lend you at 4.5 percent. I know their costs of funds and you are being defrauded. If you don't get paperwork in two days, call me."

We'll gee, this made me nervous. So I called Met Life day after day as the paper work never showed up. And every day the person at Citizen called or emailed me that I was being subject to fraud. I got so nervous that I called Met Life's headquarters to check that Bill actually worked for Met Life and that the office he referenced was Met Life's. It all checked out.

Bill finally got me the paper work and I closed. But this experience was quite the eye opener. Here we have three of the country's largest financial companies. One is asking me to pay to see its interest rates. That sounds like fraud to me. One is telling me I'm being defrauded by another. And the other can't conform to the paperwork deadlines set by law.

I have no doubt that the Consumer Finance Protection Agency can help. But my Limited Purpose Banking proposal features a way to ensure all borrowers get the best rate, namely by having their mortgages put up for public auction under the auspices of a single agency called the Federal Financial Authority. (See my forthcoming on Feb. 22, 2010 book, Jimmy Stewart Is Dead for details. John Wiley and Sons is the publisher.)

Apart from the Consumer Finance Protection Agency, the House Bill lets shareholders vote on whether they like how much management is stealing from them but provide them no ability to make their votes binding. This is standard Congressional windage.

The bill will also force hedge funds to register with the SEC -- the agency, which recall, couldn't shoot straight when it came to investigating Mr. Madoff and which let the entire subprime toxic asset fiasco materialize before its eyes.

There are also rules for forcing derivative traders to operate in organized markets unless they decide they don't want to. Even if they do operate in organized markets, there is nothing that would prevent an AIG from selling credit default swaps or a Citigroup from selling CDO Liquidity Puts that they can't cover when things go south. Selling things you don't have to sell is fraud and when AIG and Citigroup sold trillions in default insurance knowing full well that it couldn't cover the claims in the context of a major recession, they were engaging in fraud, at least at I'd define it. Under the House Bill, such insuring of the uninsurable would potentially occur in a more organized, documented manner, but it wouldn't be prohibited.

The House bill also gives the Fed more power to regulate risk and set cash reserve requirements at all major financial institutions, including Wall Street investment houses, not just banks. The Fed is another Keystone Cop regulator. Why should we expect it will better baby sit the financial industry in the future than it has in the past? The Fed's had all the power it needed to supervise Citigroup, for example, and exercised none of it.

Finally, the House Bill lets the government take control of large financial firms, not just banks, that pose a systemic risk to the economy. I don't see this as a new power. Perhaps its legalization of a power that's been illegally used, but it's not authorizing a new action that's not been undertaken. AIG is not a commercial bank. But the government certainly took over its control.

What we need is Limited Purpose Banking (see to ensure that financial corporations don't gamble, period. Pretending to baby sit them is a shame. Nothing in the House bill would, it seems to me, prevent a reoccurrence of the financial malfeasance we've just experienced.

Enacting this bill is like responding to the tainting (with cyanide) of Tylenol in the 1970s not by taking the poisoned pills off the drug store shelves and resupplying the stores with Tylenol packaged in safety sealed containers, but by telling drug stores to keep their Tylenol receipts.

Congress doesn't understand how terribly fragile our economy remains. Uncle Sam has become the new AIG -- insuring far beyond what's insurable. This bill would leave us perched ever further out on an extremely precarious limb, which can snap simply from the public's knowledge that the financial industry is being backed by Uncle Sam and Uncle Sam's backing is nominal, not real. I.e., it's a commitment to "bail out" depositors in banks and lenders to banks by paying dollars, not real goods and services.

Were we to experience a run on the banks today, the FDIC would be short $6 trillion, which would need to be printed. This would lead to hyperinflation, which would mean that anyone who didn't run on her bank to withdraw her money and buy something real would be assured that her dollars were safe, but that her when she used them, they'd purchase little if anything.

And a run on the banks would trigger a run on the life insurance companies' cash surrender policies, which total some $3 trillion. These events would trigger more obligations Uncle Sam has taken on in the last 24 months to cover financial obligations of major financial companies. Neal Barofsky, Congress' watchdog for the TARP program, testified this summer that Uncle Sam has committed to paying close to $24 trillion were push to come to shove. We'll making incredible commitments in an economy as fragile as is ours and failing to fix the fundamentals is a sure-fired way of raising the chances of push coming to shove.