All the Devils Are Here [93]
Preemption also became a recruiting tool for the regulators trying to expand their own empires. Incredibly, American financial institutions had the ability, under certain circumstances, to switch regulators—an idea that had long been promoted by Alan Greenspan. His essential belief was that having multiple, overlapping regulators was good for the system because, as he once put it in testimony before the Senate banking committee, it served as a “valuable restraint on any one regulator conducting inflexible, excessively rigid policies.” (“The present structure,” he added, “provides banks with a method . . . of shifting their regulator, an effective test that provides a limit on the arbitrary position or excessive rigid posture of any one regulator.”) Jerry Hawke, the comptroller of the currency, took that idea a step further—rather than sit back and wait for institutions to come to the OCC, he actively talked up the “advantages” of being regulated by the agency he headed. In early 2002, for instance, the OCC issued a press release with this startling headline: “Comptroller Calls Preemption a Major Advantage of National Bank Charter.” A former regulator says that he viewed his job as “a salesman for the national charter. He would make sales calls. The OCC used preemption as its advertising.”
Just about a year after the OCC first began trumpeting the virtues of preemption, the OTS joined in, announcing that the thrifts it oversaw were exempt from the key provisions of Georgia’s new law. The OTS’s move helped make the state’s law moot. “Either we will have an unlevel playing field and a rush of people to go get OTS charters or we will see a leveling out of the playing field by having the state legislature” change the law, said a spokesman for the mortgage lobby. Sure enough, by the spring of 2003, the law had been replaced by a much weaker one.
The OTS had long asserted preemption when states passed laws that it didn’t think its thrifts should have to follow. But in early 2004, the OCC went all in, decreeing that all institutions under its watch would be exempt from all state and local laws aimed at predatory lending.
After Wachovia moved its mortgage company into its federally chartered bank in order to take advantage of the OCC’s preemption policy, the state of Michigan argued that it should still be able to regulate Wachovia’s local lending unit. Wachovia sued. The OCC filed a supporting brief. The fight went all the way to the Supreme Court, which in 2007 sided with Wachovia.
And so it went. New Jersey, which passed a predatory lending law in the fall of 2003, repealed it a year later after the lending community, along with the rating agencies, followed the Georgia playbook. In New York, the OCC asserted preemption when then attorney general Eliot Spitzer simply tried to get data from national banks in order to see if they were complying with fair-lending laws. “I think the reality is that the refusal to permit our inquiry, and the assistance of the OCC in helping the banks stop it, was symptomatic of a world where nobody wanted to look at anything,” Spitzer later said.
John Dugan, who replaced Hawke in 2004 as comptroller of the currency, would later argue that national banks were only a small part of the problem. He wasn’t completely wrong; by the OCC’s calculation, national banks originated 12.1 percent of nonprime loans between 2005 and 2007. But his argument missed the larger point. Preemption created competition between the OCC and the OTS—and the OTS, which regulated institutions like IndyMac and WaMu, was indisputably a weaker regulator. Secondly, preemption meant that even the state-chartered lenders didn’t have to curb their abuses, because states were reluctant to pass or enforce strict rules for