“It is a striking irony to me that the outcome of the public anger directed toward Washington and Wall Street may lead to the further empowerment of both Washington and Wall Street in regulating financial institutions,” Hoenig said in the letter, written in response to lawmakers’ questions.

It’s an curious premise: If Americans are upset at Washington for not regulating banks stringently enough to prevent a financial crisis, they’ll be upset when Congress asserts its authority and regulates banks more stringently? St. Louis Federal Reserve Bank President James Bullard added his own criticisms of the plan on Feb. 25.

St. Louis Federal Reserve Bank President James Bullard told a business group that a plan for a multi-member financial system watchdog is unlikely to prevent a future crisis because it was unlikely to act decisively.

One of the major criticisms of the bailout is that the Fed and the Treasury Department acted too quickly to throw money at banks without proper oversight or control mechanisms, leading to a situation today in which many banks continue to make money hand over fist while refusing to extend credit or loans to struggling businesses. Hoenig followed up on his letter to the Senate on Feb. 26, when he claimed that the Fed needed to retain its full regulatory powers to keep up with the lives of regular Americans.

“I think that is a tragic mistake; it takes the eyes away from the Federal Reserve in knowing what’s going on in America.”

It’s amusing to think that the Fed needs to maintain its significant regulatory authority to keep up with what is going on in America, when its lack of involvement in what was going on in America helped lead to the subprime mortgage crisis. Today, the president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, added to the calls to keep his authority intact in a speech in Washington

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“As long as the Federal Reserve is responsible for discount-window lending, it makes no sense to diminish the Fed’s robust role in the supervision of a range of banking institutions, from large to small,” Lacker said today in remarks to the annual conference of the Institute of International Bankers in Washington.

In other words, because the Fed loans money to banks and sets interest rates, it should be in charge or regulating banks because those two missions, somehow, inherently go together. To critics who find fault in the Fed’s protection of consumers, Lacker had an answer.

I think we do a really good job of consumer protection, if you look at our record, especially since 2007,” Lacker said. “We acted very rapidly to emerging information about risks to consumers in mortgage lending,” Lacker said. “Plus, putting it with somebody who’s doing safety and soundness regulation makes sense to me.”

Yes, because eventually the Fed realized that the banks over which it had regulatory authority were outright deceiving their customers, putting them in mortgages for which they were unqualified and doing it all for the purpose of securitizing the loans and earning money off of insurance against mortgage defaults, they should be the agency in charge of protecting consumers. All of the Fed presidents’ opinions square neatly with Fed Chairman Ben Bernanke’s statements that the Fed should keep, and even expand, its regulatory authority. Bernanke is even now promising to investigate the currency derivatives set up by Goldman Sachs to help Greece hide the true extent of its debt. Of course, Goldman started its relationship with Greece in 2001, and Greece is now in the midst of a financial meltdown, partly as a result of the swaps which allowed Greece to hide its debt. It only took the Fed nearly a decade and the collapse of an entire country’s economy to get it to think about investigating derivatives. They’re obviously ready to provide consumers with assurances about financial companies and the products they offer.

Congressional oversight committee chairwoman Elizabeth Warren told reporters today that the government’s hands are tied without the consumer protection agency for which Sen. Chris Dodd (D-Conn.) has sought a Republican backer, to no avail.

“[The Credit Card Accountability, Responsibility, and Disclosure Act] is a good first step but it isn’t enough alone,” said Warren on a conference call with reporters hosted by the U.S. Public Interest Research Group. “The credit card industry and the entire consumer credit industry is broken. We need an agency, a cop on the beat that is flexible and responsive.”

Unfortunately, too many senators seemingly disagree with her.

Ed Mierzwinski of the U.S. Public Interest Research Group does not. He thinks the fact that the Fed refused to take tough action against credit card companies’ regulatory evasions last year indicates they don’t have consumers’ best interests at heart and never will.

“The Fed could have had a broader anti-evasion provisions as well, which we all asked for in our comments and didn’t get,” said Mierzwinski. “The Fed gave us obvious protections against a couple of provisions but they should have given us a big hammer and they didn’t.”

But with the folks at the Fed seemingly set to cede some authority to the Treasury Department over banks as part of the larger financial oversight council, don’t bet on them agreeing to give authority to a new agency just because some people think consumers deserve protection. That’s not their job, and they prefer that it not be anyone else’s, either.

Flickr: respres

A central element of the Democrats’ strategy to stabilize the economy — empowering homeowners to prevent foreclosures through bankruptcy — has hit a wall in the Senate, where fierce opposition from the finance industry is threatening to kill the proposal this week.

Despite major concessions to the banks at the expense of borrowers, Senate leaders have been unable, after weeks of negotiations, to persuade most industry players to endorse the proposal. Unless further genuflections are made to the banks, supporters of the bill appear unlikely to garner support from enough senators to defeat a mostly Republican filibuster — a vote that could occur as early as Thursday.

Illustration by: Matt Mahurin

The saga is just the first in what will likely be a series of hurdles as Democrats attempt to reform the finance industry this year with new protections for borrowers and consumers. Despite the epic fall of Wall Street — not to mention the trillions of dollars put up by Washington to rescue the ailing finance industry — the banks remain a lobbying juggernaut on Capitol Hill. And they’re using their influence to water down a host of consumer-friendly proposals this year — including credit card, mortgage lending and payday loan reforms.

The bankruptcy bill, sponsored by Sen. Richard Durbin (D-Ill.), permits bankruptcy judges to reduce, or “cramdown,” homeowners’ mortgage payments to help borrowers stay in their homes — an option currently available to save vacation homes, yachts and almost any other valuable asset, but not primary homes. The House passed a similar bill in March, but it’s been stalled in the upper chamber while Durbin and other Senate leaders tried for weeks to negotiate the support of the giants of the finance industry, including Bank of America, Wells Fargo, JP Morgan Chase and the Credit Union National Association.

To no avail. Only Citigroup, which endorsed the Senate bill earlier in the year, has signed on in support. And it wasn’t for a lack of concessions from Democrats. Indeed, behind Durbin, Senate leaders diluted the bill so that eligibility applies only to: (1) loans taken out before Jan. 1, 2009; (2) loans that are at least 60 days delinquent; (3) loans with outstanding balances of less than $729,750; and (4) loans for which homeowners were not offered a modification from their servicer — one compatible with either the Obama administration’s new anti-foreclosure plan or the Hope for Homeowners program. Also, the Durbin compromise sunsets the bankruptcy option in 2012.

“It’s a compromise six ways to Sunday to answer everyone’s concerns, and yet you’ve still got what looks like all the Republicans, and a handful of Democrats, who don’t want the bill,” said David Abromowitz, a housing expert at the progressive Center for American Progress. “[The banks] still have enormous political power on Capitol Hill.”

And it’s not only Republicans who are lined up with the banks. Indeed, the Huffington Post reported this week that Democratic Sens. Mary Landrieu (La.), Ben Nelson (Neb.) and Jon Tester (Mont.) plan to vote against the proposal, while a long list of other moderate Democrats remain on the fence.

Defeat of the bill would come at a tough time for homeowners. Foreclosure filings topped 800,000 in the first three months of this year, up 24 percent from 2008, according to RealtyTrac, an online foreclosure database. And the numbers are rising as unemployment jumps as well. Of the first quarter foreclosures, more than 341,000 came in March alone — up 17 percent from the month before.

A Credit Suisse report conducted in December found that the cramdown bill alone would prevent 20 percent of the nation’s foreclosures. A more recent analysis from Moody’s Economy.com found that Durbin’s proposal could prevent 1.7 million foreclosures nationwide.

Yet the finance industry and Republicans have blasted the bankruptcy change as adding another layer of uncertainty to the borrower-lender relationship. If judges are permitted to alter the terms of mortgages to reduce the lenders’ profits, the critics argue, then those lenders will have little choice but to hike rates on other more reliable borrowers to compensate for the additional risk. Industry opponents also argue that the change would encourage homeowners to seek bankruptcy as a early option rather than a last resort — something consumer advocates and Democrats adamantly refute.

“They’re acting like it’s just a walk in the park to go into bankruptcy,” said Linda Sherry, director of national priorities at Consumer Action. “It’s not. It’s a life-altering process. It’s not something that you go out and do just because you want to screw a bank.”

Considering all the bailout money doled out to Wall Street in recent months, Sherry added, it’s high time Congress focused some of that largess on Main Street as well. “Corporate America has gotten enough welfare,” she said. “It’s time to help the people who are in distress.”

Speaking from the Senate floor Tuesday night, Durbin laid out his own theory why the industry opposes cramdown. “They don’t like this change,” he said, “because it means at the end of the day, if they will not sit down with someone facing foreclosure to try to work out and renegotiate the terms of the mortgage — at the end of the day that person may go to bankruptcy court and end up having a judge do it … [T]hat is why many of the banks resist it. They don’t want to sit down and renegotiate the terms of the mortgage.”

A failure of cramdown in the Senate would mark a defeat for the Obama administration, which is supporting the proposal as a complementary element of its foreclosure prevention strategy. Unveiled in February, that plan offers mortgage lenders and servicers a number of financial incentives to modify troubled loans voluntarily. Housing experts say the threat of bankruptcy is a necessary accompaniment to the administration’s voluntary enticements.

“The Obama plan has some carrots,” Abromowitz said, “but they’re pretty small carrots if there’s not a stick behind them.”

The Senate bottleneck has placed some housing advocates in the uncomfortable position of supporting the diluted Durbin Senate compromise for the singular reason that it’s better than having no bankruptcy language at all. Ellen Harnick, senior policy counsel for the Center for Responsible Lending, an advocacy group, said the compromise is “substantially limited,” yet without some threat of bankruptcy “there’s nothing to compel the lender to participate in the Obama modification plan.”

David Berenbaum, executive vice president of the National Community Reinvestment Coalition, relayed a similar message, arguing that the compromise “is certainly watered down, but will help a lot of consumers.” Berenbaum said a particular advantage of the Durbin proposal is a provision that would force lenders, as a condition of precluding bankruptcy, to reduce monthly mortgage payments as low as 25 percent of the homeowner’s income in the case of low- and moderate-income borrowers — a good deal lower than the 31 percent demanded under the Obama plan.

“Each day that we wait, there are thousands of consumers who are facing foreclosure,” Berenbaum said.

The Senate is scheduled to begin debating housing legislation Thursday, with the cramdown provision likely arriving as an amendment to the larger bill. Durbin warned the finance industry Tuesday that a failure to pass cramdown this week wouldn’t dissuade him from trying again soon.

“I might say to the bankers, if you beat me this week — I hope you do not, but if you do — hang on tight. We are coming back at you next week.”