Bailout watchdog and middle-class advocate Elizabeth Warren is accusing Wall Street CEOs of abusing the public's trust and is challenging them to step up and support financial reform -- for the nation's benefit as well as their own.
In an opinion piece in Tuesday's Wall Street Journal, Warren writes that the lack of strong consumer rules has set off a competition to see which firms can make the most profits by tricking the most consumers.
For years, Wall Street CEOs have thrown away customer trust like so much worthless trash.
Banks and brokers have sold deceptive mortgages for more than a decade. Financial wizards made billions by packaging and repackaging those loans into securities. And federal regulators played the role of lookout at a bank robbery, holding back anyone who tried to stop the massive looting from middle-class families. When they weren't selling deceptive mortgages, Wall Street invented new credit card tricks and clever overdraft fees.
The Harvard Law professor, who serves as Congress's watchdog for the TARP program, added that the bankers "squandered what little trust was left" when they took taxpayer bailouts.
The piece, titled "Wall Street's Race to the Bottom," explains how bankers can reclaim that trust: by supporting a strong consumer protection agency designed to root out the kinds of abuses that helped lead to the financial crisis. Long championed by Warren, this new agency would protect borrowers from abusive lenders by policing mortgages, credit cards and personal loans.
President Barack Obama proposed the agency last year as part of a set of comprehensive financial reforms. The House of Representatives passed a bill in December that would create it.
Bankers, however, argue that the agency will add another layer of bureaucracy to government and increase costs that would ultimately be passed on to consumers seeking credit.
As proposed by Warren and Obama, the agency could protect consumers by writing and enforcing robust rules. Right now, that authority is split among seven regulators that also are charged with overseeing the health of individual banks and the broader financial system.
Faced with those dueling missions -- bank profitability and consumer protection -- the regulators tend to favor the former, for instance refusing to cap overdraft fees, Consumer advocates charge that the fees are excessive and structured in a way to maximize the potential hit to the customer. Banks see them as a profitable practice that reaps billions of dollars.
Warren takes on the argument that crises are inevitable:
So far, Wall Street CEOs seem determined to stop any kind of watchdog. They seem to think that they can run their businesses forever without our trust. This is a bad calculation.
It's a bad calculation because shareholders suffer enormously from the long-term cost of the boom-and-bust cycles that accompany a poorly regulated market. J.P. Morgan CEO Jamie Dimon recently explained this brave new world, saying that crises should be expected 'every five to seven years.'
He is wrong.
Warren contends that the agency would actually serve the banks' long-term interests. "It will stabilize the industry, rebuild confidence in the securitization market, and leave more money in the pockets of families," she writes.
Wall Street CEOs need to decide how they want to be remembered, she writes:
When the history of the Great Recession is written, they can be singled out as the bonus babies who were so short-sighted that they put the economy at risk and contributed to the destruction of their own companies. Or they can acknowledge how Americans' trust has been lost and take the first steps to earn it back.