Spitzer, the OCC, and the Emperor’s Club

I love a good conspiracy theory as much as the next guy.

I am going to weave you one–connecting Spitzer’s recent confession as Client Number 9 in the Emperor’s Club and his February announcement that the Bush administration through the OCC (Office of the Controller of the Currency) has been complicit in allowing predatory lending practices among national banks and thrifts.

Spitzer was a rising hero in the Democratic Party, obviously scheduled for callings higher than that as governor of New York State. The long and short of this conspiracy theory is: “They” got him. Spitzer, like Bill Clinton, has a big weakness: His desire for illicit sex.

Some caveats before I start.

• Spitzer was caught fair and square. He just had to have his crotch illicitly jollied
• Wall Street hated him. We cannot blame them, nor can we deny it its jubilation at his fall. (It did cheer at the news.)
• Spitzer had plenty of enemies in New York state. He has been accused, rightfully or wrongly, of unfair prosecutorial practices.
• For many, Spitzer was a hero in bringing the likes of Merrill Lynch to heel. (I cheered; I was once a client of ML. I remember asking my ML advisor about the charges. He hemmed and hawed.)
• Those who hate Spitzer will certainly connect his prosecutorial practices with his visits to the Emperor’s Club.

Most importantly, while I love conspiracy theories, I do not necessarily believe them. But I thought I would be among the first to trot this one out. Do I believe it? I am not sure.

On February 28, 2008, Spitzer wrote an article in the Washington Post, one that received little attention, yet one that strikes at the heart of the subprime mess that is now threatening each and every one of us.

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers’ ability to repay, making loans with deceptive “teaser” rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York’s, enacted laws aimed at curbing such practices

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules

The OCC is the Office of the Comptroller of the Currency. Charted in 1863, its purpose is to organize and to administer a system of national banks and a uniform currency. Its mission is “…to ensure that national banks are safe and sound, competitive and profitable, and capable of serving in the best possible manner the banking needs of its customers.”

In his 2003 annual report, J. D. Hawke, Jr., then Comptroller of the Currency, said:

The OCC defines predatory lending as the aggressive marketing of credit to borrowers who cannot afford it on the terms being offered—typically, on the basis of the liquidation value of the collateral. The OCC issued two advisory letters to national banks, aimed at ensuring that neither they nor their subsidiaries engage in lending that might be considered predatory, and that their lending complies with safety and soundness standards and all applicable consumer protection laws. A number of states sought to impose their own anti-predatory lending laws on national banks in 2003. In response to an appeal by two national banks and after reviewing public comment, the OCC concluded that a Georgia law that imposed severe restrictions on all lenders operating within the state, did not apply to national banks and their subsidiaries. In issuing this preemption determination, the OCC ruled that the Georgia law interfered with national banks’ ability to exercise permissible federal powers and was thus in conflict with federal law.

It seems to me that Hawke, Jr. defined predatory practices rather nicely. Yet what has the OCC done? Were they the watch dogs they should have been? What if those at the top were looking only at the profits without regard for the consequences? I have the feeling that the “buddy system” is alive and well in Washington. The officers of the OCC wine and dine with the banking and financial crowd.

A storm was brewing. Many state examiners were concerned that predatory lending practices were on the rise. In 2003, the seeds of the now subprime disaster had been planted. Some people were concerned. The OCC was apparently doing nothing. (How well I remember Secretary’s Paulson’s comment that we have to be careful not to stifle financial innovation with regulations…and undue oversight?)

In response to this storm, Julie L. Williams, then Chief Counsel of the OCC, issued the following remarks:

At the heart of these issues are Constitutional principles of Federal preemption. We are acutely aware that in many quarters the very concept of preemption is unpopular. In some respects, the fact that Federal preemption arises from the federal charter of national banks seems to put us, inescapably, at odds with some state authorities. This is unfortunate, because the OCC and the states do not have fundamentally different goals.

At heart was the concept of “uniform” administrative system. Because the OCC was charged with organizing and administering a uniform system of banking, the OCC employed “Federal preemption,” arguing that any other approach simply led to chaos. In short, the states could not oversee or regulate national banks, regardless their suspicions of predatory or dangerous lending practices. She does have a point. A uniform regulatory system is important. What happened, I suspect, is that the laissez-faire principle was in effect. Money was being made. Friends were happy.

A somewhat similar preemption occurred during the Keating Lincoln Savings and Loan Association scandal of the 1980/s. This preemption involved the Federal Home Loan Bank Board.

San Francisco examiners suspected that Lincoln was engaged in high risk investments. Keating asked that the examiners be removed in favor of Seattle based examiners. At first the FHLB objected the removal of the San Francisco examiners. Then, oddly enough, by a vote of 2 to 1, it removed them, recommending that “oversight of Lincoln be handed either to the bank board’s Washington, D.C., office or to examiners from the Federal Home Loan Bank of Seattle.”

Keating, apparently, had squealed long and loudly about the San Francisco examiners. His voice was heard.

A year later, that scandal finally broke with the bank board taking “over Lincoln, with $5.5 billion in assets, saying it posed a threat to the banking system. Losses at the institution, which has vast holdings of undeveloped land in Arizona, are expected to exceed $2 billion. “

The FHLB’s handling of the Lincoln case was cause for much Congressional scrutiny. Guess who worked for the FHLB during this time. Yup, Julie L. Williams, soon to be Chief Counsel at the OCC.

So there you have it, a brand new conspiracy theory. Spitzer was the visible leader, spearheading the attempt to hold responsible those who have created what Nouriel Roubini calls a “financial meltdown.” His voice was a national voice, not some out-of-the way examiner. Was there an attempt to find the messenger’s weakness, to sully him so that his message would not be heard?

Meanwhile, rest assured, the media will deluge us with soiled panties and other sexual sundries. The Roman circus has been ramped up. Nothing in this country sells quite so much as sex and sexual scandals. We just cannot help peering into our neighbors windows to see how they “do it.”

Yup, “they” got him, and “they” got him in a way that will tease and delight us all.