BLOG VIEW: Some people have the gift of saying the most outlandish things with the most convincing sincerity. These people are usually blessed with listeners who accept these statements without pausing to question the illogical nature of what is being said. I am sorry to report that Elizabeth Warren has joined the lineup of people who spin ridiculous tall tales – but, hopefully, no one is going to buy what she is peddling.
Warren, who is setting up the new Consumer Financial Protection Bureau (CFPB) without actually being formally appointed to run it, dropped a whopper of a tall tale at the end of December in an opinion column that appeared in the Miami Herald. In her editorial, Warren stated that the depth and scope of the financial crisis would have been averted if the CFPB had been operational before the housing bubble began to swell.
‘Had it existed, the new consumer agency could have stopped these problems before they multiplied,’ Warren wrote. ‘Many of the failures already admitted were not sophisticated scams that had been carefully concealed. By enforcing existing laws and involving state authorities early on, the agency could have made sure that the law was respected.’
I am not certain how to react to such a statement, except to inquire about Warren's temperature and blood pressure. Not only is Warren completely rewriting recent history, but she is also displaying a wild ignorance at how the federal government operates.
For starters, the writing was on the proverbial wall long before the disastrous events of September 2008 – and there were plenty of regulators, law enforcement officers, elected officials, trade groups and media professionals around to stop it. Of course, that didn't happen.
In case you don't recall, let's do the time warp again: In April 2007, Secondary Marketing Executive was reporting warnings from the Center for Responsible Housing that 2.2 million American households were likely to go into foreclosure. In the May 2007 edition of the magazine, we wrote about a $1 billion undertaking by Bank of America, Citigroup and the Neighborhood Assistance Corporation of America to help refinance the mortgages of homeowners who faced losing their property.
The powers in charge at the time were more than aware of what was happening, but they pretended that nothing was wrong. In the May 2007 issue of Secondary Marketing Executive, we ran a quote by Robert Steel, undersecretary for domestic finance at the Department of the Treasury, who offered a quote that ranks as the ultimate anodyne optimism: ‘It seems to us that the situation is a manageable one.’
So how would the CFPB have stopped the crisis? Certainly not by involving the Federal Reserve – back in spring 2007, Fed Chairman Ben Bernanke refused to acknowledge there was a serious problem brewing. In fact, his eyes never opened to the catastrophe until it was too late.
And Warren's notion of stopping the madness would certainly not have been achieved by bringing in the federal law enforcement agencies – the investigation of mortgage-related fraud was traditionally a low priority for the under-financed and over-worked crime fighters at the Department of Justice. Even today, there are still not enough federal agents on the job.
As for the state authorities, they knew what was happening but could only apply financial tourniquets in their markets – they lacked the proactive power to stop the chicanery. In May 2007, Secondary Marketing Executive detailed an effort by the Ohio Housing Finance Agency to issue a $100 million municipal bond to help 1,000 families with the refinancing of their toxic mortgages. But no one in state government – either in Ohio or the other 49 states – had the power to halt the crisis as it scalded over.
Warren also used her op-ed piece to look ahead to how the CFPB will operate.
‘Once it is fully operational, the new consumer agency will have supervisory authority over all large mortgage servicers,’ she wrote. ‘It will be able to examine them on a regular basis to make sure they follow the rules. If those servicers decide it is cheaper or faster to circumvent federal law, the consumer agency will have the tools to hold them accountable.’
In concept, yes. In reality, however, it is highly unlikely. After all, Fannie Mae and Freddie Mac had supervisory authority in the years building up to their collapse – remember the Office of Federal Housing Enterprise Oversight? Yet the government-sponsored enterprises ran amok – with the full consent of Congress, the White House and the financial services industry – until their incompetence required their placement in conservatorship.
Even worse, there was no shortage of regulatory oversight of the financial institutions that derailed, yet no one at a federal or state level ever bothered to step forward and hit the brakes as the crisis sped out of control. Even worse, none of these regulators have ever been reprimanded for their dereliction of duty.
The CFPB is not going to be the cure-all for the financial services industry's woes. I am aware that Warren is not intentionally trying to pitch the CFPB as a snake oil panacea. But to pretend that this agency could have prevented what occurred is nonsense, and to imagine that it will create a better world is highly specious.
– Phil Hall, editor, Secondary Marketing Executive
(Please address all comments regarding this opinion column to hallp@sme-online.com.)
