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Don’t Count on Real Regulatory Reform, Even Though It’s a Great Idea

Kevin Drum at Mother Jones applauds the idea of a single bank regulator, a proposal The Washington Post reports is now under consideration by the Obama administration.

For what it’s worth, I’d say that having a single bank regulator is long overdue. The current structure not only doesn’t make sense, but allows banks to shop around for the most lenient regulator they can find, prompting a race to the regulatory bottom. It’s also a problem for big banks, which end up under the regulatory authority of multiple agencies.

According to The Post, the new regulator would replace the patchwork of agencies that now regulate financial institutions.

The agency would be a key element in the administration’s sweeping overhaul of financial regulation, which officials hope to unveil in coming weeks, including the creation of a new authority to police risks to the financial system as well as a new agency to protect consumers, according to three people familiar with the matter. Most of the proposals would require legislation.

Drum finds himself slightly leery of the systemic risk regulator, saying he’s not sure such an authority would have done anything to head off the current crisis. He’d also like to see more specifics on the guiding principles behind regulatory changes, not just new rules. I’ve got other concerns.

The fact that most of the proposals require legislation should be cause for concern, given the way Congress caved in to the banks on mortgage cramdown legislation that should have been a slam dunk. Do not underestimate the financial industry’s lobbying clout and the survival instincts of agencies likely to be targeted for elimination, such as the Office of Thrift Supervision.

And speaking of the OTS … this little nugget mostly got overlooked last week, and it’s worth a mention. The inspector general for the Treasury Department found evidence of improper backdating at six thrifts, including failed subprime lender IndyMac. From Reuters:

High-level bank regulators were aware that thrifts were inappropriately backdating capital contributions, allowing the institutions to appear healthier, and in one case directed a thrift to engage in the practice, according to a government watchdog report released Thursday.

The inspector general’s report called the practice “alarming.” I’d go beyond that and question whether it’s criminal — isn’t this sort of thing blatant accounting fraud?

So what does this all have to do with regulatory reform? Plenty. As we’ve noted, insurance companies recently partnered with the OTS to buy troubled thrifts, which allowed them to qualify for TARP funds. Here’s how we’ve described this little arrangement:

Banking analyst Bert Ely told TWI that the insurers actually were teaming up with the Office of Thrift Supervision, which found them troubled thrifts to buy. That way, insurers could get a chance at TARP money – and avoid stricter federal oversight. Buying thrifts instead of banks would allow the insurers to be regulated by the Office of Thrift Supervision, which is well-known for its lax oversight.

Ely also told us he once thought OTS would go down in flames after several failures of the institutions the agency was supposed to be overseeing, like IndyMac and Washington Mutual. But with the insurers involved, he said, the picture has changed. The OTS now has powerful friends with a vested interest in seeing it survive, and who will be likely to lobby for its survival.

That’s one reason why I’m not counting on the creation of a single regulator or any other good idea to become a reality. Already, according to American Banker, former OTS director John Reich, a deregulatory zealot if there ever was one, is coming out swinging to defend his former agency’s practices. I guess it’s the financial industry’s version of the debate over the Bush administration’s policies on torture.

Except the financial industry’s people have very deep pockets, and Congress often ends up on their side.

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