Coming Soon: A Toothless "Watchdog" as Banks Win, Consumers Lose--Again

Last Updated Mar 1, 2010 3:27 PM EST

Here's one prediction I would've sorely liked to have gotten wrong: Senate lawmakers are giving up on creating an independent Consumer Financial Protection Agency. Reports Bloomberg:
Senate Banking Committee negotiators, working through the weekend, agreed to drop the stand-alone consumer agency sought by the Obama administration and opposed by the banking industry, removing an obstacle that has stalled new U.S. financial rules.
Committee Chairman Christopher Dodd, a Connecticut Democrat, joined panel Republicans in seeking an alternative to the Obama proposal. Both parties are still aiming for a deal on placing consumer powers within another regulator...
Banks win, consumers lose. I wish I could cushion the blow, but scuttling the formation of an independent agency to protect people against unfair and deceptive financial products (pay-option ARMS, anyone?) counts as a major victory for the industry -- and a bitter defeat for just about everyone else.

Why? Oh, let me count they ways. Better yet, let me just show you. The following flowchart -- taken from a recent report by Demos, a New York think-tank -- illustrates which financial regulators today are looking out for consumer interests.

Everyone got that? Good. So the next time you get nailed by that 2,000 percent pay-day loan or your bank graciously decides to crank up its "courtesy fees," you know where to bring your complaint: Everywhere. Which is precisely the same place as nowhere when it comes to this sort of thing.

Dodd, who's retreating on financial reform faster than Roy "Wrong Way" Riegels, has proposed establishing the CFPA within the Treasury Department. Alabama Republican Richard Shelby today came out with a plan locating the agency in a 7-Eleven in Topeka, Kan., or, barring that, within one of the existing "prudential" banking regulators.

Dodd's idea is better because it would let the CFPA write all consumer-protection rules. The President also would get to choose who heads the agency, meaning someone serious could head up the effort to protect consumers, rather than leave it to financial industry shills like OCC's John Dugan.

But lawmakers appear to be drifting toward the plan backed by Shelby, a long-time opponent of financial reform. Instead of a CFPA, he wants to establish a consumer protection unit within the FDIC. The head of the unit would report to the FDIC's chairman, and the agency's board would have to approve any rules it proposed. On the plus side, the new office would get a phone, two potted plants and free lollipops in the lobby.

Says Demos:

Making the CFPA an office within a prudential regulator would be worse than the status quo. Any solution that gives a bank regulator veto power over the CFPA -- an agency charged with protecting the public -- would be like giving the Small Business Association a veto over workplace safety rules.
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    Alain Sherter covers business and economic affairs for