The signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act gave us a new, powerful regulator, the Consumer Financial Protection Bureau, whose job is to protect consumers in connection with their purchase and use of financial products.
There really was only one major question as the legislative process drew to an end: Who would be the bureau's first director?
As of today, there is no director meeting the requirements of Dodd-Frank. However, the administration has exercised Plan B, recognizing that it could not muster enough Senate votes to approve Elizabeth Warren, its first choice. Consequently, she was given two hats: assistant to the president for consumer affairs and special adviser to the secretary of the Treasury to execute the Treasury Department's responsibility to establish the bureau.
What are the benefits and drawbacks of this strategy? The main benefit is that Warren can take charge of (and impose her views on) the bureau's establishment (including its policies, personnel and culture), without having to go through a lengthy and brutal confirmation battle. Joseph Kennedy played a similar role in getting the Securities and Exchange Commission off the ground in 1933.
Also, she still could be appointed director at a later date, which may be a real possibility if her initial stewardship does not turn out to be as draconian as expected by the financial services industry.
The plan provides a number of immediate benefits. From an administration and consumer perspective, it gets the bureau up and running.
However, the main drawback is that this plan is seen as an end run around the confirmation process and will further damage Warren's credibility in the eyes of the financial services industry and the Senate.
Though she has two powerful bosses — the president and Treasury Secretary Timothy Geithner — she lacks the independence that both Congress and the market anticipated. Also, she does not have the five-year term that Dodd-Frank provides.
Some are wondering whether the bureau can issue and enforce rules without a "statutory director." Views differ, but Senate Banking Committee members from both sides of the aisle believe that the bureau, under its current arrangement, lacks such power.
There are two overriding questions: Does a bankruptcy law professor, with little or no private sector financial services experience, have the proper qualifications to develop and run its activities and write its rules? And will the bureau just protect consumers from overreaching financial products and business, or will it be used as a vehicle for credit allocation?
In particular, what will be the outcome when a bureau rule could adversely affect the safety and soundness of a covered financial institution? This could be a real disaster, particularly with the restricted watchdog authority of the Financial Stability Oversight Council.
The good news for the country is that consumers now have an independent consumer regulator. Obviously, the financial services industry is concerned about how the bureau's structure and operations will develop, and consumers are concerned about how the Fed will affect the bureau. Everyone probably is concerned about the absence of a statutory director and how that will affect the bureau's development and operations.
The transition program with Warren, because of its nonstatutory approach, will end badly unless she can reach out to the financial services industry, which she appears to be doing, and make its leaders feel comfortable.