House Financial Services Committee Chairman Barney Frank (D-Mass.) (WDCpix)

As a House committee begins tackling major financial regulatory reform, consumer advocates find themselves shaking their heads over why something that should have been a slam dunk — reining in the financial industry in the wake of the subprime crisis — has turned into a hard-fought battle instead.

Proposals for a Consumer Financial Protection Agency, a new federal authority to regulate mortgages and other financial products, and for oversight of the private and unregulated market for derivatives, risky financial instruments cited in the subprime collapse, are under debate by the House Financial Services Committee this week. In the immediate aftermath of the financial crisis, it seemed to many consumer advocates that those proposals, and other efforts at financial regulatory reform, would have been already been in place by now.

Illustration by: Matt Mahurin

But what seemed back in 2007 like a clear path ahead was upstaged by the health care battle, which stalled momentum on the biggest overhaul of financial regulations since the Great Depression. Yet there’s even more to the reform slowdown, noted Kathleen Engel, a Suffolk University law professor who specializes in predatory lending and subprime securitization.

A weakening economy has left homeowners worried about paying their mortgages and keeping their jobs, leaving less time and attention for larger problems in the banking system. Regulating mortgages and securitization are complex issues that are difficult to translate, making it hard to get the public engaged in the debate.  And banks are in a better position to fend off regulation, now that their bottom lines are stronger and the government needs them to modify as many mortgages as possible to bolster the economy, she said. “They really have the federal government over a barrel right now,” Engel said.

She added that people feel “relieved” that banks are stable these days, which contrasts with their emotions when the subprime collapse first hit. “I was really hopeful at the beginning that the rage that people felt about the banks getting us into this mess would lead to needed regulation,” she said. “But people are so strapped right now, they’re stressed out how to get a loan mod, or how to get a job, that they’re not able to focus on what the government should be doing.”

Banks, for their part, continue to argue that new regulations aren’t needed, and will only choke off financial innovation. The American Bankers Association, the Financial Services Roundtable, and even small and community bankers are opposing the agency, saying it presents a new and unnecessary layer of regulation. Those arguments have gained a foothold because of a long-held distrust of any new rules coming from Washington, noted Cathy Lesser Mansfield, a Drake University law professor and consumer law expert.

“For the last 20 or 30 years, we’ve kind of bought this notion that all regulation is bad regulation,” said Mansfield, who also chairs Americans for Fairness in Lending, a nonprofit consumer advocacy coalition that supports reforms. “The reason the banks are getting away with this is they’re saying, ‘We’re already regulated. We already have a regulator.’”

Lax regulation, however, is often cited as one of the contributors to the financial crisis. And the nation’s top banking regulator, John Dugan, the Comptroller of the Currency, recently gave a speech arguing that banks weren’t responsible for the financial crisis.

As overhaul begins to move forward, the financial industry remains an enormous influence on Capitol Hill, causing committee chairman Barney Frank (D-Mass.), to dilute his proposal to get industry defenders on board.

In order to win wider support from conservative Democrats and others for the consumer agency, Frank already has dropped from the proposal a “vanilla” option which would have required mortgage brokers and banks to offer consumers a plain, 30-year fixed mortgage, along with more exotic mortgage products. Frank also eliminated a reasonableness standard, which would have required bankers to ensure consumers understood their products, and could afford them. He proposed that an oversight panel for the agency be staffed by top bank regulators, and said he would exempt most non-financial businesses, including retailers, merchants, and real estate agents and brokers, from oversight.

The committee is likely to end up approving some sort of consumer financial agency, “but we’re worried about how watered down it will be,” said Lauren Saunders, a lobbyist with the National Consumer Law Center. She also said it’s hard to believe that the banking and financial industry has any credibility regarding its arguments against regulation, given its role in the financial crisis. But the sector has managed to mount an aggressive opposition effort, with the U.S. Chamber of Commerce in particular putting its clout into fighting the proposal with a multi-million dollar ad campaign.

“The banking industry is highly profitable,” Saunders said. “They’ve put a lot of money into this, both through lobbying and campaigning. We can’t even come close to them.” For the 2010 election cycle alone, commercial banks already have contributed $3.7 million to members of Congress, according to the Center for Responsive Politics.

Said Alan White, a Valparaiso University law professor who studies subprime loan modifications: “What saddens me the most is the extent to which Congress still allows the bank lobby to veto legislation it doesn’t like, and this includes the Democrats. You would think banks would have lost some credibility on Capitol Hill, but money still talks.”

For White and others, the ability of the finance industry to benefit from loopholes in the current regulatory system adds to the frustration. Goldman Sachs managed to refinance some of the toxic mortgages it controlled into Federal Housing Administration-backed loans, shifting the risk to the government. Former top executives of failed subprime lender Countrywide Financial, whose toxic loans were a major contributor to the subprime collapse, stand to earn millions of dollars by buying delinquent home mortgages that the U.S. government took over from other failed banks, sometimes for pennies on the dollar, and reselling them. Bailed-out insurance giant AIG is once again under fire, after a government report on Wednesday found that controversial retention bonuses intended to retain key employees went instead to workers in the firm’s troubled financial products unit, with even a kitchen assistant receiving a $7,700 bonus. “They’re totally taking advantage of the system,” Saunders said.

Advocates aren’t giving up. They noted that both the Federal Reserve and the Federal Trade Commission have been more aggressive regarding consumer protection lately, although they pointed out their actions may be due to fear of giving up power to a new agency. Congress also approved credit card reform, and some Democrats want to move up the timetable for putting new rules in place.

Frank has vowed to bring a reform package to a floor vote in the House by November. In the Senate, Banking Committee Chairman Christopher Dodd (D-Conn.), also strongly supports the creation of consumer agency, but there is significant Republican opposition to the idea. Dodd also has proposed merging four bank agencies into one super-regulator, an idea that goes beyond the scope of the Obama administration’s proposals. Dodd has said he hopes the Senate will act on some kind of financial reform before the end of the year.

Unless there is substantial financial regulatory overhaul, however, the opportunity for reform presented by the financial crisis will have been lost for good. “We would never have gotten into this financial crisis if the financial industry and these products had been regulated in the first place,” Engel said. “If we don’t manage to get reform done now, then we haven’t learned any lessons here.”

The poll was conducted between May 20 and 25 — while President Obama was heaping praise on Dodd for his work authoring the credit card reform bill, signed into law last week.

Dodd must be concerned when the popular president goes to bat for him and he still sees polling numbers like this:

Connecticut Sen. Christopher Dodd is gaining on former U.S. Rep. Rob Simmons, a possible Republican challenger, and now trails 45 – 39 percent in the 2010 Senate race, according to a Quinnipiac University poll released today.

This compares to a 50 – 34 percent Simmons lead in an April 2 poll by the independent Quinnipiac (KWIN-uh-pe-ack) University.

And this:

Connecticut voters disapprove 53 – 38 percent of the job the Democratic incumbent is doing, compared to 58 – 33 percent April 2, his lowest approval rating ever.

And this:

Connecticut voters say 49 – 35 percent that Dodd is not honest and trustworthy and say 47 – 42 percent that he does not care about their needs and problems.

Despite those poor reviews, the pollsters say Dodd “appears to have stopped the bleeding” since news broke that he had inserted a provision in the stimulus bill that paved the way for the AIG bonus scandal, all while being the top recipient of campaign contributions from AIG employees since 1989.

Quinnipiac University Poll Director Douglas Schwartz said he “Dodd is an exceptionally skilled politician, and he has plenty of time. He is lucky to get this early warning more than a year before the election.”

If this is luck, I’m guessing Dodd’s opponents want none of it.

Documents show that senior officials at the Federal Reserve Bank of New York received details about the bonuses more than five months before the firestorm erupted and were deeply engaged with AIG as well as outside lawyers, auditors and public relations firms about the potential controversy. But the New York Fed did not raise the alarm with the Obama administration until the end of February.

And who was head of the New York Fed five months before the AIG bonus scandal broke? Right. Tim Geithner.

The Post is quick to point out that Geithner’s name doesn’t appear anywhere in the documents obtained by the paper. But is there any reason to believe that, as president of the New York Fed, he somehow would have been kept in the dark about the imminent bonuses? And if Geithner was part of the team that approved those bonuses in late 2008, who would be better placed to see to it that they were ultimately paid? Also, would he not have known that those payments were nearly four times the amount AIG reported earlier in the year?

Perhaps now we know why Geithner et al. swooped into the Capitol to insist that Dodd alter his amendment to exempt AIG.

AIG now says it paid out more than $454 million in bonuses to its employees for work performed in 2008.

That is nearly four times more than the company revealed in late March when asked by POLITICO to detail its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees.

The figure Ashooh offered was, in turn, substantially higher than company CEO Edward Liddy claimed days earlier in testimony before a House Financial Services Subcommittee. Asked how much AIG had paid in 2008 bonuses, Liddy responded: “I think it might have been in the range of $9 million.”

“I was shocked to see that the number has nearly quadrupled this time,” said Cummings. “I simply cannot fathom why this company continues to erode the trust of the public and the U.S. Congress, rather than being forthcoming about these issues from the start.”

I wonder if the higher figure will again spur the kind of public outrage brought on by the earlier bonus disclosures. Good thing for AIG that it’s not getting back in line for another bailout.

Now he’s back with a new proposal to stick a 70 percent tax on all executive pay above $1 million for firms accepting more than $500 million in bailout money. It also fills a gaping loophole found in the other bills: “My bill deals with all compensation, whether it is called a salary, bonus, retention payment, commission, employee of the week prize, or whatever,” Sherman said in a statement introducing the bill.

How far will it get? Well, when Sen. Claire McCaskill (D-Mo.) attached a provision to the stimulus capping executive pay at $400,000, the White House stripped it right out.

But then you find out that even in a year when people saw their retirement and college savings accounts decimated, top hedge fund managers raked in the big bucks, according to The New York Times.

As major markets and economies careened downward last year, 25 top managers reaped a total of $11.6 billion in pay by trading above the pain in the markets, according to an annual ranking of top hedge fund earners by Institutional Investor’s Alpha magazine, which comes out Wednesday.

James H. Simons, a former math professor who has made billions year after year for the hedge fund Renaissance Technologies, earned $2.5 billion running computer-driven trading strategies. John A. Paulson, who rode to riches by betting against the housing market, came in second with reported gains of $2 billion. And George Soros, also a perennial name on the rich list of secretive moneymakers, pulled in $1.1 billion.

The thing is, we need these same hedge funds to buy up those toxic assets from banks. So it might not be a great idea to start picking on them, even though Treasury Secretary Timothy Geithner wants to regulate them and tax their profits. From The Times:

Even as the spotlight intensifies, these hedge fund managers and others who made it through last year with cash on hand are the sort of investors the federal government hopes will step in and buy troubled assets from banks. The richest managers are also in the best position to take advantage of the distressed environment to build their wealth.

“The guys who own the future are the guys like John Paulson and the others on the Alpha list,” said Keith R. McCullough, the chief executive of Research Edge, a firm in New Haven that provides trading analysis for hedge funds. “Ironically enough, we’re going to go beg for capital from the very people we’ve been trying to vilify.”

More evidence of why populist rage exists. And how, in this increasingly complicated crisis, it can be difficult to decide where to direct it.

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

DeSantis also aims at Liddy directly:

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

This tidbit on Liddy’s timing is particularly interesting:

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

Read it for yourself, and decided whether DeSantis deserves your sympathy. But whether or not you agree with his side of the story, it’s worth hearing. In the outrage and anger of last week, not everyone’s voice was heard.

Responding to a question from NBC’s Chuck Todd, Obama implied that too much of the nation’s economy in recent years has hinged on the imaginary gains of the finance industry.

When AIG sells an enigmatic derivative and that’s considered a part of the GDP, Obama said, “then that’s not a model for sustainable economic growth.”

The comments arrive exactly seven days before Detroit’s automakers will submit viability plans in hopes that the White House will reward them with more bailout money. Would the president call for an economy based on more tangible things, then turn around and deny the car companies — once the country’s greatest manufacturing engines — the next round of emergency loans?

We’ll know shortly.

Without government help, 2.4 million homeowners will lose their homes to foreclosure this year, according to the Center for Responsible Lending (CRL), an advocacy group.

Every 13 seconds another family receives notice a lender’s foreclosing on their home. That means  6,600 additional foreclosures start every day at a time foreclosure rates already are four times normal levels. A week ago, the number of families forced into foreclosure since January 1 surpassed 500,000.

The Federal Reserve reported earlier this month that home values nationwide fell $870 billion in the last quarter of 2008 alone. Dean Baker, co-director of the Center for Economic Policy and Research, has estimated that home wealth has tanked more than $6 trillion since the housing crisis began. CRL projects that 73 million families will each lose $6,000 in home value in 2009 just for living in the proximity of foreclosed homes.

Meanwhile, housing legislation that would cut into these numbers remains stalled in the Senate over a provision, unpopular among the banks, that would allow bankruptcy judges to modify the terms of primary mortgages to help homeowners keep their homes. Credit Suisse has estimated that the bankruptcy provision alone would prevent 20 percent of all foreclosures — keeping more than 1.6 million families in their homes between now and 2013.

Claiming time restraints, Senate leaders don’t plan to take up the housing bill until after their two-week-long Easter recess, which doesn’t end until April 20. Yet Congress had plenty of time to fritter the last week grappling with efforts to clawback $165 million in bonuses to AIG — hardly a tiny sum, but it’s a rounding error relative to the cumulative wealth being lost by the country’s homeowners while the housing bill idles.

“Continued delay by Congress costs us all,” CRL warned in a statement issued today. “The sooner the Senate acts to get such legislation to the President’s desk the better for all of us.”

Anyone listening?

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