Treasury Announces Intention to Implement Portions of Overhaul Via Executive Order

On a conference call with Assistant Secretary for Financial Institutions David Nason yesterday, Treasury Department officials announced that they will implement many parts of their plan to overhaul the nation's financial regulatory structure by executive order. This includes "streamlining the approval process for securities that contributed to the crisis now roiling Wall Street."

According to the Washington Post, "The Treasury's initiatives seek to sweep away the current patchwork of regulation over the coming decade in favor of three more powerful agencies to oversee banking, market stability, and consumer and investor protection."

Treasury officials also acknowledged that the plan is "silent on CRA," or the Community Reinvestment Act.

As Paul Krugman noted,

"Traditional, deposit-taking banks have been regulated since the 1930s, because the experience of the Great Depression showed how bank failures can threaten the whole economy. Supposedly, however, 'non-depository' institutions like Bear (Stearns) didn’t have to be regulated, because 'market discipline' would ensure that they were run responsibly.

When push came to shove, however, the Federal Reserve didn’t dare let market discipline run its course. Instead, it rushed to Bear’s rescue, risking billions of taxpayer dollars, because it feared that the collapse of a major financial institution would endanger the financial system as a whole.

And if financial players like Bear are going to receive the kind of rescue previously limited to deposit-taking banks, the implication seems obvious: they should be regulated like banks, too."

We agree that "if financial players like Bear are going to receive the kind of rescue previously limited to deposit-taking banks,they should be regulated like banks."

This includes CRA.

Mortgage GSE's, Predatory Lending and Minority Banks

The Washington Post reported yesterday that "government-chartered mortgage funding companies Fannie Mae and Freddie Mac .. shares rose on speculation that regulators may relax restrictions on their investments to allow them to pick up slack in the troubled market for home loans." We believe equity markets will trend to the downside until the end of 2007, but believe an increase in lending limits will be good, over the long run, for both mortgage and stock markets.

We believe troubles at Fannie and Freddie allowed predatory lenders to enter the mortgage market in full force. While there is no question that Fannie and Freddie were hurt by their own fraudulent practices, large and small predatory lenders, using groups like FM Policy Focus as a shield and a proxy, were able to obtain a greater share of the profits being generated by an overheated home mortgage market. Significant profit increases depended, however, on an ability to engage in predatory practices. Given distractions caused by their own incompetence, the GSE's were unable or unwilling to protect mortgage borrowers.

Major market institutions are now, as the troubled Bear Stearns reveals, feeling the negative effect of allowing these practices to flourish. Bear Stearns may be in real danger - it's stock decreased in value by 27% over the last month. We do not expect, but would not be surprised if the firm failed, another casualty of arrogance and greed.

These issues also impact smaller, minority-owned institutions, especially black owned institutions, who have been struggling to reverse predatory lending practices in their markets. According to the Kansas City Business Journal, "Louisiana-based bank owner First Guaranty Bancshares Inc. has agreed to buy troubled Douglass National Bank of Kansas City."

This is the second black owned bank in as many months sold to a non-minority banking group. This seems a direct contradiction of FIRREA Section 308, which, according to the FDIC, "requires the Secretary of the Treasury to consult with the Director of the Office of Thrift Supervision and the Chairperson of the FDIC Board of Directors to determine the best methods for preserving and encouraging minority ownership of depository institutions."

Given the two transactions noted above, anecdotal evidence suggests these consultations have not taken place in any meaningful way.