Amodei, Heck Join Big Bank Boys Club: H.R. 1062 Protects Wall Street

Almost lost in the hyperbolic distractions so beloved by the D.C. press, was the House passage of H.R. 1062 on May 17, 2003, a bill to gut the capacity of the Security and Exchange Commissions rule making to protect American investors.   And, Nevada Representatives Amodei (R-NV2) and Heck (R-NV3) voted in favor of it.  Representatives Titus (D-NV1) and Horsford (D-NV4) voted against H.R. 1062.

What did they support?

“SEC Regulatory Accountability Act – Amends the Securities Exchange Act of 1934 to direct the Securities and Exchange Commission (SEC), before issuing a regulation under the securities laws, to: (1) identify the nature and source of the problem that the proposed regulation is designed to address in order to assess whether any new regulation is warranted; (2) use the SEC Chief Economist to assess the costs and benefits of the intended regulation and adopt it only upon a reasoned determination that its benefits justify the costs; (3) identify and assess available alternatives that were considered; and (4) ensure that any regulation is accessible, consistent, written in plain language, and easy to understand.”  [Thomas CRS Summary] (emphasis added)

Oh, how the Wall Street Wizards will love this one! The Little Wizards in the investment banking sector have long wanted all regulators to use the “cost/benefit” standard for restraining the excesses of investment enthusiasm.   H.R. 1062 seeks to gut the Dodd-Frank financial reform statute enacted in the wake of the Mortgage Meltdown and attendant financial machinations, and unleash the Wall Street Wizards from all regulation “past, present, and future.”  [HuffPo] We already have “cost/benefit analysis”  built into the system — so why another bit of legislation?

Here’s the little kicker in the bill:  “This bill was transparently designed to allow each regulation to be challenged in court by industry, but not by consumer advocates.”  [HuffPo] Got it?

Evidently, Representatives Heck and Amodei believe this to be a good idea — that the financial sector battalion of legal expertise may challenge each and every regulation proposed by the Securities and Exchange Commission — but the rules may NOT be challenged by consumer advocates.

As Representative Gwen Moore (D-WI4) explains:

“The ink would not be dry on a SEC rule before the race to the courthouse door to challenge the regulations would begin. Presumably, the most powerful industry participants would challenge the rules in the way that achieves their narrow interest, which may be to the detriment of investors or other less-affluent market participants. In this way, the most powerful industry interests would be able to not only use the courts to undo consumer protections, but to also seek competitive advantage over competitors.”

The big get bigger, the fat get fatter, and the rest of us sit waiting to find out how best to serve the Big Bankers on Wall Street.

But wait! It gets better — if you happen to be a Big Banker on The Street:

Requires the SEC to: (1) consider whether the rulemaking will promote efficiency, competition, and capital formation; (2) consider the impact of the regulation upon investor choice, market liquidity, and small business; (3) explain in its final rule the nature of comments received concerning the proposed rule or rule change; and (4) respond to those comments, explaining any changes made in response and the reasons that it did not incorporate industry group concerns regarding potential costs or benefits. [Thomas CRS Summary] (emphasis added)

Any rule has to promote “capital formation?“  Translation: No SEC rule may prevent any investment banking operation from accumulating capital (money) just about any way it wants to, and even further — if the rule does prevent some Wall Street investment house or Monster Bank from accumulating all the coin of the realm it wants then the SEC has to explain (presumably to Wall Street’s satisfaction) why “industry group concerns” weren’t incorporated into the rules.  Another translation might be in order:  The SEC can’t propose and adopt any rule Wall Street doesn’t like.

Wall Street would like to modify some existing rules (like those pertaining to the Dodd-Frank Act) and H.R. 1062 offers them a way to do that:

Requires the SEC to: (1) review its existing regulations periodically to determine if they are outmoded, ineffective, insufficient, or excessively burdensome; and (2) modify, streamline, expand, or repeal them.  [Thomas CRS Summary] (emphasis added)

How nice.  Now, just what does “excessively burdensome” actually mean?  The standard Wall Street dictionary applies the term to any regulation they don’t like.   Is it “excessively burdensome” to require a Wall Street firm to report what it’s doing with derivatives? Is it “excessively burdensome” to make Wall Street stop playing casino games with people’s mortgages?   If the rule isn’t “excessively burdensome,” then how about making rule proposals almost impossible?  The bill had a little something for that prospect too:

“Requires the SEC, whenever it adopts or amends a major rule, to state in its adopting release: (1) the purposes and intended consequences of the regulation, (2) the post-implementation quantitative and qualitative metrics to measure the economic impact of the regulation and the extent to which it has accomplished the stated purposes, (3) the assessment plan that will be used under the supervision of the Chief Economist to assess whether the regulation has achieved those purposes, and (4) any foreseeable unintended or negative consequences. Requires the assessment plan to: (1) consider the costs, benefits, and intended and unintended consequences of the regulation; and (2) specify the data to be collected, the methods for its collection and analysis, and an assessment completion date.”  [Thomas CRS Summary]

Got all that?  How is an “unintended consequence” foreseeable?  That’s why they’re called “unintended” in the first place.   So, the SEC cannot enforce any rule which might at any point in the future have an “unintended consequence” because that would violate the provision calling for a full assessment of the development of the rule.

After this bit of legislative legerdemain on behalf of the Big Banks and their cohorts on Wall Street, Representatives Amodei and Heck have not a quarter of an inch of room to talk about protecting small businesses — who are all too often at the mercy of the Big Banks, nor do they have any leeway to discuss protecting investors and their retirement accounts.  Nevada homeowners facing all manner of difficulties with mortgages that were sold off in packages and then bet on more enthusiastically than the Kentucky Derby might want to inquire precisely how Representatives Amodei and Heck are protecting their interests?

Representatives Heck and Amodei have joined the Big Bank Boys Club in this vote; a connection avoided by Representatives Horsford and Titus.

If you are not a resident of Nevada and would like to see how your Representative voted on this egregious bit of pandering to Wall Street and Big Bank interests click here.

At Play In The Fields Of The Frontier Markets

Repeat: One man’s debt is another man’s asset.  Repeat: The higher the yield the higher the risk.  The higher the risk the more likely something will go haywire.  And, why repeat these boring bits? Because,  if one is sitting in Nevada (or Florida, or Arizona) and still looking at an economy which is sluggish for the average family and volatile for the 0.1% investor — The Players Are At It Again.

Some time in the future — one can only hope it isn’t soon — the term  “Frontier Market” is going to come back to haunt someone, and we might wish to pray that not only is the backwash not immediate, but also that it doesn’t repeat the last financial debacle.

Tucked into Reuters’ reporting of market news was this article which may prove altogether too prescient:

“With the world’s biggest central banks driving yields on safe assets to near zero, some investors are tossing caution to the wind and rushing to buy illiquid and previously overlooked bonds sold by countries with no capital markets track record.”  [Reuters]

If this sounds too familiar, it should — it should have reminded someone of Argentina (1992-2002) the Asian financial calamity (1997) and the mess in Russia (1998) which brought down Long Term Capital Management.  We ought to take a second look at what happened in the LTCM mess:

“Long-Term Capital was advised by finance quants, or quantitative analysts, who made a number of unsound, esoteric bets, including investments in interest rate derivatives. When Russia’s inability to pay its debts roiled global markets, the fund, saddled with high-leverage and off-balance-sheet obligations, was near collapse.

Because Long-Term Capital owed large sums to banks and other financial institutions, the Federal Reserve Bank of New York organized a consortium of companies to buy it out and cover the debts. Alan Greenspan, then the Fed chairman, eased monetary policy to restart capital markets, which were starting to freeze up. Long-Term Capital’s shareholders were wiped out, but none of the creditors took losses.”  [NYT]

Quick summary:  A large hedge fund, guided by quantitative analysis (but not exactly a boatload of common sense), took positions in debt issued by Russia.  Because the hedge fund owed large amounts to “other financial institutions” (read: banks and other funds) when the Russian economy collapsed the Big Hedge Fund blew up, and the creditors (those other banks and investment firms) were about to get not only a hair cut, but possibly get their heads shaved.  Not surprisingly the financial markets began to “freeze up” (Does this sound familiar?)  Enter the first big government bail out of the Era of the Financialists.

This wouldn’t be the first or last time the bankers blew it.  Consider Mexico in 1994, those investors bought Mexican debt in pesos and were repaid in dollars — but the Mexican government didn’t have sufficient reserves to keep up the fixed rate repayment.  At this juncture a sentient creature might have wanted to ask: Why am I buying debt without checking to see if the nation in question has ample reserves to repay it?  Not enough investors (and their institutions) ask the question, and the result was messy.  The U.S. ended up buying pesos on the open market, and then added loan guarantees  to the tune of some $50 billion.

So, now let’s add “investors” interested in buying Paraguayan, Bolivian, and Honduran debt in 2013.  Just for good measure we can toss in some Vietnamese and Romanian debt as well.  These nations are issuing debt (bonds) and “investors” are buying it up.

Paraguay offered bonds at 4.65% interest (yield) on January 17, 2013.   Reuters reported: “Paraguay, one of South America’s poorest and most unstable nations is expected to see a strong economic rebound this year and the government is keen to tap increased investor interest in smaller emerging market issuers.”

U.S. Treasury bonds are currently going for 1.95% for ten years.  [Treasury] thus for the Greed Is Good Crowd that 4.65% might be very appealing?  However, that “poorest and most unstable nation” thing might give a few individuals pause.

Honduras was rated B+ by S&P when it issued its international bonds at 7.5%, mature in 2024.  They are involved in a $205 million lawsuit concerning a state owned logging company which caused Barclay’s to pull out of the deal. [Bloomberg] But Gee! doesn’t that interest rate look enticing? There’s just a bit of a problem — Honduras has “gang problems,” $6 billion in foreign debt, and an internal debt that’s tripled since 2010.  [AJTV] What could possibly go wrong?

Guatemala entered the lists: “Guatemala, rated two steps higher than Honduras at BB, sold $700 million of 2028 bonds to yield 5 percent on Feb. 6, according to data compiled by Bloomberg. The yield on the bonds has fallen to 4.95 percent since they were issued.” [Bloomberg] The fact that 54% of the nation’s citizens are living in poverty ought to be some kind of clue about its economy, and the fact that  the highest income earners are responsible for 42+% of the nation’s consumption might also be a sticky point. [CIA]  The State Department offers this caution: “Guatemala continues to face major challenges to successful development, including poverty, malnutrition, and vulnerability to economic fluctuations and natural disasters. The Guatemalan government also faces the challenges of corruption and the presence of transnational organized crime.”

Just imagine for a moment if Burnham Down & Crash LLC,  bought up some Paraguayan, Honduran, and Guatemalan bonds, which they mixed with some U.S. bonds (1.95%), some bonds from Great Britain (1.95%), and some German bonds (1.37%).   A bit of careful slicing, dicing, and repackaging could be used to manufacture “Unlimited Horizons” — a bond offering for “investors” (read: Other Bankers).  Incorporate a touch more Magic Hands and the bonds from “Unlimited Horizons” could be repackaged with bonds from “Blue Skies” yet another mixture of national paper, and an admixture of really good investments piled in with some really questionable ones.  Is this sounding familiar yet? Clue: Think Housing Bubble.

How many of the bonds from the shaky sources have to default before the investors are looking at the financial equivalent of Sweeney Todd’s barber shop?  How many investment houses are going to be involved in the purchase of these bonds and their derivatives before the Major Bankers “have to step in” and announce austerity measures so that the small debtor nations can repay the investors?  Clue: Look at Greece? Cyprus?

How many of us on this planet would be just as happy if the bankers had not decided to play in those debt markets in the first place?

It isn’t as though the bankers didn’t learn anything from Argentina, Mexico, the Asian markets, and Long Term Capital Management — from Lehman Brothers, or from the Mortgage Meltdown — it really doesn’t look like they’ve learned anything.

Sunday Roundup of Recommended Reading

Nevada Legislative News:    For an analysis of the tax reform battle currently on view in the Nevada Legislature, see “Mining for Clarity,” from the Nevada Progressive.  You’ll find some context in “Let’s Talk Tax Reform and Mean It” from a February edition of the Nevada Public Employees Focus, and a bit more from The Nevada View.  For more information see: “Nevada Funds Mining’s Big Mistakes,” in CityLife.  And, there’s more from the mining corporations in “Mining Rep: Republican Effort to Tax Us in Punitive,” Las Vegas Sun.

The economy:  The battle over the provisions of the Dodd-Frank Act have moved into the caliginous rule making phase.  The efforts were the subject of an MSNBC piece (video), which (finally) picks up on a review from The Hill, in which it was reported that more than half of the Dodd-Frank Act rules are still “in the works” from January 28, 2013.   There’s more from the Angry Bear economics blog,  in which we find the fraudsters now seeking to use the Sequester to cut funding for rule making and implementation.  The following does not bode well for assisting the various Federal agencies tasked with keeping up with the “creative” machinations of the Wall Street Wizards:

“Aside from federal civil and voting rights programs, investment law enforcement agencies and commissions on the chopping block include the Securities and Exchange Commission (a possible $115 million reduction), Commodity Futures Trading Commission ($17 million), federal courts ($384 million at risk), Public Accounting Oversight Board ($18 million) and the Securities Investor Protection Corporation ($23 million). In sum, $557 million could be cut from investor protection programs, barring Congressional intervention.”  [Angry Bear]

Naked Capitalism has an excellent piece on the prevarications of banking regulators who are supposed to be keeping an eye on the welfare of Americans who have money in the banks, not just the bankers who are raking in more American money, they call it “safety and security” — they mean “profitability.”  In a more general vein, there’s a MUST read post from Henry Blodget, “In Case You Needed More Proof That It’s Stupid To Cut Government Spending In A Weak Economy…” in Business Insider.    And, if you have not already read Michael Hiltzik’s piece for the Los Angeles Times, “The five biggest lies about entitlement programs,” please click over and read his summarization.  Here’s a taste:

“As efforts to cut Social Security and Medicare gather steam in the budget wrangling in Washington, you’ll hear these mega-trillions being thrown around more and more. Beware. They’re numbers designed to terrify, not edify.  The assertion comes from something called the “infinite horizon” projection. It’s a calculation of funding gaps projected out to the limitless future and then converted to present value — meaning what the cost would be if we had to pay it all today. For Social Security, the figure was $20.5 trillion, as reported in the program trustees’ latest report. For Medicare, the number comes to about $42.7 trillion. Even professional actuaries say this calculation is bogus.”

Media and Politics:  Finally! Someone calls out the Village Press Corps for continuing to bleat that the “President should reach out more…,” another Must Read is Dee Evan’s blast of sanity “More Selective Memory…” in the Huffington Post.

A Shot In the Sequester Battle: GAO Report on BRAC Implementation and Implications for Civilian Cost Cutting

Something for the Nevada Congressional delegation to consider while pounding away on the Sequester question is a report today from the GAO concerning the Cost of Base Realignment Actions (COBRA) by the U.S. Department of Defense.  If the intention is that our military operations become more fiscally rational, and our military system more structurally efficient — we have a way to go.

Our first clue is that when a report shifts from a complimentary tone concerning Department of Defense efforts at fiscal responsibility to the next sentence beginning with the word “however,” something is amiss.  For example, after commending the DoD’s projections about costs of base realignments, here comes the punch line:

“However, DOD’s process for providing the BRAC Commission with cost and savings estimates was hindered in many cases by underestimating recommendation specific requirements that were entered into the COBRA model. For example, military construction costs for BRAC 2005 increased from $13.2 billion estimated by the BRAC Commission in 2005 to $24.5 billion after implementation ended in 2011.”

We’re all familiar with cost overruns in construction projects, and with under-estimations of expenditures, but a +93.18% level is much more difficult to explain.   There’s (a) something wrong with the model? (b) something wrong with the estimates? or (c) something wrong with both of these inputs?  The GAO Report explains:

“GAO found that other cost estimates increased because requirements were initially understated or not identified as inputs into COBRA. DOD also did not fully anticipate information technology requirements for many recommendations. For example, the initial information technology cost estimate for one recommendation was nearly $31 million, but implementation costs increased to over $190 million once those requirements were better defined.”

In short, the difference between the idea and the implementation proved to be far more expensive than initially estimated.   Moreover, the methods used to guide its projections didn’t fill the bill:

“DOD was unable to always document the methodology used to estimate savings from reducing military personnel positions. Therefore, to increase the fidelity of the initial cost estimates that DOD submits with its recommendations to the BRAC Commission for a future BRAC round, GAO is recommending that the Office of the Secretary of Defense (OSD) improve the process for identifying and estimating the cost of requirements for military construction and information technology and update the guidance on documenting how it identifies military personnel position-elimination savings.”

Or, not to put too fine a point to it, the U.S. military (a) didn’t do a very good job of estimating the costs associated with construction and IT demands, and (b) needs to figure out a way to substantiate its estimates of the results of eliminating redundant or unnecessary positions.   The GAO provides a helpful example:

“By implementing BRAC 2005, DOD closed 24 major bases, realigned 24 major bases, eliminated about 12,000 civilian positions, and achieved estimated net annual recurring savings of $3.8 billion; however, the department cannot provide documentation to show to what extent it reduced plant replacement value or vacated leased space as it reported in May 2005 that it intended to do.” (emphasis added)

And, when the documentation is faulty it is difficult, if not nearly impossible to determine if the actions taken are producing any real savings to U.S. taxpayers.   Part of the problem associated with generating cost savings in the Department of Defense may well be related to the priority given to the implementation of the BRAC recommendations themselves.

“Although reductions in excess infrastructure to generate cost savings remained an important goal for DOD, the extent and timing of potential costs and savings, including the number of years it would take for the savings to exceed costs, was included as “other” or secondary criteria. As a result, many BRAC recommendations were not expected to produce 20-year net savings. Also, the BRAC Commission added contingency clauses to some recommendations, which allowed some outcomes to be defined by events or decisions that could occur after Congress could have prevented the BRAC recommendations from becoming binding, if it so chose. Hence, Congress had limited visibility into the potential cost of those recommendations.”

If the Department is realigning for strategic purposes then it might be logical to conclude that savings aren’t the main priority.  However, if the Department is called upon to further reduce costs as the result of sequestration, a Grand Bargain, or other Congressional maneuvers, then Congress definitely needs more “visibility” into the process.

One of the more helpful components of GAO reports is that they don’t merely criticize, but also offer recommendations for improvement.  In this case there are three:

“GAO is suggesting several matters for Congress to consider for amending the BRAC statute if it decides to authorize future BRAC rounds. First, if cost savings are to be a goal of any future BRAC round, Congress could elevate the priority DOD and the BRAC Commission give to potential costs and savings as a selection criterion for making BRAC recommendations. Second, Congress could consider requiring OSD to formally establish targets that the department expects to achieve from a future BRAC process and require OSD to propose selection criteria as necessary to help achieve those targets. Finally, Congress could consider whether to limit or prohibit the BRAC Commission from adding a contingent element to any BRAC recommendation and, if it is to be permitted, under what conditions.”

The first makes perfect sense.  If, in fact, cost savings and not strategic considerations are the priority then Congress should say so.  Secondly, more thought should be given to forming implementation targets and setting BRAC priorities.  Finally, if “contingent elements” are to be added we need more oversight into what will be allowable, and under what conditions it would be permitted.

All of this argues against the Meat Axe Approach to the reduction of federal spending.   There may very well be a message here which could be applicable to other government agencies.

There are at least two reasons why agencies, military or civilian, might adjust their operations: Strategic (providing better or more efficient service), and Monetary (getting by with less expenditures of public funds.)

The first asks the question how can we better and more efficiently implement our core mission to serve the people of the United States, while the second simply asks what can we cut in order to save money.  If we extrapolate the military situation into civilian terms then we can more readily see the implications of cost cutting for its own sake.

At this point it would be well to consider the nature of budget cutting and the rationales offered therefore.   Budgets can be cut to save money, but not so much that the agency cannot perform its central mission, or budgets can be axed to prevent an agency from conducting its basic business.   In this context, the House Republicans will be re-introducing the Ryan Budget 2.0 (or whatever version count we’ve now achieved).

“The plan by the GOP vice-presidential nominee is expected to lock in cuts to agency budgets, and curb the future growth of benefit programs like food stamps and Medicaid and contain a controversial proposal to turn Medicare into a voucher-like program for seniors younger than 55. Ryan said it’ll take relatively small additional spending cuts beyond those proposed last year to demonstrate balance.” [USAToday]

What if we were to apply the GAO recommendations on BRAC implementation to the civilian side of the budget proposed by the House Republicans (or, for that matter, to the budget amendments being compiled on the Senate side)?

The Medicare Question

Are the House Republicans proposing to voucher-ize the Medicare program into a coupon-care operation because they want to save money, or because they want to revert to a privatized system of health insurance acquisition for the elderly?  In GAO/BRAC terms — is the proposal strategic or savings oriented?  The Tea Party/GOP response could well be “both.”  Adopting their ideology assumes that privatizing the system would in theory save money and secure the basic provision of health care for elderly Americans in a “free market.”   This is an essentially locular position.

The main cavity is that health care markets in the United States aren’t working like commodity markets, never have and never can.  “Health” is not a commodity.  People don’t make economic choices about the purchase of health care services.    A “strategic” view would incorporate this concept.  As there is no logical way to argue that U.S. military presence in Korea is “unessential” at the moment — there is no way to validly argue that the access to health care service can be fobbed off into a market which commodifies the un-commodifyable.

The Oversight Question

As the GAO recommended more Congressional visibility in the issues raised by BRAC policies, we might want more transparency in the strategies asserted by Congress in others, civilian, functions.  One example might be the CFPB. The Consumer Financial Protection Bureau has never been popular with Republicans, who seek to replace it with a “committee” structure beholden to bankers and Wall Street investment houses.   Again, we come to the question of whether the proposed cuts are “strategic” or “cost saving” in nature.

Initial estimate projected  it would cost about $143 million to get the agency up and running, and Republicans immediately revised this downward in 2011 to $80 million. [HuffPo]  Budgeting for an agency in “creation mode” offers a point of comparison with Defense Department efforts to “re-create” some of its functions and their implementation.   The CFPB needs to hire employees (as the DoD needs to recruit personnel compatible with its mission) and to “build out core supervision and enforcement capability.” [BIB CFPB pdf] The FY 2013 Administration Budget calls for $261,119,000 for enforcement and supervision (up 22% from FY 2012) and $126,025,000 for consumer engagement and responses to consumer concerns about financial products being marketed to them. (Up 49% from FY 2012)

A suggested reduction in the FY 2013 budget for the practical elements (supervision of financial services and engagement of consumers in understanding financial products and services) means that someone is making a “strategic” decision about how resources are to be allocated for these basic functions.  Do we, for example, put “bases” in all major U.S. cities, or do we attempt to function with a single centralized base of operations in Washington, D.C? Do we appropriate funds for minimal staffing in all “bases,” or do we strive for moderate staffing levels in some, minimal in others?

The Final Question

Removing for the moment those ideological radicals who really want no government and no regulation of major economic or environmental factors (physical or social) in our lives (save for the defense contractors in their Congressional districts?) it’s reasonable to assert that when we say “smaller government” we say we want more efficient government.  If this is truly the object then why not consider applying the GAO recommendations to the budget conversation?

We want the best cost projection models possible. Further, we want to know if the estimations are predicated on cost savings or strategic considerations.  We deserve to know the Congressional priorities in budget allocations, and finally we should be told — in terms as clear as possible — if changes are to be made who made them and why.

Problems with your credit report? Heller isn’t helping.

On February 10, 2013 CBS broadcast a “60 Minutes” report concerning the 40,000,000 mistakes made by credit rating agencies.  Worse still, not only are mistakes being made which have profoundly negative effects on individual credit reports but the errors are exceedingly difficult to correct.  If this situation weren’t sufficiently dismal, we have 43 members of the United States Senate — including Senator Dean Heller (R-NV) — who aren’t helping.

Members of the Republican caucus sent a letter to President Obama on February 1, 2013 expressing their “concern” for the operations of the Consumer Financial Protection Bureau, and their intent to block the nomination of director Cordray until the bureau — which is to exercise oversight of CONSUMER CREDIT REPORTING AGENCIES — until said agency is “reformed” to their satisfaction.  The second name on the sign up sheet?  Senator Dean Heller, Republican, Nevada.

Here’s the core of their discontent:

“As presently organized, the CFPB is insulated from congressional oversight of its actions and its budget.  Far too much power is vested in the sole CFPB director without any meaningful checks and balances.
We again urge the adoptions of the following reforms:
1. Establish a bipartisan board of directors to oversee the Consumer Financial Protection Bureau.
2. Subject the Bureau to the annual appropriation process, similar to other federal regulators.
3. Establish a safety-and-soundness check for the prudential regulators.”

This is essentially a repetition of their complaints in 2011 after the passage of the Dodd Frank Act and the nomination of Mr. Cordray to head the CFPB, and the Banker’s Boys are disturbed about provisions of the financial reform act which placed banks under adult supervision.  That “bipartisan board,” for example, is code for replacing the director with a five member committee, to be confirmed by the Senate.

There is nothing so effective in creating gridlock as to have a watchdog agency governed by committee.  Especially a committee subject to all the political pressure the Senate can create.   What of the second “hostage demand?”

The Republican Senators would “subject the agency to the annual appropriation process.”  There is no way to hamstring an oversight agency so quickly as chopping its budget to shreds under the flapping banner of “savings.”

“Despite claims about its unlimited power, the CFPB is the only banking regulator whose budget will be capped (for now, at 12 percent of the total Fed budget) and whose rules can be overturned (by a two-thirds vote from the Financial Stability Oversight Council, a new group of top federal economic policy-makers)”  [Nation] (emphasis added)

Thus much for the “rogue” agency, unencumbered by accountability argument.  The problem, as perceived by the Republican Senators, Senator Heller included, is that the agency isn’t sufficiently controlled by the American Bankers Association, the U.S. Chamber of Commerce, and the other banking interests which have bankrolled the opposition to financial reform and regulation.

When we tread toward the Safety and Soundness hostage demand we’re approaching some semantic territory in which the intent is couched in bureaucratic jargon.  The essential issue is captured in the following analysis:

“The tug-of-war between “safety and soundness” and “consumer protection” is at the heart of this debate. Consumer advocates want a powerful single-body regulator and enforcer that is distinct from safety and soundness regulators. The conservative response is that it’s a very bad idea to have one consumer organization slashing profitable practices — or promoting risk taking — divorced from any safety and soundness responsibility.”

First, it’s assumed that bank regulators of yore were primarily concerned with the “safety and soundness” of the banks under their purview; and, that “safety and soundness” means PROFITABILITY.  So, what the Republicans, Senator Heller prominently included, do not want the Consumer Financial Protection Bureau to issue any regulation likely to impact on the PROFITABILITY of the banking institutions.

Thus, while 40 million Americans are grappling with credit reporting agency errors, the Banker’s Boys in the U.S. Senate want (1) a consumer protection agency saddled with management by committee; (2) a committee subject to the political pressure of the Bankers and the Senators who are bankrolled by them; and (3) unable to issue any regulation that might have any negative impact on the profitability of the banks.

Rarely will we see such a blatant display of pure special interest pleading by any group of special interest pleaders.  It doesn’t seem to matter to the Banker’s Boys if there are taxpayers expected to bail out the bankers when their traders’ excesses create systemic problems.  It doesn’t seem to disturb the Banker’s Boys if there are homeowners subjected to exotic mortgage products — as long as the “safety and soundness” (profitability) of the mortgage bankers is assured.  And, it doesn’t appear to trouble the Banker’s Boys if there are American consumers whose own financial “safety and soundness” are at the mercy of banks, mortgage bankers, and credit rating agencies unable, or unwilling, to put their own profitability at any risk in order to create a more positive financial environment for the rest of us.

Nevada’s Moral Hazard: The One With No Connection To Brothels

Nevada, one of the nation’s poster children in home foreclosures, is now tangled in the process of unwinding the results of the financial sector’s vulpine avarice.  Which home mortgages may legitimately be foreclosed upon and which are so defective that no legal process will rationally resolve the issues?  Bankers are lobbying for changes in NRS 106.210 and NRS 107.070 as included in AB 284 (pdf) of the 2011 session.

“At issue is Assembly Bill 284, a measure passed by the Nevada Legislature in 2011 and signed by Gov. Brian Sandoval that forces banks to prove they have the legal right to foreclose on a particular home before they take action. Most important, the law requires bank workers to sign an affidavit that they have personal knowledge of a property’s document history, or they will face criminal or civil penalties.”  [LVSun]

That “document history” part is important. A person doesn’t know the “document history” if the mortgage was robo-signed.  The “document history” may be unfathomable if the property documentation wasn’t properly registered with local government officials.  If the mortgage was signed, handed over to a servicer, later packaged with other mortgages into securitized asset products, sliced up into bits, and then re-sold to investors — we’ve seen this movie before and it didn’t have a happy ending…

Just how badly the financial sector had mismanaged the handling of mortgages can be quickly discerned from the numbers included in the Las Vegas Sun article.  Of the 5,350 foreclosure notices filed in August 2011, and the 4,684 default notices sent later, only 80 were compliant with the statute requiring that the banker demonstrate knowledge of the “document history.”

The issue also demonstrates how long it can take to fix messes created by free wheeling enthusiasts of financial creativity.  The housing boom lasted until 2007-2008, it’s now the end of 2012, and the bankers are only now returning to focus on their foreclosure mess.  It also provides an object lesson on the transitory nature of Moral Hazards.

Members of the financial community are oft heard speaking of Moral Hazards.  The New York Times explains: “…in economic terms it refers to the undue risks that people are apt to take if they don’t have to bear the consequences.”  For decades the formerly obscure term was applied to the “little guy.”

The Theory of Moral Hazard was applied to sales representatives, who it was said would not work hard to sell the manufacturer’s products if not given incentives like commissions to augment their enthusiasm for sales.  Later, it was applied to those “losers” who purchased home mortgages they did not understand with terms which were designed to create income for the mortgage sellers at the expense of the homeowner — whether the homeowner was financial capable of the increased expense or not.   In short, it is often argued under the matrix of Moral Hazards that the more trouble one might be in, the less help should be provided.

Even the libertarian Cato Institute was willing to accept the possibility that corporate malfeasance, unaccountable management, and shoddy risk management played a role in the collapse of the U.S. financial system in 2007-2008.*  The question becomes how much Moral Hazard should apply to the corporate entities which engaged in the financial transactions that fueled and eventually blew up the financial markets?

State Senator Tick Segerblom (D-Las Vegas) places the Moral Hazard on the bankers: “If it comes down to a homeowner who had a mortgage, or a bank — who has the right to be there? I’ll go with the homeowner,” he said. “I’m not worried about the banks. They made their beds. They can sleep in it.” [LV Sun]

If the question is: Shall the unworthy who got themselves into a Big Mess by the dint of their own avarice be offered succor from the government, either state or federal? Then those who truly hew to the Moral Hazard argument are stuck with banks, mortgage institutions, and investment houses whose porcine appetites caused them to fall into the trough.  The only other way out of the mess is to attempt to claim that the bankers didn’t really do it (an obvious mirage) or that, as the libertarians would like to assert, the bankers were merely acting out the extrapolations of government policy (as if the bankers have no free will and cannot discern Moral Hazards when they see them.)

Unfortunately for the banking industry apologists, the first option flies in the face of economic reality; and, the second makes them look like first class fools.

*The Institute author, after having pointed out the core of the problems, promptly reverts to the anti-government “Devil Made Me Do It” argument holding that low interest rates, deposit insurance, and federal participation in the secondary market were the ‘real evils.’

Nevada New Tech Investment on the Fiscal Cliff

Once in a while I get lucky, as when a local Nevada story about start up tech companies in Las Vegas has implications for our nation-wide discussion of economic policy. There area some start up tech companies in the Las Vegas metro area that could use financing, and there’s the problem:

In spite of the city’s recent startup boom, there remains a small number of local investors willing to put cash into tech companies. And the funding gap could stanch tech development in the valley, as most startups earn paltry revenue and could easily flop or stagnate without outside capital.  [LVSun]

The problems associated with the lack of start up funding are common: Las Vegas has fewer local investors than other areas.  Las Vegas isn’t a tech hub center.  Local wealth doesn’t come with expertise in tech investment.  Venture capital funds don’t have offices in the Las Vegas area.  There aren’t enough “angels.” [LVSun]  It’s one thing to list the issues, but to address them requires some thought given to economic policy.

#1. Are we promoting an economic climate in which investment in start up companies is valued?

Speak to me of a gubernatorial candidate who didn’t campaign vigorously on his or her Economic Growth Plan, and I’ll show you a person who didn’t get elected.  Everyone has one, and everyone loves Small Business, and everyone prints out forest killing quantities of Economic Plans designed to create a pro-growth business climate.   Right?

Not so fast. Too much campaign literature is dedicated to the climatological issues of  existing businesses.  For example, candidate Bilgewater carefully explains to us that low taxes will create economic growth because the wealthy will have money to invest in new businesses.  Of course, what Bilgewater leaves unsaid is that the money and the expertise may not be a match.  There are two problems specified in the article and neither one is addressed by the proponents of the Trickle Down Hoax.

First, as observed in the article, people are reticent about putting money into tech companies if they don’t understand the milieu.   Why shouldn’t they be? Enough individuals got burned during the Tech Bubble Crash to leave many sensitive fingers behind.   If we would create a climate for successful ventures in tech-based firms, then we need to apply some assets toward educating potential investors in the characteristics of likely successful start ups, especially in tech-related fields.

Secondly, also as noted in the article, start up firms usually need some mentoring.  As in any market, some ideas are better than others, but even the brightest idea can devolve into disaster if there isn’t a cogent business plan behind it.   If local mentor-investors aren’t available, who is?  Here’s where we need to be watching the Fiscal Cliff (Curb) discussion carefully.

The Republican Party has offered a budget which severely cuts non-defense discretionary spending — and included in this category are funds for the Small Business Administration — in the interest of diminishing the Great Gloomy Cloud of Debt.   Existing businesses may have an over-arching interest in the Great Gloomy Cloud of Debt because it could restrict their access to capital. However, start ups haven’t gotten that far.  They’re still trying to get initial capital.  Or, to put it more bluntly, if SBA loans aren’t available this is no skin from the fingers of existing businesses, it burns the start ups.

As the NYT small business writer explains:”Much of the S.B.A.’s mission is to guarantee loans to small companies that banks would otherwise not make, and steep cuts would likely force the agency to turn away borrowers.”

In short, small start-ups are the very ones which find funds (either investments or loans) difficult and need assistance.  If we would improve the climate for innovative tech-based firms then it doesn’t make sense to slash funding for the Small Business Administration.

A third question should be raised in this part of the discussion: Do our economic and tax policies reward investment in technology and innovation, or do they favor already existing firms? This question splits into two topics: Taxation on Capital Gains and the diversion of wealth into speculative investment as contrasted with venture capital.   Let’s leave the second part for now, and look at the capital gains side of the argument.

For the record, capital gains are taxed as ordinary income if the investment is made for less than one year.  Since 2003 taxes on long term capital gains, defined as investments held for more than one year are at 15%.  Without going too deeply into the weeds, venture capital invested in a start up company for more than one year gets the 15% “bonus.”

If the contention that low rates of taxation, especially on capital gains, creates economic growth then the first speed bump on the road is that it is extremely difficult to infer a causal relationship between the number of new businesses and the tax rate for capital gains.   If the causal relationship is true, and low rates of capital gains mean more start up entrepreneurial enterprise, then why has the start up trend declined?

The start up rate peaked in 1987 (13.02%) and is now reported at 7.87%.  [Reuters]  The capital gains tax rates have held steady but the start up trends still show a decline.   Lower tax rates, then, are not the end and be all explanation for start up growth — or start up demise — the number still indicate a long established pattern: new businesses tend to fail in the first two years.

The argument that if we increase taxation on capital gains then there will be fewer start up companies falters when we look at the graphs showing a declining number of start ups even with the 15% rate on capital gains and the lowest overall tax burden since the Eisenhower Administration.   It also can’t be successfully argued that business “success” is better insured by lowering tax rates — the Sell By date is still about 2 years.

It’s easier to argue that small business efforts are best promoted when Small Business Administration funds and mentoring projects are available, and when the small business in question can overcome the more common problems associated with failure than esoteric questions about taxation rates.

#2. Are we diverting wealth from investment toward speculation?

On a micro-level this is an oversimplification.   If venture capitalists and “angels” can find good start up firms with a substantial service or product, a good business plan, and adequate resources to break the Two Year ceiling, they’ll invest.  Unfortunately, there’s also money to be made by making big bets on incomprehensible financial products — if a person can find someone to take the other side of the bet.  If not, then we have the spectacle of JP Morgan whose London Whale turned out to be the sucker at the exact time the CEO was arguing against the implementation of the Volcker Rule.  [MJ.com]  [Reuters]  Even if the Wall Street Casino isn’t siphoning off investment at a substantial rate, there are still problems for start up firms.

In the wake of the speculation begotten Financial Crash of 2007-2008 more entrepreneurs found getting bank financing more difficult.  The role of family, friends, angels, and venture sources became more significant.  There are two forms of venture capital, corporate and independent, and both have different motives.

CVCs typically make a financial investment and receive a minority equity stake in an entrepreneurial company. CVCs also facilitate investment of in-kind resources into portfolio companies. In return, the parent corporation gains a window on new technologies and strategically complementary companies that could become strategic partners. CVCs generally invest with a combination of financial and strategic objectives. Strategic objectives include leveraging external sources of innovation, bringing new ideas and technologies into the company, and taking “real options” on technologies and business models (by investing in a wider array of technologies or business directions than the company can pursue itself). [NIST] (pdf)

And, corporate venture capital investment tends to be in smaller amounts than independent sources.

“Because corporate venture capitalists are making partially strategic investments, while independent venture capitalists are making purely financial ones, corporate venture capitalists can accomplish their goals by putting in less money. The ability to tap knowledge from an investment in a young company is not proportional to the size of the investment, but earning a financial return is. Therefore, corporate venture capitalists tend to make smaller investments than independent venture capitalists.” [SmBizTrends]

We need to ask better questions?

If candidate Bilgewater is pontificating on the necessity of reduced capital gains tax rates, or any other tax rate reduction, then the question needs to be asked — On what basis do you draw the conclusion that a reduction in the marginal tax rates will spur increased investments in entrepreneurial enterprise?  Because the numbers simply don’t support the conclusion when we have declining start ups, with the same life expectancy, in the least burdensome tax environment we’ve had for decades.

If candidate Sludgepump is preening before the cameras with the message that “We Must Support Small Business The Backbone Of American Life,” then the next inquiry ought to be how do we incentivize investment in small business enterprises by making it more attractive to invest in the business than to hedge bets on the little business’s securitized loans?

If candidates Bilgewater and Sludgepump argue that the Great Gloomy Cloud of Debt threatens to rain on our business parade and we must deplete it before doing anything else, then someone needs to ask:  How do you reconcile the reduction in Small Business Administration funding when you presume small business activity is the motor impelling our economy forward?

 

See also: Monthly Labor Review, Amy E. Knaup, May 2005. (pdf) “Corporate Venture Capital: Seeking Innovation and Strategic Growth,” National Institute of Standards and Technology, Department of Commerce, June 2008. (pdf)

S. 3468: It’s Baaack…and shouldn’t be

Heads Up!  They’re back, again.  S. 3468 is yet another attempt by the financialists and related banking lobbyists to hamstring efforts to regulate the financial services sector.   It’s not like these interests have ever given up their campaign to revert to Business As Usual  such that the Wall Street Wizards can become yet another font of ill advised, incomprehensible, albeit highly profitable synthetic or otherwise manufactured financial products — You know, things like those adorable synthetic CDO’s which flooded the financial market with valueless toxic paper.

Here’s the CRS summary of the bill submitted by Senator Rob Portman (R-OH) on behalf of the banking sector:

Independent Agency Regulatory Analysis Act of 2012 – Authorizes the President to require an independent regulatory agency to: (1) comply, to the extent permitted by law, with regulatory analysis requirements applicable to other federal agencies; (2) provide the Administrator of the Office of Information and Regulatory Affairs with an assessment of the costs and benefits of a proposed or final significant rule (i.e., a rule that is likely to have an annual effect on the economy of $100 million or more and is likely to adversely affect sectors of the economy in a material way) and an assessment of costs and benefits of alternatives to the rule; and (3) submit to the Administrator for review any proposed or final significant rule.

Prohibits judicial review of the compliance or noncompliance of an independent regulatory agency with the requirements of this Act.

Translation: If any of the financial regulatory agencies, like the SEC, the OCC, the FDIC, or the CFTC wants to approve regulations which might have a “significant effect” on some bank’s bottom line, then the agency would have to present a “cost – benefit analysis,” and submit the rule for administrative (read executive branch) review.

There are some very cogent reason to be extremely skeptical about this bill.

#1.  It dramatically changes the relationship between the administration (executive branch) and the independent financial regulators.   The SEC, et. al. are supposed to be independent of the executive branch, which is why their leadership is subject to confirmation.  To require that the agencies present their proposed rules for executive approval inserts presidential politics directly into the rule making process.

Those who find the diminution of regulatory oversight disturbing will not be pleased with this proposal. Nor will those who decry the transference of yet more power to the executive branch.   There’s nothing here for either end of the political and ideological spectrum.

#2.  It invites endless litigation.  S. 3468 could be alternately named the Wall Street Attorneys’ Full Employment Act.  For those of us who believe that the interminable foot-dragging on CFTC regulations of the derivatives market has gone on long enough, this is entirely too much, [CFTC law] the Portman bill merely serves to add yet another bureaucratic roadblock before regulations can be finalized.  [Lieberman/Collins pdf]

#3. It prevents agencies from acting in a timely manner.  Again, inserting a secondary layer of “review” invites both executive interference and financial sector slow walking before any effective oversight of financial institutions can be effected.

#4. It is redundant.  All the agencies involved, with the single exception of the Federal Reserve, are already required to do formal cost-benefit analyses of proposals.  In case no one had noticed during the attempts to get the provisions of the Dodd Frank Act implemented that the banks have been availing themselves of these requirements to slow down the whole process — they have.  All this bill accomplishes is to slow the process down from a crawl to a drag.   Here’s why:

“The thirteen new analytic requirements this legislation could impose are only the beginning of the delays and burdens it would create. The mandated OIRA review of significant rules would take up to six months. In addition, the review process could force agencies to go back to the drawing board or do a re-proposal of the rule, which could add years to the regulatory process. While agencies could overrule an OIRA determination that a rule or a cost-benefit analysis was inadequate, such a step would render the regulation highly susceptible to court challenge. It would make industry attempts to overturn new rules in court almost inevitable. The increased risk of court reversal will discourage independent financial agencies from finalizing any regulation that receives a negative OIRA review.” [AFR pdf] (emphasis added)

In short, what we have here is a bill that simply refuses to die… and one which is unnecessary, unwarranted, and merely serves to benefit the financialists who don’t want oversight of their speculation in the Wall Street Casino.

Perhaps we might initiate newly elected Nevada Senator Dean Heller’s in-box with a few e-mails indicating that this is not a bill which deserves the support of 99.9% of the American public?

A Little Regulation Can Go A Long Way: Protecting Those Vulnerable to Predatory Lending

Yesterday’s post concerned the efforts of the House Republicans to de-regulate the payday lending industry in the guise of H.R. 6139.  With nearly a third of Las Vegas, NV individuals availing themselves of high interest short term loans the problem of predatory lending deserves more than a passing critique of an individual piece of legislation.  Additionally, if we truly believe the function of government is to protect its citizens, then the de-regulation of the high interest lenders stands in high contrast to that goal.

This isn’t a call for a nanny state, it’s more like an extension of the point made by President Reagan: “Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves.”  Predatory lending practices definitely fit in the former category.

With this in mind, who are the targets of high interest lenders?

The targets are the unbanked and the underbanked: “The highest unbanked and underbanked rates are found among non-Asian minorities, lower-income households, younger households, and unemployed households. Close to half of all households in these groups are unbanked or underbanked compared to slightly more than one-quarter of all households.”  [FDIC pdf]

Those who are unbanked are families in which no one has a checking or savings account; the underbanked are families in which there might be a small savings and checking account, but financial needs are augmented by non-bank money orders, check cashing services, rent to own firms, RAL’s (refund anticipation loans), and pawn shop services.

The Federal Deposit Insurance Corporation found that the unbanked, and underbanked, are predominantly in ethnic minority communities.

As the FDIC graph indicates, those likely to fall into the unbanked and under-banked categories are predominantly Hispanic and African American.

The unbanked and under-banked also tend to be low income, and low education.

And, there’s no surprise here… most of the unbanked and under-banked are younger people.

Fully 57.5% of the unbanked are under the age of 44, with 37.3% under the age of 34.   11.1% of the unbanked are new to the work force, aged 15-24 years of age, and 8.1% of the under-banked are 15 to 24.

The unremarkable conclusion is easily reached: Those who are most likely to fall prey to predatory high interest lending are young, minority group individuals, with lower rates of educational attainment.  The vulnerable at risk of running into the vultures.

Advocates of “alternative banking” complain that since the high interest rate lenders deal with higher risk borrowers they must, of necessity, charge higher rates to cover their risk of default.  No one would make a sound argument based on an inversion of the risk and reward model of consumer lending.  However, the amount required to cover potential expenses doesn’t automatically justify rates which might make a loan shark lose his appetite.

The argument that making many small loans incurs more cost than making fewer larger loans founders on the same shoals.

Pilot Whales and Loan Sharks

In February 2008 the FDIC launched a pilot program with 28 volunteer banks to offer small dollar loans with restrictions on interest rates and provisions.
The agency reported: “Since the pilot began, participating banks made more than 34,400 small-dollar loans with a principal balance of $40.2 million. The pilot tracked two types of loans: small-dollar loans (SDLs) of $1,000 or less and nearly small-dollar loans (NSDLs) between $1,000 and $2,500. All pilot banks offered only closed end installment loans.”   The FDIC used initial information to produce a template for small and nearly small dollar loans:

The Pay Day lending lobbyists promptly dismissed the FDIC’s efforts as too little (only 31 banks participating) and insufficiently differentiated from pay day lending.  The critique failed to note the program was a PILOT project to create templates for the banking sector and not an attempt to initiate a broad banking program for the unbanked and under-banked.   Also missing from the criticism was the information that the pilot program yielded results necessary to create banking guidelines for small dollar loans.

“In June 2007, the FDIC issued the Affordable Small Dollar Loan Guidelines (Guidelines) to encourage financial institutions to offer small-dollar credit products that are affordable, yet safe and sound, and consistent with all applicable federal and state laws.”  [FDIC]

What the FDIC discovered in the course of its pilot project was that regulated banks could issue small dollar loans, which didn’t break either the lender or the borrower, and which didn’t involve stretching — or avoiding — federal and state consumer protections.

And, still protect the vulnerable from the vultures.

For further information:  FDIC, “2011 FDIC National Survey of Unbanked and Underbanked Households,” pdf.   FDIC Small Dollar Loan Pilot Program.

An Amen Chorus: Nevada Doesn’t Need H.R. 6139

Nor does any other state!  H.R. 6139 is a bill in the U.S. House of Representatives which would give predatory lenders all the latitude they need to put consumers on a debt treadmill at infinite cost to the consumer and almost limitless benefit to the lenders.  How this directly affects very real Nevadans is the topic of a MUST READ article by J. Patrick Coolican in the Las Vegas Sun.

After cringing at the descriptions in the article about what predatory lenders do to desperate customers, more gasps might be in order as we look deeper into what the bill would actually DO.

The Congressional Research Service summarizes part one of the bill:

“Requires a qualified nondepository creditor seeking a federal charter to submit an application which includes in part: (1) a business plan for at least a three-year period with its primary business activities serving underserved consumers and small businesses; (2) a market demand forecast, the intended customer base, competition, economic conditions, financial projections, and business risks; (3) a marketing plan that describes the types of financial products or services such creditor intends to offer; and (4) adequate capital structure.” (emphasis added)

Those two words, “federal charter,”  are the crucial part of the matter.  H.R. 6139 would allow predatory lenders to fall under the jurisdiction of the Comptroller of the Currency — the agency that supervises federally chartered banks.

What’s missing? State consumer protection laws — which the newly minted “federally chartered” lenders could circumvent by shuttling under the OCC jurisdiction.   Nevada has placed restrictions on predatory lending under the provisions of NRS 604A since 2007.  Section  NRS 604A.420 should be of additional interest: It prevents predatory lending to members of our Armed Forces, which would include Creech AFB in Indian Springs, NV; Nellis AFB in Clark County, and the Fallon Naval Air Station.   The state provisions define “high interest lending,” and prohibit making loans which amount to more than 25% of the individual’s gross monthly income.

By allowing the predatory lenders to slither under the OCC umbrella the bill would also protect them from oversight by the Consumer Financial Protection Bureau.

In its “Snapshot Report,” October 10, 2012 (pdf) the CFPB summarized the complaints it has received in regard to banking practices:

“Approximately 10,300 (86 percent) of bank account and service complaints have been sent by Consumer Response to companies for review and response. The remaining bank account and service complaints have been referred to other regulatory agencies (11 percent), found to be incomplete (3 percent), or are pending with the consumer or the CFPB (5 percent). Companies have already responded to approximately 9,800 complaints or 95 percent of the complaints sent to them for response. The median amount of monetary relief reported was approximately $105 for the approximately 2,500 bank account and service complaints where companies reported relief. Consumers have disputed approximately 1,900 company responses (20 percent) to bank account and service complaints.”

Thus we have a relatively new agency which has already received and processed some 10,300 consumer complaints, 1,900 of which are still unresolved.  This doesn’t sound like all the lending industry members are yet practicing “safe lending.”

The second major section of the bill is summarized by the CRS as follows:

“Directs the Comptroller to: (1) ensure that Credit Corporations focus their business operations primarily on providing underserved consumers a variety of affordable and commercially viable financial products or services, including some that facilitate personal savings and enhance the credit record of such consumers; (2) facilitate business partnerships among Credit Corporations, insured depository institutions, other nondepository creditors, third-party service providers and vendors, and nonprofit organizations in order to ensure greater credit access for underserved consumers and small businesses; and (3) examine and supervise the Credit Corporations.” (emphasis added)

Who are those “underserved consumers?” Many of them, as reported by Mr. Coolican, are in Nevada:

“Nevada leads the nation in the percentage of residents who are “underbanked” — meaning they have some sort of bank account but also resort to high-interest loans from nontraditional lenders to make ends meet. In theory, a borrower uses these services to tide him or her over until the next paycheck because he or she doesn’t have access to a bank loan or credit card. One-third of Las Vegas Valley residents use these services.” (emphasis added)

Riding the tide until the next paycheck could be a problem for those who would be at risk of being “sold” a pay day loan greater than 25% of their gross monthly income should that protection by the State of Nevada no longer be available to them.  Nor could these “underbanked” individuals and families count on the State to protect them from pay day lenders who want to issue multiple loans.

And Nevadans aren’t alone, although 7.5% of Nevada households are unbanked, and another 31.2% are underbanked.  This, as Coolican notes, puts  us in the Dubious Category of Number One in the Nation in underbanked persons.  [FDIC pdf]  8.2 percent of US households are unbanked. This represents 1 in 12 households in the nation, or nearly 10 million in total.  20.1 percent of US households are underbanked. This represents one in five households, or 24 million households with 51 million adults. [FDIC pdf]  Which brings us to the part of the bill which is supposed to make us feel better.

“Requires Credit Corporations to make available to each consumer to whom a financial product or service is being offered: (1) information on how a consumer may obtain financial counseling services, the benefits of following a regular personal savings program, and how consumers can improve their credit ratings; (2) disclose clearly and conspicuously in the loan agreement the true cost of the loan, including all interest, fees, and loan related charges; and (3) offer an underserved consumer who is unable to repay an extension of credit with a loan repayment term of less than 120 days, an extended repayment plan, at no cost to the consumer, at least once in a 12-month period.”  [CRS]

Not. So. Fast.  The Center for Responsible Lending research found that –

“Although marketed and advertised as a quick solution to an occasional financial shortfall, the actual experience of payday loan borrowers reveals there is nothing quick about the loan except its small principal. According to new CRL research that tracked about 11,000 payday borrowers over two years, many borrowers remained indebted for the 24 months that followed their initial loan.”

The lending isn’t quick, it isn’t inexpensive (with rates up to about 400%), and it is borderline pathological.   Credit counseling is fine — depending upon who does the counseling.  Even adequate credit counseling should put off the borrower from even considering a pay day loan.  Disclosing the true cost of the loan is fine — but it may very well NOT prevent the individual from taking on more debt in subsequent transactions.  Further, an extended re-payment plan for one loan does nothing to ease the pain of the subsequent ones.

There is one more thing we should notice about H.R 6139 — the enthusiasm for placing the predatory lenders under the jurisdiction of the OCC (which doesn’t want it).

Why?  Because the Consumer Financial Protection Bureau is tasked with handling consumer complaints about predatory lending practices, and has a special section dealing with the issues affecting military families and their  lending or home ownership issues.   AND because the Federal Deposit Insurance Corporation created the Division  of Depositor and Consumer Protection in August 2010.

“The establishment of a new division dedicated to depositor and consumer protection will provide increased visibility to the FDIC’s compliance examination and enforcement program. That program ensures that banks comply with a myriad of consumer protection and fair lending statutes and regulations. While Congress established the new bureau to promulgate consumer protection rules, the FDIC maintains the responsibility to enforce those rules for banks with $10 billion or less in assets and to perform its traditional depositor protection function.” (emphasis added)

And, there we have it. The FDIC has a new initiative to regulate the activities of lending institutions under its jurisdiction to curtail predatory lending practices, and the CFPB is tasked with restraining predatory lending practices, so … the only regulatory agency remaining would be the Office of the Comptroller of the Currency which oversees nationally chartered banking institutions.

The bill now sits in the House Subcommittee on Financial Institutions and Consumer Credit to which it was referred on October 1, 2012.  It should stay there.  Forever. And ever. Amen.