supposedly independent watchdogs—this time government banking regulators, no less—are funded by those they regulate

Letting Sleeping Watchdogs Lie | The business press rediscovers regulators | By Dean Starkman Thu 20 Dec 2007 03:20 PM
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“Paulson attacks ‘shameful’ lenders,” The Financial Times reported in October.

[Paulson] said the conduct of some mortgage market participants had been ‘shameful’ and called for consideration of a nationwide licensing and monitoring system for mortgage brokers.

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The USA Today story also says that Sheila C. Bair was “frustrated” at the “slow pace” of loan restructuring for subprime borrowers.

‘Washington needs to push hard on this,’ she said. ‘Our message is, “Prioritize these folks, if they can convert” (to fixed-rate loans). That will free up more time to deal with some of the more challenging cases.

That’s fine, except Bair heads the Federal Deposit Insurance Corporation.

She is “Washington.”

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One of its chief merits is that it reveals even more about Alan Greenspan’s failure to act on urgent private warnings. In one passage, he seems paralyzed by his own ideology as he explains why he had parried pleas as early as 2001, from the late Fed governor Edward Gramlich and the FDIC’s Bair, to use powers the Fed already had.

‘I got the impression that there were a lot of very questionable practices going on,’ he said. ‘The problem has always been, what basically does the law mean when it says deceptive and unfair practices? Deceptive and unfair practices may seem straightforward, except when you try to determine by what standard.’

The Times makes a point that has appeared elsewhere but is one that nonetheless bears re-emphasizing: supposedly independent watchdogs—this time government banking regulators, no less—are funded by those they regulate.

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As The New York Times reported in December of that year:

State officials and consumer groups have opposed the [OCC’s -- [part of Treasury Department]] move to override state laws aimed at protecting consumers, including those to curb ‘predatory’ lending practices.

These lending abuses include exorbitant fees and interest rates and
payments for undisclosed insurance products.

But the comptroller has the power to override state banking laws.
‘Federal pre-emption is not unprecedented,’ a spokesman, Bob Garsson, said.

And remember, the OCC wasn’t just fighting Spitzer. Actually, it was Michigan that challenged OCC preemption in a case that went to the U.S. Supreme Court, and attorneys general from all fifty states filed amicus briefs in support.

Business-news organizations covered the dispute between federal and state officials as a power struggle, a tit-for-tat fight. But something must have seemed odd even at the time. For one thing, The Wall Street Journal editorial page threw its federalist principles overboard and became a champion of federal regulation—seriously. In retrospect, the editorials are howlers.

The OCC has a large staff of economists whose only job is to perform the sort of sophisticated statistical modeling needed to discover relevant disparities between loan approvals and denials or in pricing. Any red flags are followed up with in-depth examinations of loan files. The agency also has staff members on-site at large banks to monitor lending practices.

And get this:

If the OCC hasn’t had a huge number of enforcement actions, one reason is because it has a chance to monitor behavior before it becomes a problem.

And the punch line:

It’s a shame more federal agencies haven’t taken their responsibilities as seriously as the OCC. (3)

That’s an embarrassment.