Plans to rein in banks may go too far
A bank sign
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Kai Ryssdal: This financial crisis has been full of twists and turns. Not all of them pleasant. Most of them unexpected. But there is one looming development you can safely bet your paycheck on -- That Congress is going to be spending a lot of time coming up with new rules and regulations for Wall Street. The Senate Banking Committee will be exploring that very topic tomorrow. Banks, obviously, have a lot riding on the outcome. They're usually a pretty effective lobbying force in Washington. But this time around they are facing some unfamiliar challenges, as Marketplace's John Dimsdale reports.
JOHN DIMSDALE: Members of Congress are lining up to introduce dozens of bills to rein in bank excesses. For example, there are proposals to create a super-bank regulator to sign off on new financial products, to regulate hedge funds, and to give bankruptcy judges the right to change the terms of existing mortgages. Scott Talbott with the industry lobbying firm, the Financial Services Roundtable, says while it's time to modernize regulations, some ideas go too far.
SCOTT TALBOTT: You have to balance the need to protect the consumers and the safety and soundness of the system without stifling the creativity, the innovation, the free flow of capital. All the hallmarks of capitalism.
The financial services industry is a prominent player in shaping policy. According to the Center for Responsive Politics, banks, hedge funds, and insurance companies contributed over a $100 million to congressional and presidential candidates in 2008. But an Ipsos public-opinion poll finds that banks went from a 31 percent favorable rating in 2007, to a minus 9 percent unfavorable rating in 2008. Scott Talbott realizes his industry faces an uphill battle for credibility.
TALBOTT: The common cry is, "Well why should we listen to you? You brought us to this mess." While it's easy to paint the industry with a broad bush like that, the bulk of the industry weren't bad actors and are working to change the perception of the entire industry together.
Recently, the House Financial Services Committee interrogated a panel of mortgage bankers, realtors and home appraisers about the causes of the recession. And Texas Republican Jeb Hensarling offered some sympathy.
JEB HENSARLING: Sometimes we see public-policy excesses, and I think we've gone from an atmosphere where a lot of you people would be brought before this committee and publicly slapped around for not making credit available to low-income people. And now to some extent you're being slapped around for providing financing to low-income people.
People who, in the end, couldn't keep up with their mortgage payments. At the same committee hearing, the chairman of the Mortgage Bankers Association, David Kittle, endorsed new rules to make mortgage lenders responsible for checking on a borrower's ability to pay. Those include better disclosure of a home-buyer's costs and requirements that loan originators bear more of the risks of default, instead of passing subprime mortgages on to third parties.
DAVID KITTLE: We know these proposals will constrain some in our industry. But they will also help members and their customers in the long run.
Advocates for strong new regulatory oversight of the banking industry, like Gail Hillebrand at Consumers Union, say they'll do their best to take advantage of populist outrage.
GAIL HILLEBRAND: The public is mad because the system is not working, and the regulators seem to have been asleep at the wheel. So what we're pushing for now are changes that make sure it never happens again.
Consumers Union figures they have a great opportunity to ban predatory loans with ultra high-interest rates, restrict banks' ability to increase rates on existing credit-card loans and impose powerful scrutiny over any future financial products.
Bankers endorse some of these changes, but warn that regulatory overreach will make credit scarcer and more expensive. The first step in selling Congress on the soundness of their arguments will be to convince the public that lenders have their customers' interests at heart.
In Washington, I'm John Dimsdale for Marketplace.