Why I don't like the Consumer Financial Protection Agency

The financial reform bill may or may not include a Consumer Financial Protection Agency. I hope it does not. This is because the fundamental role of finance is to make loans that get paid back, and anything that dulls or distracts from this task of credit analysis is contrary to the fundamental role of finance and should be banned.

From the New Yorker:

What’s less explicable, and more troubling, is the way all the players in this deal in effect outsourced the responsibility for their own due diligence to others. On the macro level, of course, the investors accepted as a matter of course the idea that you could package together lots of mediocre securities—as you can see from the flipbook that was put together for the deal (pp. 55-56), the actual securities in the deal were generally only BBB-rated—and create a security that was virtually guaranteed not to default. While widely shared, this was an assumption that made absolutely no sense in the case of subprime C.D.O.s. Then, instead of looking at the fundamentals of the securities themselves, they simply assumed that they could rely on the credit ratings the ratings agencies bestowed, even though those agencies’ conflicts of interest were well-known. And they also implicitly assumed that they didn’t have to scrutinize the actual securities because ACA Capital—the asset manager—had done that for them.

Read more: http://www.newyorker.com/online/blogs/jamessurowiecki/2010/04/wall-street.html#ixzz0laSxMdjH

The CFPA is to the household sector what the Ratings Agencies are to the corporate sector--elements that undermine a bank's duty and responsibility to conduct credit analysis.