An Open Letter to the President of the United States of America

President Barack Obama
The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Dear President Obama,

I sure hope all’s well in Washington. It’s so damn hot here in Phoenix! I’d turn my AC down if I could afford it – maybe once you approve some bigger solar energy grants? (J/K!!)

You know I dig you. I excitedly voted for you, and I can’t even fit into the first Obama shirt I bought after your speech at the Democratic National Convention almost exactly five years ago today. I have no political axe to grind with you, sir. I do, however, have a few things to say about your banking regulatory reform ideas.

As I read through your report, Financial Regulatory Reform: A New Foundation, I noticed five key tenets to your plan:

1. Promote robust supervision and regulation of financial firms
2. Establish comprehensive regulation of financial markets – Who can argue without blushing that we don’t need better transparency and discipline here, and the proposal doesn’t seem to add too much undue red tape.
3. Protect consumers and investors from financial abuse
4. Provide the government with the tools it needs to manage financial crises – Certainly, I can agree that we could improve our act on how and when to bail out or close financial institutions, particularly very large or risky institutions.
5. Raise international regulatory standards and improve international cooperation – This part of your plan contains a lot of “urging” and “recommending” that international regulatory standards continue to improve. It’s a great idea with pretty little chance of success, but there does not seem to be enough time or funds being poured into this initiative to worry about it too much.

 I want to focus on #1 and #3 above.

Promote robust supervision and regulation of financial firms
First, let’s agree that there is a massive consignment of blame to share for the financial mess we’re in now – banks, consumers and, yes, regulators. So, no argument from me about the need for reform. 

Part of your proposal is to create a formal committee made up primarily of the head regulators to coordinate supervision of the big, risky institutions.

• The Fed will retain its High and Mighty status and have the role as systemic risk overseer. That is fine in theory, President Obama, but please don’t think the Fed will ever be credible at anything but a 10-mile-high perspective.The Fed will be in charge of oversight of newly designated Tier 1 Financial Holding Companies (Tier 1 FHCs) – firms whose failure could put our entire system at risk. The Fed is likely more capable of this mammoth task than any of the other regulators, but only if we are talking about high level oversight and macro analysis that the pointy head PhDs in the Fed are great at. If you are talking about the Fed actually examining the Tier 1 FHCs, you are making a big mistake.

  The Fed is capable of big picture management and research, but its ability to supervise at the street level, with dirty fingernails and real world analysis, is a joke. I saw it in action during my OCC days. A day in the life of field examiners from the Fed consisted of drinking coffee, flirting with tellers, planning happy hour, and occasionally asking the real OCC examiners if they have found anything interesting. If the Fed’s street examiners are going to be utilized as anything but a sounding board for the primary regulators, you better fund a serious training program.

• Your idea of restructuring the regulatory agencies is both too much and too little. It is too much in the fact that the last thing you want your regulators doing now is concentrating on anything other than safety and soundness. That’s literally all they should be thinking right now. Safety and soundness.When you start talking about collapsing agencies and changing the roles of agencies, regulators get nervous just like anyone whose job gets threatened. And when jobs are threatened, people start making decisions for the wrong reasons – political, personal, financial, etc. There is a lot of room to restructure to make bank cops better poised to prevent another crisis in the future, but please make this a process that happens in a few years when the current crisis is behind us.

  However, once the time is right to shuffle the regulatory deck, you may as well really shuffle it. Right now, you are asking for slightly more power for the Fed (the new super-regulator) and FDIC (the new standard-setter for regulators), no change in the NCUA, and in effect a merging of the OCC and the OTS into a new agency called the National Bank Supervisor (NBS).

  For a politician promising sweeping change, your proposed regulator restructuring is window dressing, to put it kindly. If you want to really streamline, you should consider consolidating the FDIC, OCC, NCUA and OTS. With the thrift charter on the table to be whacked and the NCUA bumbling its way (at best) through this crisis, why not consolidate all of the bank police into one agency? Now that would be sweeping. That would be a big step toward efficiency and accountable government.

Protect consumers and investors from financial abuse
Your desire to establish financial consumer protection is admirable, but your plan to make that happen is the most troubling part of your reform plan. You want to create yet another agency, called the Consumer Financial Protection Agency (CFPA), to oversee financial products and services – especially mortgages – similar to the FDA’s oversight of prescription drugs or the Consumer Product Safety Commission’s oversight of appliances.

Yikes! This is downright Goresque. Remember when your critics said you would be nothing but a policy wonk who talks a great game, assembles think tanks, and doesn’t get much done? This is exactly what they meant.

I realize that listening to us bankers complain about heavy regulation is a bit like listening to teachers complain about low salaries. Both groups are right, but heavy regulation isn’t exactly a new issue in the banking world, just like low salaries really shouldn’t surprise anyone who takes up teaching. So I get it if you are a little deaf to our complaints about too many laws and regulations.

I also understand that some consumers really were screwed over by financial service companies – credit card companies, mortgage lenders and yes, a few banks. That said, a new agency to oversee consumer protection is serious overkill. Here is a much better way to address the problem:

• Reestablish specialty consumer compliance examiners within the primary regulatory agencies. Make consumer protection at the feds a legitimate career path like it once was.
• Create an ombudsman at each primary agency who would specifically address consumer compliance issues and infractions.
• Give some teeth to compliance examinations with more venomous issuance of Civil Money Penalties for the few bad wolves giving us all a bad name.
• Direct the Justice Department to actually do something about consumer compliance crimes.

I am 100% in agreement that the consumer does need some protection from the few dishonorable elements in the financial industry. But I promise you, the last thing we need is yet another supervisory agency in the mix. Give your existing agencies some tools to get the job done, and it will happen. Streamline, baby, streamline.

Mr. President, I thank you for your attention.

Yours truly,
Hodgins

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