Archive for the ‘Consumer Protection’ Category

Fighting for the Right to Be a Weak Regulator

Thursday, January 5th, 2012

The conservatives fulminating about the Consumer Financial Protection Bureau and President Obama’s recess appointment of Richard Cordray to head it may feel outmaneuvered at the moment.  But if history is any guide, the bureau will not be too big a threat to the financial powers that be.

The federal government is filled with regulatory agencies whose main mission seems to be to protect the interests of the largest companies they are charged with regulating. There’s always the possibility that the CFPB will be the exception to the rule of regulatory capture, but the fledgling entity would have to clear some high hurdles.

Cordray and his colleagues would do well to study the track record of the federal agency that has supposedly served as a financial watchdog for the past seven decades: the U.S. Securities and Exchange Commission. The CFPB is getting off the ground just as the SEC is embroiled in a dispute that reveals its cozy relationship with the big banks and its feckless approach to enforcement.

Back in October, as part of its belated and half-hearted response to the chicanery that led to the financial meltdown of 2008, the SEC announced that giant Citigroup had agreed to pay $285 million to settle charges that it had misled investors about a $1 billion issuance of housing-related collateralized debt obligations that Citi knew to be of dubious value and had bet against with its own money. As is typical in such SEC cases, Citi neither admitted nor denied doing any wrong.

That would have been the end of a typical case if the judge overseeing the matter, Jed Rakoff the Southern District of New York, had not done something remarkable. He declined to rubberstamp the settlement and raised a host of questions about the size of the settlement—which was well below the estimated $700 million lost by investors—and the failure of the SEC to get Citi to admit guilt.

Rakoff (illustration), who had questioned settlements in several other SEC cases, rejected the deal the agency made with Citi and ordered a trial on the matter. In his November  28 order (which I retrieved, along with other case documents, from the PACER subscription database), Judge Rakoff called the amount of the settlement “pocket change to any entity as large as Citigroup” and said it would have little deterrent effect. He also pointed out that the SEC’s decision to charge Citi with mere negligence and allow it to avoid admitting guilt “deals a double blow to any assistance the defrauded investors might seek to derive from the S.E.C. litigation in attempting to recoup their losses through private litigation, since private investors not only cannot bring securities claims based on negligence.” In other words, Rakoff was accusing the agency of protecting the interests of the big bank.

Calling the deal “neither reasonable, nor fair, nor adequate, nor in the public interest,” Rakoff thundered:

An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts – cold, hard solid facts, established by admissions or by trials -it serves no lawful or moral purpose and is simply an engine of oppression.

Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.

Instead of using Rakoff’s powerful order as leverage to extract a larger settlement from Citi, the SEC went on the attack against the judge. It appealed Rakoff’s order to the federal court of appeals, arguing that its enforcement process would be crippled if it had to hold out for admissions of guilt. Rakoff fired back with a charge that the agency had misled the appeals court and had withheld key information from him.

As the pissing match continues, one could only imagine the satisfaction felt by Citi at being able to sit on the sidelines and watch its regulator do battle with the judiciary to preserve its ability to handle financial misconduct with kid gloves. The SEC has suddenly become aggressive—not in fighting fraud but in defending its right to be a weak regulator. Richard Cordray, take heed.

The People’s Regulator

Friday, April 16th, 2010

Government regulation of business is looking pretty lame these days. After 29 workers were killed in an explosion at a Massey Energy mine in West Virginia, it came to light that the facility had accumulated more than 1,300 safety violations over the past five years but was not shut down by the Mine Safety and Health Administration – an agency labeled a “meek watchdog” in a recent New York Times headline.

It has also been revealed that Toyota managed to keep critical information about faulty gas pedals from federal regulators in an ultimately unsuccessful effort to avoid a massive recall of its vehicles. A pair of recent reports show that regulatory oversight of Citigroup was deficient both before and after the banking giant had to be bailed out by taxpayers. Again and again, it’s the same old story: aggressive corporations riding roughshod over feckless regulators.

Compare this to what recently happened when Consumer Reports issued a “don’t buy recommendation” for a Lexus sport-utility vehicle because its testing had shown a risk of rollovers. Within hours after the warning was issued, Toyota, the parent company of Lexus, announced that it would suspend sales of the GX 460. A company official stated: “We are taking the situation with the GX 460 very seriously and are determined to identify and correct the issue Consumer Reports identified.”

Toyota’s quick response was undoubtedly part of its effort to control the damage to its reputation from the sudden-acceleration controversy, but it also demonstrates the power of Consumer Reports. More than a magazine, it is a bulwark against shoddy manufacturing and dishonest practices that threaten the physical and financial well-being of the public. It is the people’s regulator.

The potency of Consumer Reports stems from its rock-solid integrity and its complete independence from the companies it is monitoring. While the magazine is often taken for granted these days, CR and its non-profit parent Consumers Union have not always been revered during their 70-plus years of existence.

The challenges Consumers Union (CU) faced in its early decades are documented in the work of Norman Silber, who wrote a dissertation on the subject in 1978 (available via the Dissertations & Theses database) which became the 1983 book Test and Protest.

CU was established in 1936 by a group of engineers, researchers, writers and editors who were unabashedly leftwing and saw their work as complementary to the growing labor movement. The organization’s mission was, Silber notes, threatening not only to manufacturers but also to the commercial media, which saw its independent product ratings as “an unfair and subversive attack upon legitimate advertising.” Many major magazines and newspapers refused to let CU advertise Consumer Reports in their pages.

CU was also an early target of the House Un-American Activities Committee, though the scrupulously non-partisan content of Consumer Reports saved the organization from serious persecution. During the anti-communist hysteria of the 1950s, Silber recounts, CU suspended its reporting on labor conditions in the industries whose products it rated. Its own staff remained unionized, though it switched from the leftist Book and Magazine Guild to the more mainstream Newspaper Guild.

CU did nothing to dilute its assessment of business practices. During the late 1950s it was especially critical of the tobacco industry for engaging in misleading advertising and for selling a dangerous product. CU also took on the dairy industry over the issue of milk contamination caused by radioactive fallout. And it began arguing for improved auto safety starting well before Ralph Nader appeared on the scene. In the 1970s CU successfully pressured federal regulators to improve standards for microwave ovens to address radiation leakage.

CU also did not flinch when the recipients of poor product ratings decided to take the organization to court. It fought companies such as Bose audio and Suzuki Motor up to the Supreme Court to protect its right to offer candid assessments.

This is not to say that CU is completely above reproach. Critics have charged over the years that the organization’s preoccupation with product testing comes at the expense of broader consumer advocacy (this is what Nader said when he quit CU’s board in 1975). And in 2007 the organization suffered a black eye when it botched its testing of infant car seats and had to issue an unprecedented apology. Nonetheless, its overall track record, up through its reprimand of Lexus, is pretty impressive.

A private organization without formal enforcement powers is no substitute for government regulatory agencies, but CU does have something to teach those agencies – above all, that a watchdog can be truly effective only when it is completely uninfluenced by the companies it is monitoring.

It also helps to be able to issue definitive pronouncements about corporate misbehavior. CU’s statement about the dangers of the GX 460 was not tentative and was not subject to time-consuming appeals.

Once official regulators show as much spunk as the likes of Consumers Union, corporations may finally start to clean up their act.