Fed may go public with its fight against consumer unit
Compromise bill may come undone
WASHINGTON — Federal Reserve governors are discussing whether to publicly oppose placing within the central bank a consumer-protection agency that they would not be able to control, three officials said.
Under a measure approved by the Senate Banking Committee, the Fed would house the autonomous organization but have no control over its budget, personnel, or rulemaking.
Central bank staffers have concluded the Fed may nevertheless be held accountable for possible missteps by the new entity, said the three officials, who spoke on condition of anonymity.
“It’s a no-win situation,’’ said Kevin Petrasic, a banking attorney who formerly worked at the Office of Thrift Supervision.
Yet Fed governors are reluctant to alienate lawmakers by coming out against the plan, which was proposed by the committee’s chairman, Connecticut Democrat Christopher Dodd, as part of a compromise to attract Republican votes. The Fed’s board has remained silent because it doesn’t want to undo another part of the deal that would allow it to retain bank supervisory powers.
Senate Republicans sought to keep prudential oversight and consumer protection under the same roof to prevent banks from getting conflicting orders from separate regulators. At the same time, Republicans did not want the consumer unit under the Treasury Department, for fear it would be influenced by the White House. President Obama wanted Congress to create a stand-alone agency to make sure consumer protection received priority treatment.
The compromise, housing the consumer unit within the Fed, was suggested in part because the Fed, an independent agency, has a chairman who is presidentially appointed yet is not part of the Cabinet. The Fed also has funding that is not dependent on congressional appropriations. To satisfy the White House’s demand for independence, Dodd would not let the Fed board exercise authority over the unit.
At the same time, the banking committee’s bill would keep in place the central bank’s supervision of the biggest financial firms. Dodd had proposed stripping all of its oversight powers.
The Dodd proposal could be subject to change once debate begins on the Senate floor, possibly this month.
Fed chairman Ben Bernanke had been opposed to setting up such an entity. He has softened that position.
The main talking point, said one official, is that the Fed is not sure how the relationship with the consumer bureau will work.
The House Financial Services Committee chairman, Massachusetts Democrat Barney Frank, called the plan to put the consumer unit in the Fed a “joke.’’
The Fed has been attacked by lawmakers and consumer groups over its failure to enforce mortgage rules that helped fuel the subprime loan crisis.
Dodd said in 2009 that the Fed’s record on consumer protection and bank regulation was an “abysmal failure.’’ In 2007, he castigated it for sitting on the sidelines while “hard-working Americans’’ were preyed upon by “unscrupulous financial actors.’’