WASHINGTON While U.S. regulators are trying to reshape financial firms considered too big to fail, an outspoken bailout watchdog is trying to crack down on big regulators.
Elizabeth Warren, head of the Congressional Oversight Panel charged with keeping an eye on the $700 billion bailout of the financial system, said bank regulators need to be stripped of their consumer protection roles.
She said regulators' recent arguments that they are best-positioned to enforce consumer protection laws do not ring true.
"It's a failed experiment," Warren told Reuters in a telephone interview late last week. "The regulators have turf to protect. They want to run big agencies with big budgets and lots of employees. The new agency would reduce some of their bureaucracy."
The Obama administration has plunked consumer protection in the center of the debate over financial regulation reform, and has proposed to create a powerful new Consumer Financial Protection Agency.
The CFPA would have broad authority to write and enforce rules to shield consumers from risky financial products and unfair practices related to mortgages, credit cards and other types of loans.
The new agency would carve out the employees charged with consumer protection at the Federal Reserve, Federal Deposit Insurance Corp, Office of the Comptroller of the Currency, and the Office of Thrift Supervision, and would move them over to the new agency.
Heads of all those agencies have told lawmakers that they harbor reservations about that reshuffling.
FDIC Chairman Sheila Bair said she supports the creation of a new agency that can focus on writing consumer-oriented rules, but said the prudential supervisors need to be able to examine banks for compliance.
The regulators have argued that supervision of consumer protection and banks' safety and soundness go hand-in-hand, and should not be separated.
Warren said splitting consumer protection between bank regulators and this new agency would not be effective.
"That's not reform," she said. "That's just re-enacting the status quo by giving it a new name."
House Financial Services Chairman Barney Frank, a Democrat from Massachusetts, has introduced legislation to create a CFPA that is largely similar to the Obama administration's proposal.
But the committee delayed consideration of the bill after the bank industry and regulators put up strong resistance. Lawmakers have said they want to hear more input from all sides.
Warren said banks are opposed to the creation of the new agency for two reasons: one, it would force real change upon their business practices, and two, it would compromise the cozy relationship banks often have with their primary regulators.
"They fear that the public may pay more attention to the consumer agency," she said.
Warren said it is up to lawmakers to decide how quickly to pass legislation but said the financial system needs real change, and needs it soon.
"The bad news has been piling up for a year, but none of the rules have changed. Many of the same things that got us into trouble are still going on."
(Reporting by Karey Wutkowski, editing by Matthew Lewis)