The Senate Committee on Banking, Housing, and Urban Affairs is not often the subject of a million YouTube views. Senator Elizabeth Warren (D-MA), who ran for office promising change in Washington, may have delivered last week by helping the committee accomplish this feat. The trouble for Sen. Warren, and the committee meeting she hijacked, is that her dangerous demand for the redrafting of underlying principles of prosecutorial discretion threatens to stymie economic recovery and keep monetary redress away from injured consumers.
On Thursday, February 14th, the Senate Banking Committee hosted the chairmen and representatives of the nation’s primary financial regulatory agencies. Agents of the Securities and Exchange Commission, Department of the Treasury, Federal Reserve, and more took their seats for over an hour of questioning regarding the implementation of Dodd-Frank mandated regulations.
Newly elected Massachusetts Senator, Elizabeth Warren used her allotted question period to lambast the regulators for their failure to bring high profile banking institutions and thrift companies to trial for violations of the regulatory apparatus. Disregarding the obvious absence of a representative of the Justice Department, the most natural agency to address Sen. Warren’s lamentations, the Senator declared, “I’m concerned that too big to fail has become too big for trial.”
The Securities and Exchange Commission responded to Sen. Warren’s criticism by pointedly explaining that the agency has been able to achieve its objectives through cost-effective settlement. NERA Economic Consulting examined the remarkable settlement achievements for the SEC in Fiscal Year (FY) 2012. In its ten largest settlements, the SEC secured the promise of payment of over $1 billion from the nation’s largest financial institutions and individuals. Currently under appeal, the settlement with Citigroup alone represents an agreement valued at $285 million.
The SEC is not alone. An approaching settlement between home loan lenders and regulators is estimated at close to $10 billion. What Senator Warren appears to miss however, is the impact on the harmed borrower. A key provision of the upcoming settlement will be the ultimate dispersal of $3 billion in redress to borrowers. This agreement comes on the heels of a prior settlement reached between banks and state attorney generals, which will allocate $1.5billion in relief to home loan borrowers.
Senator Warren appears ready to see this money instead spent on the defense of these banking institutions during costly show trials. Senator Warren explains her logic through example, stating:
“I want to note that there are district attorneys and U.S. attorneys who are out there every day squeezing ordinary citizens on sometimes very thin grounds and taking them to trial to ‘make an example,”
Litigation is, however, a very costly example and legal fees are paid to lawyers, not distressed borrowers. In FY 2012 Citigroup reported spending $1.3 billion in legal costs and related expenses, and this is without actually taking to trial the disputes referenced above. To illustrate what may have been the cost of litigation, Apple and Samsung have spent $10 to $20 million each in their recent patent disputes thanks to lawyers billing upwards of $500 an hour.
Rather than return much needed monetary support to home-owners struggling to make their mortgage payments, Senator Warren demands that regulators allocate resources and funding simply to ensure the exciting theatre of the nation’s largest financial institutions on the stand, regardless of whether the agency feels it can better achieve its objectives through settlement.
While examples may work well in the law school classrooms that Sen. Warren has customarily helmed, this should not be the policy of the U.S. administrative law system. Federal Agencies have the opportunity to secure much needed legal redress for those Americans harmed by the practices of these financial institutions while correcting illegal practices in balanced, efficient settlements that spare the soaring costs of litigation.
Senator Warren clearly felt that last week’s hearing was an appropriate time to announce her presence on the committee. This empty grandstanding however placed self-achievement above the aims of the hearing. The result of Sen. Warren’s exchange was to shift the discussion to her awkward, five minute exchange with the chairwoman of the SEC and away from any meaningful discussion of the implementation of Dodd-Frank regulation and the practical accomplishment of agency objectives.