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Revenge of the Quants

The finance empire strikes back

If the financial corruption that led up to the Great Recession in 2008 demonstrated anything beyond a reasonable doubt, it was how extreme the power imbalance in the United States is between those who loan money and those who borrow. In the aftermath of the predatory lending scandals that nearly brought down the economy, the corporate perpetrators walked away with few consequences. But ordinary borrowers across the country endured a wave of foreclosures and bankruptcies. For those at the bottom end of the economy, the crash destroyed livelihoods and lives.  

After the 2008 election, with a Democrat in the White House and Democratic control of Congress, federal lawmakers enacted a few mild remedies to rein in the financial sector and protect consumers. One of the most celebrated was the creation in 2010 of the Consumer Financial Protection Bureau—an idea based on a proposal then-Harvard Law Professor Elizabeth Warren floated in the journal Democracy in 2007. The bureau was charged with enforcing consumer-protection laws and cracking down on deceptive or abusive issuers of mortgages, auto loans, student loans, and credit cards.

Now, almost a decade later, the debt problem is as severe as ever. Personal debt is at a historically high level. Payday lenders continue to prey on the poor. Debt collection has become increasingly aggressive, as the ACLU documented in a paper last year on the criminalization of private debt. And, of course, the Consumer Financial Protection Bureau is loathed by the financial lobby and their allies in Congress and the White House.  

Now those enemies of the bureau have a chance to make their case against it before a sympathetic audience: the United States Supreme Court. Justices agreed last month to hear a case claiming the CFPB is unconstitutional because as the law was written, the president can’t fire its director at will.

With the anti-regulatory bent of the other four conservative judges, it’s not hard to guess how the case will turn out.

The lawsuit against the bureau draws heavily on Justice Brett Kavanaugh’s dissenting opinion in a 2018 ruling by the D.C. Court of Appeals in a separate challenge (PHH Corporation v. Consumer Financial Protection Bureau), in which he nursed his long-held belief that the president is an all-powerful god-king. Requiring the president to come up with a good reason to fire the CFPB director, Kavanaugh wrote in his dissent, “diminishes the president’s power” while giving the bureau director power that’s “massive in scope, concentrated in a single person, and unaccountable to the president.”

Kavanaugh was at first in the majority of a three-judge appeals court panel that decided in 2016 against the CFPB. But the ruling was partially reversed by the 2018 en banc opinion that decided the CFPB’s structure was sound. Now Kav gets a do-over in service of his liege. With the anti-regulatory bent of the other four conservative judges, it’s not hard to guess how the case will turn out.

News stories about the current case to be decided by the high court, Seila Law LLC v. Consumer Financial Protection Bureau, have treated it as a discrete bureaucratic matter. It is not.

“The radical nature of this must be stressed. Since the New Deal, Congress has had broad latitude to set up agencies to make policies and this would be the Supreme Court reverting to a pre-New Deal understanding of the constitution and the federal government,” Sandeep Vaheesan, CFPB’s regulations counsel under its first director, Obama appointee Richard Cordray, told me over the phone earlier this month.

“I feel like the story is presented as something for the CFPB and its future. But it has major implications for the federal government as it’s presently constituted,” said Vaheesan, now legal director of Open Markets Institute, an anti-corporate monopoly organization. “I worked on the payday lending rule, and I’m watching the CFPB do its best to undo that rule,” he said, which he added is “really depressing.”  

The case brought by the California-based firm Seila Law LLC—which the CFPB had been investigating—argues that the bureau’s administrative structure violates the constitutional plan for separation of powers. It’s unusual that the CFPB’s director can only be fired for cause, plaintiffs say, despite the fact that other regulatory agencies have a similar stipulation, like the Securities and Exchange Commission, and that “perhaps the most agreed upon characteristic of an independent regulatory agency is what is termed ‘for cause’ removal protection, which is intended to provide a measure of independence from presidential direction and control,” as former Library of Congress Congressional Research Service specialist Curtis W. Copeland put it in 2013.

A win for plaintiffs would not only mean a president could swap out the CFPB director whenever he or she wants—discarding the normal five-year term for the director. “It would signal that the Supreme Court is hostile to the regulatory state and doesn’t defer to Congress’s policy choices,” Vaheesan said, adding that the point of the CFPB’s structure was to insulate it from corrupting forces after the 2008 market crash. “Congress wanted a watchdog that would consistently protect consumer interests, not be influenced by corporate interests and lobbyists.”

Already Trump has corrupted that mission. Under his administration, the CFPB is an agency that protects corporate interests and lobbyists and punishes consumers. His first appointee was Mick Mulvaney, champion of the payday lending industry, who had earlier sponsored legislation to scrap the bureau and once called it a “joke.” Mulvaney put new enforcement cases on hold, froze hiring, and delayed a rule to protect people from abusive payday lending practices that was supposed to take effect in January 2018.

Now Mulvaney is part of Trump’s cabinet twice over: as director of the Office of Management and Budget and acting chief of staff. The new CFPB director is Kathy Kraninger, a “mid-level budget staffer lacking expertise, chosen to lead one of the most powerful agencies in the government,” as the chief economist for former Rep. Jeb Hensarling put it. She also helped establish the Department of Homeland Security after 9/11 and once worked in Ukraine for the Peace Corps.

She’s continuing the effort to prop up payday lenders, because doing so will “encourage robust market competition to improve access, quality, and cost of credit for consumers.” And she’s doing her best to make sure that lenders get paid back, for example by proposing that collection agents can hound borrowers via email and text message as much as they like—a rule that would really be for our own good because then “consumers know their rights and debt collectors know their limitations.” 

The attack on an agency meant to regulate industries that sell personal debt—educational loans, home loans, and credit cards—comes as personal debt has soared, rising for the first time above $4 trillion late last year, and climbing higher still as of September, according to the Federal Reserve. It’s an amount so large that it’s well over the approximate amount the Internal Revenue Service collects every year in taxes. Getting that money back is an $11 billion industry, ProPublica recently reported. Sometimes, lenders and debt collectors decide who gets arrested for their debt. Sometimes, as that ACLU report on the “criminalization of debt” noted last year, they do so with extreme force:  

In September 2015, Gordon Wheeler was arrested by seven or eight U.S. Marshals at his Texas home for failure to appear at the U.S. District Court for the Southern District of Texas. Wheeler was unable to show up in court because he had just had open-heart surgery. “You just coming over here serving me papers saying I got to show up and I just told you I had open-heart surgery two or three weeks ago . . . so I’m not a well man,” he said. The original $2,500 federal student loan he obtained to pay for trucking school in 1983 had mushroomed into $12,000 with interest and fees. Wheeler is retired and subsists on Social Security and disability, and says he cannot pay it, noting, “You can’t squeeze blood out of a turnip.”

Under Trump’s administration, the CFPB is an agency that protects corporate interests and lobbyists and punishes consumers.

Apparently without cognitive dissonance, even Kraninger herself says the CFPB “received approximately 81,500 complaints about first-party and third-party debt collection in 2018, making debt collection one of the most prevalent topics of consumer complaints about financial products and services received by the bureau.”

All of this is part of the massive project to give fat wads of cash to the already rich and strengthen a caste system that demands poor people stay poor forever. It joins Trump’s tax code and his push to privatize more of our public works as new activity that will significantly redistribute wealth upwards. The condition is making us sick and sad, as we can all see, which even a financial firm has pointed out.

Milwaukee life insurance firm Northwestern Mutual found in its 2019 Planning and Progress Study that one in five participants said their debt makes them “feel physically ill at least once a month.” Almost half said debt makes them feel anxious and 35 percent said it made them felt guilty. Fifteen percent believe they’ll be in debt until they die.

Compare that condition to the glee of debt peddlers—sellers of the record $1.6 trillion in educational debt, say. They have an ally in Secretary of Education Betsy DeVos, who, like them, enjoys flouting rules and squeezing money out of us turnips. For them, crushing debt is cause to celebrate, as Sallie Mae executives and their staff did in Maui for five days this summer.

“If you look at this through the prism of a politically dominant financial capitalism, which has managed to reduce consumer protections, has weakened audits to the point of meaninglessness, and captured state regulatory agencies to the extent that these have become impotent fig-leaves, then the current situation becomes more or less understandable: consumer protections don’t work because the behaviour of the dominant players, many of which are monopolists, is geared towards predatory wealth extraction rather than supporting wealth creation,” John Christensen, director and chair of the Tax Justice Network, wrote in an email response to questions.

But back to Seila Law LLC v. CFPB. Say the Supreme Court rules for Seila and the CFPB is weakened even further. And say Bernie Sanders or Elizabeth Warren wins the presidential election in 2020. The good news is that the new president could immediately replace Trump’s lackey CFPB director. The bad news is that they would still have to contend with the new precedent the case set for corporate interests to challenge regulators. Corporate interests could point to a favorable ruling and say nothing the CFPB does is legitimate because of how its set up, or extrapolate the ruling to attack other regulators based on their structures.

“In a sense, a Supreme Court decision against the CFPB could be a narrow win for a Sanders or Warren administration,” Vaheesan says, “but a larger defeat, because they would have the ability to appoint their own person on day one, but the rest of their administration would be functioning under a cloud . . . Even modest regulatory actions would be subject to challenge, not just to the substance, but to the very structure of the agency itself.”

Justices say they’ll hear the case this term. As part of that, they’re also considering this question: If the CFPB is found unconstitutional on the basis of the separation of powers, can it be severed from the Dodd-Frank Act? That’s the Obama-era law that established the CFPB and was meant to solve the problems that led to the 2008 crash. If the CFPB and Dodd-Frank can’t be severed, then an unconstitutional CFPB means an unconstitutional Dodd-Frank, and the whole law would be invalidated, Vaheesan says.

A decision is likely coming in June—right in the middle of 2020 election campaigns—and we should watch how (and if) candidates respond. We should ask them: If the CFPB is weakened further, or eliminated completely, how will you protect us from the robber barons?