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Dealbook Column

So Where’s Consumer Protection?

If six of the biggest banking industry lobbying groups are in perfect lockstep on an issue, do they most likely have the best interests of consumers at heart?

No, that’s not a trick question.

The American Bankers Association and its lobbying brethren, including the Financial Services Roundtable, sent a letter last week around Capitol Hill pressing their case that the Federal Reserve should supervise them.

Last night, they seemed to have lost part of that battle as senators tentatively agreed to limit the Fed’s regulatory power over just the biggest banks.

Left unresolved is the much-debated consumer protection agency, which many in the industry also hoped would end up under the Fed’s purview.

Their preference for the Fed in itself raises a question about its ability to regulate the banks for the benefit of the system and consumers.

So the questions are these: Should a consumer protection agency have true independence — in effect, its own street address — as many Democrats believe it should, so that it has real power to act on its own? Or should it be given the equivalent of a room in the basement of the Fed, next to the janitor’s closet — as the bankers themselves and many Republicans would prefer?

That the debate has devolved into an issue of location, location, location is yet another reminder of how the urgency of the financial crisis now feels like a mud-slog.

Later this week, Christopher J. Dodd, chairman of the Senate Committee on Banking, Housing and Urban Affairs, is expected to finally unveil the Senate’s version of a financial reform bill.

It may address some of the big-ticket items that are supposed to avoid another financial fiasco on a global scale — like higher capital requirements for banks to reduce risk, some version of a resolution authority to wind down failing investments banks (like Lehman Brothers) and insurance giants (like A.I.G.), and perhaps a say-on-pay plan.

But the fate of the proposed consumer protection agency remains the biggest question mark.

The Obama administration first proposed the idea of an independent watchdog for consumers to safeguard the citizenry from predatory lenders and fine print.

Its impact would be limited, truth be told. It would do virtually nothing to change the undergirding of Wall Street and its risky products, like derivatives, that helped put the system at risk.

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Christopher J. Dodd, head of the Senate banking committee, is expected to unveil his version of a financial reform bill soon. Credit...Joshua Roberts/Bloomberg News

Worse, at least according to the latest reports about drafts of the bill, the agency may not have any oversight of nonbank mortgage companies, which were largely responsible for some of the worst subprime loans to people who could not afford them.

Nonetheless, it is hard to argue against the notion of consumer protection. Democrats have made the agency a requirement of any reform legislation. Republicans have argued that it is unnecessary given that regulators already have the power over banks’ behavior (even though regulators didn’t use those powers when they needed to).

So the debate has turned to this question of who should run this agency. The Democrats want it to be run independently (though Mr. Dodd thinks the Treasury would be best if he had no other choice).

Republicans and most of the banks want it inside Federal Reserve, where they say it will be free of political influence (though Senator Richard Shelby has suggested the F.D.I.C. as an alternative).

“We haven’t seen the details yet, but believe that consumer protection and bank supervision should be housed under the same roof,” said Scott Talbott, senior vice president for government affairs for the Financial Services Roundtable. “Just as bank regulators with a myopic focus on safety and soundness didn’t work, a consumer regulator that doesn’t consider the bank, is not the most effective way.” (Put another way: one regulator is enough.)

Edward L. Yingling, president of the American Bankers Association, differs somewhat with Mr. Talbott. He says, “We don’t care where you put it,” adding that their position has always been “we’re totally against it.”

Word is that Mr. Dodd’s reform proposal, which seems to get more watered down by the day, may end up making the agency part of the Fed as part of a compromise, an idea that has Congressman Barney Frank up in arms.

“After all the Fed bashing we’ve heard? The Fed’s such a weak engine, so let’s give them consumer protection? It’s almost a bad joke,” Mr. Frank told Politico last week.

In fairness, if everyone were to agree that the agency is not going to be independent, the Federal Reserve may be the best place for it, given that it is one of the few places in Washington with an understanding of the banking system and markets.

The Securities and Exchange Commission would seem a natural place for a consumer protection group because part of its mission is, ostensibly, to protect consumers in the stock market. But its recent track record — think Madoff — is not exactly stellar.

What’s so interesting about the battle over the proposed consumer protection agency is that Republicans have painted the Obama administration as being in the tank with Wall Street.

But now they are the ones that seem to be helping Wall Street this time around.

The latest news on mergers and acquisitions can be found at nytimes.com/dealbook.
A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: So Where’s Consumer Protection?. Order Reprints | Today’s Paper | Subscribe

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