In July 2010, nearly two years after the 2008 financial crisis exposed the vulnerability of the world’s economic system, Congress passed sweeping changes to laws regulating the U.S. financial industry. Washington Post associate editor Robert G. Kaiser persuaded the bill’s main sponsors, Rep. Barney Frank (D-Mass.) and Sen. Christopher J. Dodd (D-Conn.), to give him behind-the-scenes access to observe the bill’s journey from conception to enactment, an 18-month odyssey that involved extensive maneuvering and dealmaking. This account of one deal, reported here for the first time, is drawn from Kaiser’s new book, “Act of Congress: How America’s Essential Institution Works, and How It Doesn’t.”
The most ambitious legislative effort to reform the country’s financial system in nearly 80 years was just a few weeks old, and already the bill was in trouble.
(FTWP) - Robert G. Kaiser’s new book comes out Tuesday, May 7.
Members of the House Financial Services Committee, the bill’s first stop in the summer of 2009, were facing a barrage of complaints from hometown bankers and the industry’s army of Washington lobbyists. They wanted to block the creation of an independent regulatory agency aimed at protecting consumers from the risky financial products that had helped bring on the Great Crash of 2008.
The proposed Consumer Financial Protection Agency (CFPA) was a centerpiece of the legislation drafted by the new Obama administration and introduced by Rep. Barney Frank, the Massachusetts Democrat who chaired the House committee. Frank had been chairman for only 21
2 years, but after 14 terms in the House he thought he could sense which way the legislative winds were blowing.
He did not like the breezes he was feeling that summer. Too many Democrats on his committee were wavering under the intense lobbying.
“The banks are now mobilizing, going crazy about this,” Frank said not long after the bill’s introduction, during one of many interviews conducted as the bill progressed. “Some of my members are getting shaky. I’ve said to them, ‘You’ve got to understand. If you kill this bill now, you’ll get creamed. You’ll get primary opponents. It will be [seen as] the people against the banks, and the Democrats [had] caved in again.’ ”
Frank saw the Great Crash as a terrifying event that created a welcome chance to make historic changes in the regulations governing the financial industry, which had changed radically in recent decades. He wanted to write “a new New Deal,” as he put it. Barack Obama’s resounding victory in 2008, along with expanded Democratic majorities in the House and the Senate, seemed to make this a realistic possibility.
The idea for a Consumer Financial Protection Agency had originated with a Harvard Law School professor named Elizabeth Warren, who argued that the government should enforce the clarity and reliability of financial products the way it monitored the safety of cribs and tricycles. The Obama administration and Frank saw the exotic mortgages that contributed to the Great Crash as evidence that supported Warren’s analysis. The banks saw something else: a new layer of expensive oversight that wouldn’t stop the people they considered to be the real culprits — the mortgage packagers and others in the unregulated “shadow” banking sector that had inflated the housing bubble.