Dissecting The Plan To Overhaul Financial Regulation

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On Monday, Sen. Chris Dodd (D-CT) released a bill that would overhaul regulation of the American financial system. Tell Me More's Money Coach Alvin Hall and John Taylor, president and CEO of the National Community Reinvestment Coalition, discuss the proposed plan.

MICHEL MARTIN, host:

I'm Michel Martin, and this is TELL ME MORE from NPR News.

Just ahead, we'll talk about how the narco war in Mexico is endangering the work of journalists. That conversation in a few minutes.

But first, the race is on to complete key legislation before the November elections. Democratic Senator Chris Dodd, the chairman of the Senate Banking Committee, did his part by unveiling a financial regulation bill yesterday. We want to talk about what this might mean to you, or rather us - in other words, consumers.

So we've called on our money coach Alvin Hall. He's our regular contributor on matters of personal finance and the economy. Also with us, John Taylor, CEO and president of the National Community Reinvestment Coalition. That's a coalition of more than 600 community-based organizations, and they're dedicated to promoting access to basic banking services for underserved communities.

And welcome to both of you. Thanks for joining us.

ALVIN HALL: Thank you.

Mr. JOHN TAYLOR (CEO and President, National Community Reinvestment Coalition): Thank you.

MARTIN: So, let me start by playing a little bit of what Chris Dodd had to say yesterday. Here it is:

Senator CHRIS DODD (Democrat, Connecticut; Chairman, Banking Committee): I'm not predicting that we're going avoid forever, in the future, any kind of financial crisis. The question is: Are we putting in place the tools that will minimize when that crisis occurs so it doesn't create the kind of economic carnage that we've seen over the last several years?

And we believe this kind of a council in place, there's experience there. They have good staffs in these places, but they need, obviously, to be beefed up and do a better job that has been the case.

MARTIN: Now, he was talking there to our colleague Robert Siegel, who's one of the hosts of ALL THINGS CONSIDERED. So Alvin Hall, does this bill do the job, in your view?

HALL: I think it's a good first step. I think by setting up the Financial Stability Oversight Council made up of nine members, including the secretary of Treasury and regulators from other agencies, they at least spread it around so that they'll get input from a lot of different areas. I think that's very good.

I think making derivatives transparent so that derivatives, trades are now made public so that people will know what's out there. And also, tightening the regulations on financial institutions so that they affords to take less risky stands with their own money, and do less with proprietary trading of investors' money. I think these are all good first steps.

MARTIN: Now, John, your group has been pretty critical of this proposal as it's been presented. One of the things you're particularly concerned about is that this proposed consumer protections agency is slated to be established within the Federal Reserve. What's wrong with that?

Mr. TAYLOR: Well, the Federal Reserve has proven itself to be inept when it comes to enforcing consumer protection. So, to have this agency housed in there, I think, creates a chilling effect on this bureau, this consumer finance protection bureau.

And I think what's important here - I mean, he talked about putting the tools in place to avoid a future crisis - we had, you know, what got us into this crisis in the first place is the lack of enforcement of consumer protections, and the lack of enough consumer protections to prevent the kind of malfeasant lending practices that we saw, that brought the economy down.

MARTIN: So, what would improve and in fact, one other criticism you had, John, is that the bill doesn't address one of the critical issues over the last couple of years - is that, in your view, the targeting of minorities for subprime loans. One of the - research done by your organization suggests that up to 60 percent of the African-Americans and Latinos who receive subprime loans had the financial bona fides to get conventional loans, but weren't offered them. So how would this be addressed? How is this better addressed, in your opinion?

Mr. TAYLOR: Well, the key is to have an independent consumer protection bureau that has the authority to write rules, to end those kind of practices - and not only for minorities, but also for working class, blue-collar Americans of all ethnicities. And the problem here is that the agency gets put in the Federal Reserve, its budget comes out of the Federal Reserve. But when it makes rules, it has to consult with the regulators in order to get permission to go forward.

It can ignore that rule, but then there's an oversight board - it's called the Financial Stability Oversight Council - that then can vote to overturn whatever rules this consumer finance protection bureau comes up with. And then if that's not enough, if a bank doesn't like the rule that's been imposed on it, it can now appeal to the regulators to have the rule overturned.

What President Obama proposed was very different than this. It created an agency that was overseen very much by, not majority, but a lot of consumer representatives who would ensure that the mission of this bureau, this consumer finance protection bureau, you know, that it stay true to its mission. And now, there's no consumer oversight. It's bank regulatory oversight the very same people who dropped the ball and let all these malfeasant lending practices pervade the landscape - and allowed disproportionate application of subprime, high-cost loans to low-income communities, minority communities.

All the malfeasant lending, these guys they were asleep at the switch; they now get to oversee this agency.

MARTIN: Alvin, what about that? I'm not making you a spokesperson for Senator Dodd, but what about that? I mean, the Federal Reserve, for example, did have the authority to outlaw some of the predatory lending practices that you've been so critical - and so many other people have been critical of - and they chose not to use that authority. So what sign is there that they would use that now?

HALL: I actually take this bill, and I see it in two different ways. I see one part thats design to protect the economy overall, and then I see another part thats design to protect the consumer. I agree with John that they've fallen down on the consumer side. I think they're trying to appease too many people, and I don't think that the banks or many of the people on the a different part of the political spectrum really know how credit is used in the lives of day-to-day people, and how they are exploited by banks and these agencies.

So I think that Senator Dodd is trying to work on a broad spectrum of things, both the economy and personal finance, and he's sort of falling down on the personal finance side.

MARTIN: I'm going to ask Alvin to explain a little bit about the rules that are in the bill for the credit rating agencies. The bill provides rules for transparency and accountability for the credit rating agencies. If you would talk about that for a minute.

HALL: Yes. There are three credit rating agencies: Moody's, Standard & Poor's and Fitch's. And what they do is to rate the default risk associated with bonds and notes in America. So let's say a large corporation is about to issue its bonds to the public. It must be rated by one of these agencies. Almost always, they use two of them in order to determine if these are risky securities.

Companies pay for this service. And what has happened is that Moody's and Standard & Poor's - has just used the information provided by the company to make the judgment, and have sometimes and have not gone outside to look for additional information. In this new provision, if these agencies rate a security as investment quality and then it defaults, then consumers will have the ability to sue the agencies for not giving an accurate rating.

I actually have some negative thoughts about this because companies are dynamic, and their financial positions are changing constantly. So to open up the credit rating agencies for lawsuits because a company's financial status has changed, and they don't get the information in a timely basis, is really hard to implement. It's an interesting idea for somebody who doesn't really understand how these agencies work, but I'm not sure it's an enforceable idea.

MARTIN: OK. John, what's your take on this?

Mr. TAYLOR: Well, you know, Alvin's right. We have a systemic problem here and that is or a structural problem that is, the very institutions that are asking the rating agencies to rate these portfolios and loans are paying the rating agencies' salary. So if you're a rating agency, and you don't come up with good ratings for this client of yours and that's what happened.

People don't realize this, but 80 percent of the high-cost loans, the worst loans we saw that really created problems for people, 80 percent of them were AAA rated by these agencies. So, you know, there's been all sorts of suggestions of making it public, you know, since it's so important making sure that the agencies really have an arms-length transaction from the industry.

The industry could still pay the bill, but through a collective way of paying that bill - kind of like what they're doing with the Federal Reserve, with this new consumer finance protection bureau. But there's no question: The key in American health to bring the economy back is to create liquidity in our market. And that means investors, pension funds, governments coming back to America, knowing that it's safe to be here.

One of the biggest problems they had is: How can you let these rating agencies give false ratings on these things - because we invested in those and they turned out to be malarkey?

MARTIN: Well, we have only a couple minutes left, so before I want to hear from both of you. John, what's the stance of your organization, your coalition, on this? What are you going to be doing going forward?

Mr. TAYLOR: Well, we're with Secretary Geithner and President Obama, who, you know, support portions of this bill, but really want to strengthen it. NCRC, in particular, is focused on wanting a truly independent consumer finance protection agency. I mean, let's face it, at this point in our history, the American taxpayer, individuals, consumers, really ought to have an agency that looks out for us the way the Federal Reserve and the others look out for banks. It's really time.

And let's face it, what happened here was the lack of consumer protections, the lack of consumer enforcement, that got us into this problem. So independent, truly independent, its decisions can't be overturned by regulators. That's what we're going to be working for.

MARTIN: And Alvin, I'm not going to ask you to advocate for a position. What I am going to ask you is, you know, there's a Financial Crisis Inquiry Commission currently working to try to talk about what the roots of this crisis were. Do you still have questions about what happened and why? And are there things that you still feel need to be addressed in this bill?

HALL: Yes. I think the report released last week, about what was happening at Lehman Brothers in the last days, was completely devastating. The fact that regulators didn't seem to know what was going on, or Lehman Brothers was able to somehow hide this from the regulators, was very, very disturbing. And you know if one company did that, another one will do it in the future. So I think that some changes need to be made to prevent that type of thing from happening again.

MARTIN: That was Alvin Hall. He's our regular contributor on matters of personal finance and the economy, and he joined us from our bureau in New York. Here with me in our Washington, D.C., studio was John Taylor, president and CEO of the National Community Reinvestment Coalition.

And I thank you both so much for speaking with us.

Mr. TAYLOR: Thank you, Michel.

HALL: You're welcome.

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