Archives : 2011 : April

Deputy Secretary of the Treasury, Neal Wolin, is Persuasive, Not Factual

Last week, April 19, 2011, Deputy Secretary Neal S. Wolin answered critics of the Dodd-Frank Act. Wolin set up his remarks by characterizing Dodd-Frank as a well-reasoned antidote to the effects of “a financial panic of a scale and severity not seen in decades.  The crisis was brought about by fundamental failures in our financial system.” He draws the very general conclusion that “There was no alternative to reform.” Reform? Or, Dodd-Frank specifically? The distinction between a general need for reform and a particular complex of new rules is not made clear in his speech.

He seemed to say that what we have is Dodd-Frank calls for popular support to neutralize critics of the legislations. Wolin wants to rally the public by making the consequences of the 2008 financial crisis personal to Americans. “Not only our economy, but also the lives and livelihoods of tens of millions of American families were devastated by the (financial) crisis.”

Wolin makes this speech an occasion to rebut very specific and selective criticisms made of Dodd-Frank. (It is not obvious who are the complainants).

Wolin takes on the following criticisms:

1. Some say that there’s a lack of coordination by the regulators.

2. Some argue that transparency in the derivatives markets will harm liquidity, or that margin requirements will unnecessarily tie up capital.

3. Some complain that our reforms will unfairly disadvantage U.S. firms as they compete globally.

4. Some say the new consumer agency will stifle consumer choice and innovation, that it will interfere with existing regulators, or that it’s not accountable to anyone.

5. And some even say we can’t afford to pay for reform.

I will deal briefly with two aspects of Wolin’s comments. First I will address the idea that the strictures of reform will make US financial institutions less competitive. Then I will critique the cost of forming the Consumer Financial Protection Bureau (CFPB), a creation of Dodd-Frank.

Competitive Stance

Much of what passes as legislation or policy is abstract. Input to the reform generally comes from academic financial models or from hearings held by legislators or their staff.

Neither politicians nor regulators systematically collect the views of the ultimate interpreters of financial reformation (the FI’s). Those that appear at hearings usually are “self-selected.” If they are representative of the industry, they are so by accident. If regulators want public input, there is more scientific way to get what is useful.

MORTECH 2010, a stratified random sample of mortgage lenders, shows that lenders are supportive if reform in general. The survey shows that lenders are skeptical of the potential results of reform. Wolin and his colleagues really should address the added expense of complying to reform, the operational complexity caused by sets of new rules, and lenders reduced ability to qualify deserving, but idiosyncratic loan applicants.

Consumer Financial Protection Bureau (CFPB)

The Bureau of Consumer Financial Protection was created in July 2010 as part of the Dodd-Frank financial reform legislation. The arguments to establish a new bureaucracy never seemed cogent to me. In this posting, I won’t visit all of the issues. I merely want to comment on the cost of elusive benefits expected from the CFPB.

The CFPB is a regulatory body. It is not an organization that can facilitate the identification of worthy borrowers, shepherd intelligent underwriting, or distribute borrowed funds more efficiently.

CFPB has as a major object the unification of seven federal agencies under the Consumer Financial Protection Bureau. The novel undertaking of the CFPB is to focus on consumer protections. None of the seven agencies had consumer protection as its singular objective. How much are the protections worth to taxpayers?

When speaking of the operating budget of the CFPB, Elizabeth Warren, Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau, refers to The President’s Budget for Fiscal Year 2012. The Federal Budget estimates CFPB operating funds of $142.8 million for FY2011 and $329 million for FY2012.

A $500 million investment over two years in a start-up with an uncertain return simply is “mind-blowing!”  A much more rational approach is to prototype the workings of the CFPB. Experimental programs would provide a bench mark against which Washington (the Federal Reserve Board in the case of the CFPB) can make future budget decisions.

The CFPB, after all, is a regulatory agency. Their mission is not to make markets for loans more efficient nor to maximize the welfare of US households. The profit accruing to a government organization like the CFPB is nearly impossible to estimate. This is all the more reason to invest carefully and with progressively more evidence of the effectiveness of the CFPB. There is no support for creating a massive agency all at one time.

 

Government siphons mortgage funds

Banks face $3.6 trillion “wall” of maturing debt: IMF — One of the most far reaching problems affecting the mortgage business is not discussed nearly enough.  Reuters reports the IMF statement that “These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources,” the IMF said.

Central banks around the world have been flooding the financial markets with liquidity. This helps considerably the re-funding of debt both public and private.

I have speculated recently that an important motivation – or, perceived benefit — of the federal government’s takeover of Fannie Mae and Freddie Mac was to give Treasury complete control over treasury and agency debt management.

I remember the urgent and critical tone as Treasury and the OMB attempted to suppress GSE note issuance in the early 1980’s.

The problem in the 80’s was characterized by the Reagan administration as “crowding out.” Treasury had large debt refunding to manage. OMB and Treasury concluded that the GSE’s were attracting fixed-income investors who otherwise would be buying Treasury notes and bonds. They had perceived that GSE competition made it more difficult and more expensive for Treasury to manage its refunding operations.

Crowding-out is back. Daniel Fuss, vice chairman of Loomis Sayles, was quoted by Forbes Magazine as having said: “There is no immediate danger to corporate credit. Eventually, however, U.S. government borrowing may begin to “crowd out” corporate borrowing. The cascade of U.S. Treasury bonds sold to pay for budget deficits will drive government and corporate yields higher.”

In a striking reversal of government’s perception of what is important for the nation, Treasury and the Federal Reserve Bank again are trying to repress or reallocate capital from housing to refunding of the federal budget deficits. It is thirty-years later and the problems are the same. Under cover of the financial markets crisis of 2007-2008, Treasury has wrested control of the largest financial markets in the county. Homeowner’s will have to do with less.