Duncan MacDonald AMC Turmoil in Bank Regulation

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					    CSBS 2007
     Annual Meeting & Conference
        Coeur d’Alene, Idaho

“Turmoil in Bank Regulation”
        Duncan A. MacDonald
      Presented, Friday, June 1, 2007


  • Thanks, I’m honored, humbled and intimidated by the task at hand
  • I usually know my audiences & how to work them. With you, I have to guess.
  • To tell you a little something about me: I’m not an advocate for anybody anymore
  • I no longer represent or work for the banking industry and haven’t for years
  • My occupation increasingly is academic: writing articles, speaking at conferences
  • Working with think tanks now and then, talking with journalists & investors
  • I enjoyed my 30+ years in a banking uniform and reflect about it still
  • It’s no secret I’ve become open about my concerns for:
          Our Constitution
          Our democratic values
          Fair play in the marketplace
          The abuse of power
          And the need for vigorous public debates on all them in the banking context

• Whenever I mention banking this morning I will usually mean retail banking
• Not monetary policy or banking involving corporations, investment banking, etc.
• When I talk about the states, I mostly mean their legal and enforcement systems
• Their laws, AGs, bank commissioners, and the like
• Lastly, when I talk about the OCC, I will usually have the OTS in mind
• That said, I intend today to talk about preemption abuse and
• What I believe is the OCC’s bias for national banks and against consumers & states
• I’ll cover a little bit of history
• And close with some steps for the states to consider to turn the tide

• I will talk a lot about Watters, but mostly as a metaphor for trouble in the banking industry
• The OCC won, as did its banks, and the states lost. The odds were bad from the beginning.
• It’s a sad example of the Supreme Court going overboard when it sets down a certain road
• And doesn’t know when to stop
• On the one hand it is only a decision that affirms a precedent – the power of an agency
• But to its celebrants it was the end of the road, closure, on bank preemption issues
• Either way, Watters will vastly increase the power of the OCC, probably dangerously
• Too much power corrupts and Watters will be no exception to the rule
• That will be much of my message this morning
• But also the reason why I will argue for the states not give up

“Turmoil in bank regulation”

  • Is my title a mistake? There can’t be turmoil for the winners, can there?
  • I’m not so sure. I think Watters is a can of worms for the OCC and national banks
  • That if will backfire if you organize and creatively and aggressively take action
  • But right now, the turmoil is yours – a quandary about what to do
          Beg the feds to throw you some crumbs and the banks to concede others?
          Standby and watch the OCC and its banks abuse consumers?
          Or to fight on?
          With the risk of suffering worse precedents, perhaps a fatal blow.
          In any event, how will you do it?
          How will you beat the combined power of Washington and giant banks?
          The top 3 have $5T in assets today; the top 6 could have $25-50T in a decade
          In short, enormous power to tilt our governments and economy in dangerous ways
          In any case, will the citizens in your states care, much less understand your quest?
          Ditto your state legislators and executive colleagues?
          Can you go it alone?

  • Pretty dreary.

By the same token,

  • Watters is not all roses for banks or the OCC – it will have troublesome side effects
  • Although it significantly reduces state power over banks, it does so at a very high price
  • It gets there by disenfranchising sacred democratic rights of bank customers
  • Their right for over two centuries to co-regulate all financial institutions
  • In effect, to protect themselves against what they believe are abusive practices
  • Their right to representative state government that’s guaranteed in the US Constitution
  • Watters takes those rights away by protecting banks in a way that’s unique in our history
          Virtually every other business in the US is subject to dual government: federal and state
          Many of their industries are just as crucial to our economy as banking, just as special
          And all of them have adjusted to state laws and have succeeded competitively
          The OCC, however, seems bent on carving a unique exception for its banks
          As though banks are too important or fragile for states to touch
  • For the life of me, I can’t understand why they deserve such royal treatment
  • More radically why the federal government should charter any business in our economy

Where’s the logic?

  •   Everybody agrees we have a have a major national heath crisis on our hands
  •   But nobody is recommending removing the states in any of the major proposed solutions
  •   Letting the federal government control the crisis exclusively
  •   By appointing a health czar like the OCC to preempt the states out of any role
  •   To make sure there’ll be no state “visitations” to assure the industry is protecting local citizens
  •   Another crisis is security from terrorism – potential massive harm to our cities, economy, etc.
  •   Congress has seen fit to create the Dept. of Homeland Security that works with the states
  •   Why does banking uniquely need an all powerful czar and not the DHS?
  •   Are our states too dumb to be trusted on banking matters but smart enough to handle security?
  •   Same issue: the states can audit local companies that provide weapons to the Pentagon,
  •   Right in the middle of a war, no less,
  •   But they can’t do the same with banks. The OCC insists the states would screw up.
  •   One last comparison: global warming – the end of the world by heat
  •   Do you think Congress will create an agency like the OCC to tackle it?
  •   “The States Not Allowed Act”
  •   As it is, right now the states have taken the lead on the issue, setting the standards
  •   In fact, the states have always been the laboratories for determining national policies
  •   Even in banking, until the OCC recently and unilaterally decided to fire them
  •   It’s crazy and they are getting away with it.

This special treatment poses great political risks for national banks and the OCC:

  • The risk that politicians will accuse them of undermining democracy
  • For trying – like bullies – to nullify the voting rights of their own customers.
  • Some might point fingers – at Citi, Chase, BofA, Wachovia, et al – as the prime culprits
  • For conspiring with distant, secretive federal agencies biased against states & consumers
  • And for closing the loop with campaign payoffs to Congress.
  • You are wrong if you think this can’t happen or if you think I am exaggerating
  • Eliot Spitzer won a governorship in a landslide saying as much
  • Others undoubtedly will adopt his blueprint
  • The problem for the banks is decisions like Watters look like treachery
          Disloyal to customers who make them rich
          Manipulative, sneaky and unfair—a corrupt abuse of their awesome power
          Deeply hostile to the government their customers rely on most to protect them
  • Fodder indeed for a backfire that makes banks an easy political target
  • If I were still in their uniform, I’d advise them to worry

I came up in an era when Wachovia couldn’t have happened
  • National banks generally were respectful of state power
  • Sure, they had skirmishes, but none that aimed to reduce states to irrelevance
  • That would have been unthinkable for the likes of Walt Wriston at Citibank
  • Or Dick Rosenberg at BofA and David Rockefeller at Chase
  • John Reed would’ve fired us for insulting a state
  • The new breed is different, more hard nosed, less differential to government, libertarian
  • Globalization and their enormous power has softened their loyalty to any government
  • I think they’ve gotten that way largely because of the increased role of lawyers
  • Banking is probably the most lawyer dominated industry in our economy
  • And not just because of excessive regulations or lawsuits – but for important strategic reasons
  • To help banks manipulate our legal and economic systems
  • To neutralize regulators and states, customers via contracts, and politicians with PAC $$$
  • To secure maximum entitlements for banks, like protections against competitors

Banks and their lawyers used to keep a safe distance from the OCC

  • They were afraid of its power over them
  • To deny or stall a license, punish an infraction, squelch a product
  • But not anymore
  • Since the 90s, the OCC and its banks have become reliable allies on a number of fronts
  • Especially against the states
  • Their ugliest moment was shortly ago when the OCC began selling charters with promises:
  • Stay with us, come with us, and we’ll protect you; we’ll get the states out of your hair
  • Of course the banks took the bait and then called in the IOUs
  • The rationalized their moves by complaining
     1. Against overregulation, claiming their burdens are the most of any industry
     2. That state law was making their burden worse – balkanizing them needlessly
     3. That state politicians had a Luddite mentality about the banking system
     4. That state interference was becoming a safety and soundness risk, and
     5. Their sharpest point – that state interference threatened the authority of the OCC

To stay with these points, never mind that:
  • National banks almost never ask for deregulation, even from the states
  • Never identify laws that should be eliminated or reduced in scope
  • And would never fight for privatization of their industry
  • The ultimate deregulation
  • That is, to be treated like other industries
  • They like their federal entitlements too much to do that.

  Never mind also:
  • That the balkanization they condemn is not a problem for other industries
  • That political Luddism thrives as much or more on the federal level
  • That safety and soundness is a bigger risk from an overly indulgent OCC
  • From an overly powerful OCC

As I see it, at this point in our history, it’s the OCC and their banks that need to be
constrained, not the states
  • Their collective court victories have made them too powerful
  • Too intimidating, too expensive and uncertain to take on
  • On big issues, they are a tag team, whether in courts or legislatures
  • Their recent gang up on Wal-Mart and Utah law is but the latest example
  • In short, their agendas are essentially the same – to protect banks
  • And that’s in good part because the banks have the clout to get their way
  • Especially with Congress through PAC campaign contributions
  • All of this tells you that they will be very tough adversaries for the states to reform
  • So what! Goliath doesn’t always win
  • Congress, presidents and regulators can be persuaded to make changes
  • Especially when enough people get angry
  • Or a legal or banking crisis occurs
  • I believe preemption abuse will move us in one or all of those direction

I can’t understand why the OCC didn’t say no to Wachovia

  • Did it really need to win Watters? To put Michigan in its place?
  • Was the risk to its authority seriously threatened? Ditto to Wachovia’s national bank?
  • Wouldn’t a more pragmatic strategy have told Wachovia to show restraint?
  • To tolerate Michigan’s “visitations” until a certain line was crossed?
  • Perhaps Michigan would have acted harmlessly against Wachovia’s disguised branch
  • So what if it ordered Wachovia to comply with a state consumer protection law.
  • Didn’t Justice Ginsberg say Michigan could still enforce those laws?
  • Or was that what Wachovia and the OCC really wanted – a fatal blow to them in all states?
  • Prosecution of the case makes no sense except to do that.
  • Unless, then again, they had another motive: to reorganize branching rules
  • Without the OK of Congress
  • Whatever the case, banking leaders clearly greeted Watters as more than an op-sub victory
  • They saw it for what it is: a dramatic increase of the OCC’s preemption power

I think I know how banks and the OCC will interpret Watters

  • I was once an insider
  • We never benignly read Supreme Court decisions
  • We read them to determine which doors they would open and close
  • How we might use them to achieve legal successes elsewhere
  • Or how we might contain the Court’s bad decisions
  • We knew always that decisions like Watters pulsate with opportunities and risks
  • As I said in a recent article in the American Banker, when decisions like Watters come along
  • Macbeths in the ranks will step forward to abuse them
  • Power corrupts

Once upon a time, the FTC won a victory like Watters
  • In early 70s, Supreme Court gave it a blank check that smacks of the OCC’s success in Watters
  • The S&H decision said the FTC could define an unfair business practices any way it wanted
  • Based on common sense, common values, reasonableness, morality, etc.
  • It was an awesome infusion of power to a federal agency
  • And the FTC quickly abused it
  • President Carter appointed a Chairman who pushed S&H in extreme directions
  • So much so that he infuriated industry to help elect Ronald Reagan in 1980
  • I believe the FTC’s misuse of power fostered the role industry now plays in electoral politics
  • It taught industry how to organize, fund and influence politics on an unprecedented basis
  • In any case, Reagan’s payback was to slash the staff, budget and politics of the Commission
  • It has never recovered.
  • The extremism of Watters could have a similar fate if you refuse to take it lying down

Even worse than S&H was the Supreme Court’s Lochner decision in 1905

  • It threw out a law NY had enacted to protect the health and safety of workers
  • The Court decided in favor of employers, striking a major blow to state power
  • And progressive legislation
  • Lochner was so strong and enduring that it even stalled FDR’s New Deal
  • In fact, Roosevelt had to wait to appoint new Justices to the Court to push it aside
  • Watters is like Lochner, because it tells the states to butt out of business matters
  • The “business of banking”
  • In effect, ridiculously to treat national banks like sacred cows
  • All three decisions – S&H, Lochner & Watters -- turned on a preemption principle
  • Lochner and its progeny led to abuses by the business community for decades
  • It was never reversed, but after FDR it lost its potency for good

Keep that in mind: Supreme Court decisions are often upended in unique ways

  • Sometimes they get reversed outright, but the norm is usually otherwise
  • They get ignored; courts begin following other precedents, or
  • The government refuses to enforce them
  • Abraham Lincoln’s answer to the Dred Scott decision was the Emancipation Proclamation
  • Harry Truman once defied a Supreme Court decision by refusing to enforce it
  • Congress can also undo decisions it doesn’t like
  • By withdrawing or reshaping an agency’s powers or repealing a law the Court upheld
  • Again, presidents can force changes via their appointment powers: FDR and Reagan
  • Or they squash the winner, as Andrew Jackson did after McCullough v. Maryland
  • One of the precedents Justice Ginsberg oddly used to buttress the Watters decision

To overcome a defeat like Watters, you have little choice but to launch a comprehensive,
disciplined effort and be prepared to stick with it for a long period.
  • That means you must learn the lessons of Lochner, S&H and others
  • You must relentlessly lobby Congress and Administrations to stop preemption abuse
  • And support the effort in court challenges – your own and with amicus briefs in others
  • That’s how the civil rights movement succeeded: never accepting defeat
  • Always aggressively promoting the fairness of its position
  • Always presenting it in different ways, refining it constantly until they got it right
  • This strategy must include creating alliances with the private sector to strengthen your message
  • There are other industries that are concerned about the concentration of banking power
  • You must also use sophisticated PR to popularize and politicize your message
  • It should include engaging scholars, economists and other opinion makers to carry your banner
  • And pressing your adversaries publicly about the folly of their defenses
  • Of banks hiding behind the OCC, making it more powerful and causing it to attack states
  • Your aim must be to divide and conquer the banking juggernaut.

One way to do this is to:
  • Press big banks to talk frankly with you about preemption
  • Not their lawyers, but the guys who push credit cards, mortgages, etc. in your states
  • Probe their understanding of total preemption as a threat to democratic values
  • Ask them how far it should go: whether their bank supports it to eliminate state authority
  • Then ask them to think of the consequences for their customers and their bank
  • The end of a sacred democratic right that has lasted for 23 decades
  • Ask if they’d be comfortable with it as a political issue put to voters – to their customers
  • What would they say to voters about what they have done?
  • That they’re innocent, that court decisions like Watters are the fault of Congress and the OCC?
  • If so, how would the OCC defend Watters? Would it say anything helpful?
  • Or it would refer all questions to Congress?
  • Ask if they have any fears about increasing the power of the OCC; at what point is too much?
  • Also, whether the OCC might someday turn that power against them
  • Make them think -- fearfully

Why do this?

  • Because the banks are oblivious to the possible side effects of their preemption strategies
  • And because there are a lot of sensible people in banking who will sympathize with you
  • You need to find them and sell the states’ preemption position
  • Why it has been abused and will get worse to the harm of the rule of law, customer fairness
  • And the banking system.
  • Again, as a former insider, I can tell you there are a lot of intelligent free thinkers in the banks
  • Who don’t want them to act wrongly
  • Who are open to compromises to promote goodwill and enhance their public image
  • They believe in a balanced, fair legal system
  • To get their ear, make a case for mutual respect and collaborative efforts to protect consumers
  • Say that your goal is not to replace the OCC but to fill important voids in federal law
  • That your goal is pragmatic solutions where everybody wins – banks, states and consumers
  • Most of all, promise not to return to your excesses of the past, like price controls

Prosecute these strategies as a chorus to punch above your weight:
  • Deliver your collective message in testimony, position papers, amicus briefs, press releases
  • Always in plain language
  • Speak at industry conferences to push your message
  • Relentlessly press it with your AGs, legislatures, Governors and reps in Congress
  • Use slogans & catch phrases to simplify your message and attract attention
  • Emulate the genius of the civil rights movement: “We shall overcome.”
  • Encourage your legislatures to continue to enact consumer protection laws
  • And your AGs and consumers to enforce them
  • Consider ways to support the latter via your AGs, funding, securing allies, amicus briefs
  • Get legislators to invite big banks to hearings to testify about their position on state power
  • Not just about the pros and cons about a bill, but whether they believe any bill is appropriate
  • Ask if they agree with Justice Ginsberg’s list of residual state powers – and which ones
  • That is, your right to promote fair contract and customer treatment practices
  • On big issues, enlist your governors and senators to call bank CEOs for support.

There’s more:
  • Create multi-state ad-hoc think tanks to develop strategies and hash out ideas.
  • Ask Brookings, law schools and other think tanks to hold conferences on preemption abuse
  • Pool budget and skill resources; assign responsibilities.
  • Involve your states in Congressional deliberations and key lawsuits
  • Get leading scholars to take your side in articles, forums and government proceedings.
  • Consider creating formalized compacts to bring to Congress for approval
  • Compacts to let your states enforce state consumer protection efforts if the OCC refuses
  • Even if you fail, the effort will elevate your message and move you closer to success
  • Alternatively, sue the OCC directly to force it to honor your laws – the Ginsberg list
  • That’s what Mass. and other states did recently against the EPA.
  • They won a Supreme Court decision allowing their suit to move forward
  • If necessary, press Congress for a similar right
  • Even if you lose, you will win important attention about the OCC’s failures
  • Aggressive stuff, but no different than what the banks and the feds do to you

In conclusion, don’t give up!
  • You owe it to our Constitution to continue the fight
  • To restore the checks and balances role that states are supposed to play in our legal system
  • Also, to uphold democratic and 1st Amendment values
  • I haven’t talked about the 1st Amendment, but it follows that when a democratic right…
  • Is taken away, there are significant consequences for free speech and
  • The other right under the 1st Amendment to petition government for a redress of grievances.
  • The 1st Amendment is the most important check on government abuse
  • By foreclosing state power over banks, Watters makes state related free speech irrelevant
  • Almost like censorship
  • Arguably, only Congress has the Constitutional power to do that
  • But it never has. It has always respected a measure of state authority in the area
  • That the OCC and Watters seem to say otherwise is a blot on our Constitution.
  • Teach them a lesson!
  •   Thank you!