Financial Regulation: Main Street vs. the White House

In his Sept. 14 speech on Wall Street, President Barack Obama argued that the financial crisis occurred in part because no single agency was in charge of blocking abusive lending to consumers. "That is what we'll change," he said. "The Consumer Financial Protection Agency will have the power to ensure that consumers get information that is clear and concise, and to prevent the worst kinds of abuses."

For a White House fighting the perception it has gone easy on big banks, winning Congress' approval for the Consumer Financial Protection Agency (CFPA) is a top priority. Yet the financial-services industry, while agreeing more protection is needed, fears the agency would limit many lucrative products. So it has put killing the CFPA near the top of its to-do list. A key industry tactic is to refocus the debate around small business owners and the small community banks that serve them. "If they can convince Congress that this isn't about helping the little guy but about strangling the little businessman, then they've got a shot," says one financial-services lobbyist who is not involved but is watching the fight closely.

The plan grew out of a June 24 meeting of financial-services trade groups, the U.S. Chamber of Commerce, and other K Street allies at the D.C. offices of lobbyist Locke Lord Strategies. The group agreed its best chance was to raise doubts among business-friendly Democrats in Congress.

Small Bankers Balk By mid-July, a draft memo entitled "The CFPA: Five Reasons Why it Could Do More Harm than Good" began circulating. "Consumers will have fewer, less flexible options to meet their financial needs" reads one bullet point. "The federal government will be put in the role of deciding which financial products and services best fit the needs of consumers" reads another.

Since then hundreds of bankers have hit Capitol Hill, many arguing that the CFPA's restrictions would limit innovation and raise the cost of credit. "I have a problem with removing ingenuity from the industry entirely," says Julieann M. Thurlow, head of Reading Co-operative Bank in Reading, Mass. She's joined conference calls with Assistant Treasury Secretary Michael Barr and other officials to voice her opposition to various aspects of the CFPA.

The Chamber of Commerce is also claiming that all small businesses that offer credit, not to mention their accountants and ad agencies, could find themselves in the agency's ever-tighter grip. "This bill is not about protecting consumers," says Tom Quaadman, a Chamber point man on finance. "It is about increasing big government." Thanks to the Chamber's campaign, by Labor Day, 17,000 anti-CFPA letters had reached Congress.

Those Democrats working on the bill say these arguments bear little relation to reality. One Treasury official says any unintended effect on small businesses is readily fixable. "No one is trying to keep shopkeepers from extending credit," adds Obama's chief economic adviser, Larry Summers.

True or not, the claims are having an impact. The House Financial Services Committee was to begin moving the bill in July. Now, October appears to be the earliest date. Some Democrats are voicing doubts. After Obama's speech, Paul E. Kanjorski (D-Pa.), a key member of the House committee, asked if a separate agency were really needed.

Howard Glaser, ex-chief lobbyist for the Mortgage Bankers Assn. who now runs his own firm, argues that without big revisions the bill won't pass. "Until now the message has been more controlled by the opponents than the Administration," he says. Time is running out for the White House.

Before it's here, it's on the Bloomberg Terminal.