Dodd-Corker: The CFPA, the Treasury, and the Fed

The news this morning that Senators Dodd and Corker may agree on making the proposed Consumer Financial Protection Agency a division of the Federal Reserve rather than the Treasury Department, as Dodd had offered, reminds me of the 1986 jurisdictional questions concerning government securities regulation.

In 1986, after some severe problems in the government securities repo market, especially the failure of ESM, an unregulated government securities dealer in Florida, and the consequent turmoil for the state-insured thrifts in Ohio, it was clear that heretofore unregulated government securities  brokers and dealers would be subject to regulation.  The Treasury had resisted this in the past, but it dropped that opposition in the face of continuing problems in the government securities market and the political inevitability that Congress would act.  The questions that remained were how much regulatory authority would be granted to a government agency in this area and the identity of that agency.

As to the second question, the identity of the agency, the SEC had quickly been written off as a  candidate to write rules in this area, partly because of Administration opposition.  The two remaining candidates were the Fed and the Treasury.  The Congress and some market participants were leaning to the Fed as the preferred regulator.  The arguments were similar to those probably being made today about were to house consumer financial protection if it is not entrusted to a new, “independent” agency.

It was pointed out that Treasury’s leadership was less stable than the Fed and that it is a more political agency.  The Treasury argued in response that it had responsibility for debt management and that it was, therefore, in the best position to assume this responsibility.  Moreover, the Treasury argued that there was no conflict in managing the public debt and regulating the dealers, because a market that was characterized by integrity would be best for minimizing interest costs on the government’s debt.  A market that was characterized by fraud, on the other hand, would shrink scare potential investors away and result in higher interest costs.

Fortunately, for the institutional interests of the Treasury, Secretary James Baker was an excellent politician and negotiator, and Treasury ended up with the rulemaking authority.  The Treasury has by all accounts done a good job of handling its responsibilities under the Government Securities Act of 1986.

Part of the reason that the Treasury did a good job in writing rules was due to the quality of the political leadership in Domestic Finance during the Reagan Administration.  While that Administration generally had a deregulatory bent, the attitude at Treasury was that, since the Government Securities Act had been enacted, was the law, and Treasury had argued for getting this new authority, the Treasury was going to do as good a job as possible in carrying it out.  In fact, the Congress had given very tight deadlines for putting out proposed, temporary, and final rules, and we met every deadline to the day.

Of course, there is no assurance that political staff at Treasury will always be good, just as there is no assurance that the Fed and its powerful staff will always make the correct judgments.  One of the tradeoffs, of course, is that while there is less institutional continuity at Treasury, there is also less danger that mistaken judgments will persists for years.

As to the current question, I find it hard to see why those who think the Fed failed in its consumer protection role would want to give the Fed even more authority, even if a mechanism can be devised to give the new division some independence from the Board.  As for the Treasury, a bureau might work, but if it had the independence of an OCC or OTS, there is little difference between that and an independent agency.  Given the amount of staff necessary to do this right and the lack of any connection to what the Departmental Offices do, putting this authority there would likely not work very well.

As a final point, if staffed with the right people, any structure would likely work; if staffed with the wrong people, the organizational structure will not matter.  If Congress creates something, the first years of a new consumer finance protection agency, bureau, or division will be extremely important.