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Consensus On Fixing Financial System Erodes

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Consensus On Fixing Financial System Erodes

Consensus On Fixing Financial System Erodes

Consensus On Fixing Financial System Erodes

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

When the financial crisis erupted last September, politicians, regulators and scholars from the left and right said it was so severe that something drastic needed to be done to prevent another meltdown. But now as a depression has been averted, consensus is slipping away into the muck of politics.


From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.


And I'm Robert Siegel.

This time last year, it was a dark day on Wall Street. The storied investment bank Lehman Brothers collapsed, setting off a chain of events that plunged the global economy into crisis. Congress will soon hold lots of hearings to study those events to learn from them and to find ways to prevent a future crisis. The former Colorado Senator Ben Nighthorse Campbell has spent a lot of time at hearings like those - and he points out one flaw they all share.

Mr. BEN NIGHTHORSE CAMPBELL (Former Colorado Senator): Oh god, it's boring. Yeah, that's right. I think it was the most boring thing I ever did. And to say nothing - I didn't understand some of that stuff.

BLOCK: Well, we are here to help. NPR's Planet Money team and the PEW Charitable Trusts conducted an experiment. We wanted to see if we could hold a hearing that was not boring and not so hard to understand. Adam Davidson and Alex Blumberg hosted a panel of leading experts at PEW's offices here in Washington to discuss how to rewrite the rules of American finance. They met before a live audience.

(Soundbite of applause)

ADAM DAVIDSON: When I report on complicated issues like financial market reform, I want to make sure the stories make sense to the average person, the non-expert, someone like my dad. So at the PEW event, Alex made a special introduction.

ALEX BLUMBERG: I would like to introduce Adam's dad, Jack Davidson.

(Soundbite of laughter)

(Soundbite of applause)


DAVIDSON: So, dad, I'm giving my dad this bell. Dad, ring the bell.

(Soundbite of bell)

(Soundbite of laughter)

DAVIDSON: Right. When any of the panelists or the presenter say something that's completely confusing, just ring the bell and that's a message that you guys have to translate what you're saying to plain English.

(Soundbite of laughter)

BLUMBERG: With the bell handy to stop any confusion, it was time to bring up the experts. The goal for the night was to see if it's possible to find consensus. Are there financial reforms that Democrats and Republicans, bankers and consumers can all agree on? Or, will the process be endlessly locked in a battle between different interests?

DAVIDSON: There has been…

BLUMBERG: First up was Adam Levitin, a Georgetown law professor with a decidedly consumer-focused approach. He said that a major cause of the financial crisis last year was the fact that there are so many different financial regulators in the U.S. that financial firms could play one against the other. Like, take the case of disgraced mortgage firm and bank: Countrywide Financial.

Professor ADAM LEVITIN (Georgetown University Law Center): Countrywide had been a national bank. And they didn't like the regulation they were getting from the OCC. So they went to the Office of Thrift Supervision, which - another bank regulator. And they said: What can you offer us if we switch our charter and, you know, bring our business to you? Well, Office of Thrift Supervision said: We'll let you choose your own appraisers. And once they - and when that opened the door to all kinds of mischief at Countrywide.

(Soundbite of bell ringing)

(Soundbite of laughter)

Mr. DAVIDSON: People, banks, they can shop for who regulates them?

Prof. LEVITIN: Yes, that's what's amazing about this.

(Soundbite of laughter)

Ms. DIANE CASEY-LANDRY (Senior Executive Vice President and COO, American Bankers Association): No. No, they cannot.

BLUMBERG: That's Diane Casey-Landry with the American Bankers Association, the largest bank trade group in Washington. She was another expert speaking at this event. One note for Adam's dad and the rest of us, when bank experts refer to shopping a charter, they mean the process by which banks switch from one regulatory agency to another.

Prof. LEVITIN: They can, they do, and this is a…

Ms. CASEY-LANDRY: No. They absolutely do not.

Prof. LEVITIN: If you were to take a banking regulation class at any law school in the United States, where the main topic would be who regulates institution and how did the institution find the best regulator for it?

Ms. CASEY-LANDRY: But the reality is that you're talking about it from a classroom. You might as well get out there and be an examiner, realize that people do not shop their charters.

Prof. LEVITIN: Don't shop their charters? Just look at Colonial, which failed recently. They were moving their charter all over the place. As soon as the regulators got wise to them…

Ms. CASEY-LANDRY: We have 8,200 banks in this country, 96 percent of which are well capitalized in a well-run institution. We have a fraction of which today are problematic and the reality is you don't regulate and set new regulations and an entire government bureaucracy because of several institutions that have failed. And even if we get a couple of hundred, the reality is we still have a World Bank system.

Prof. LEVITIN: And the system hasn't worked and it's hurt a lot of people.

DAVIDSON: So, Levitin, the consumer advocate, says the crisis revealed fundamental flaws in our regulatory system. For Casey-Landry, the system is sound. It just needs a few tweaks. But Levitin said that doesn't mean they have to be enemies all the time.

Prof. LEVITIN: I think we can agree that there needs to be a uniform, regulatory umbrella for all types of institutions offering financial products. Banks should not be playing with a different set of rules than non-banks - that the mortgage broker should be regulated just like banks. Is that…

Ms. CASEY-LANDRY: I agree with that.

Prof. LEVIDIN: Oh, well.

(Soundbite of applause)

Ms. CASEY-LAUNDRY: But that's about all I agree with, but I agree with that.

DAVIDSON: My goodness, Alex, we got a minor miracle, a tiny shred of agreement between a consumer advocate and a bank advocate. This brief moment of agreement did not last. Later in the evening, things took a turn from the partisan. Michael Barr is assistant secretary for the Treasury - obviously a Democrat. Peter Wallison, now with the American Enterprise Institute, worked for President Reagan's Treasury Department.

Barr said the Obama administration is proposing strict rules on financial firms that are systematically important, ones that if they fail, could bring down the entire economy. Republican Peter Wallison is skeptical.

Mr. PETER WALLISON (American Enterprise Institute): Let me ask you this thing -just a simple question, and that is: How can you tell the difference between a company that when it fails will simply cause disruption in the economy and one that when it fails will cause what we're supposed to be protecting against and that is systemic risk.

Prof. LEVIDIN: I think, Peter, precisely because that question is so hard, you want to build your system so it's more resilient to failure. We need to have a financial system with bigger buffers in the event of failure. Our largest, most complicated firms need to have more capital requirements. They need to have better risk assessments. That's got to be - bigger buffers have to be built in the system precisely because you don't want to be left in a situation where you don't…

BLUMBERG: So you don't - you don't know which company is…

Prof. LEVIDIN: …which company is trying to make this…

BLUMBERG: You don't - first of all, you don't know…

Prof. LEVIDIN: I'm not smart enough to talk which ones those are.

BLUMBERG: Right, exactly, but someone…

Prof. LEVIDIN: No, which ones are going to fail? I know which ones in advance. I want to have bigger buffers, bigger capital requirements in advance.

DAVIDSON: You get the idea here. This goes on for a little bit and then Martin Bailey of the Brookings Institution jumps into the fray.

Mr. MARTIN BAILEY (Brookings Institution): Do you - the regulators didn't do their job under your system, why are they going to do their job? Are they going to have more expertise? Are they going to be paid better?

DAVIDSON: I think…

Mr. BAILEY: What is it in your system that makes sure the next time the regulators do their job - there were rooms full of regulators in these banks that went under.

DAVIDSON: You need to build in bigger buffers because we're not going to always get it right. I think you need to have a system that is humble, that is able to understand that regulators are going to make mistakes, that financial institutions are going to go too far, they're going to make mistakes and they're going to be failures, you need to have a system that's more resilient to that.

BLUMBERG: Adam, you and I started the evening wondering if we could find some basic ideas that pretty much everyone agrees on - a basis for a new stronger financial system.

DAVIDSON: And by the end of the evening, the answer was clear: not yet. Adam Davidson.

BLUMBERG: And Alex Blumberg.


(Soundbite of music)

SIEGEL: If you'd like to listen to more of the hearing that NPR hosted with the PEW Charitable Trusts, check out our Planet Money podcast at

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