“This anniversary is not a celebration, but a moment to reflect.”
That is how the director of the Consumer Financial Protection Bureau (CFPB), Rohit Chopra, began his remarks marking the 15th anniversary of the collapse of Lehman Brothers, the first proverbial domino to fall in the financial crisis of 2007-08 that ultimately gave rise to the establishment of the CFPB.
Speaking at the Better Markets Conference on Wednesday ahead of the actual 15th anniversary of the collapse on Friday, Chopra gave an account of what led to the collapse of what was, at one time, the fourth-largest investment bank in the U.S., which was only partially due to holding subprime mortgages on its books.
“First, it relied heavily on short-term, often overnight funding that looked a lot like the deposits that banks fund themselves with. But these deposits did not have insurance, access to the Federal Reserve’s Fed-to-bank lending system, nor the safeguards that come with being a chartered bank,” Chopra said. “Instead, Lehman Brothers operated like this – imagine taking a mortgage out on your house every morning, with the expectation you would pay it off by midnight – every single day. That’s what Lehman Brothers was doing to stay afloat.”
The bank also “relied excessively on borrowed money” without enough of its own capital, and by November 2007 had borrowed $30 for every $1 of its own money available to absorb losses, Chopra explained.
“Finally, it originated, packaged, distributed, and held high-risk subprime mortgages that inevitably nose-dived in value,” he added.
Little concern was given to homeowners’ ability to repay these mortgages, nor “to the pensioners and retirees who had been led to believe had their money safely invested in securitized and bundled mortgages,” he said.
A key lesson emerging from the bank’s collapse — after which executives said they wondered why the federal government never bailed them out — was that consumer protection needed to be recognized for its vital importance to the stability of the U.S. financial system, he said. A lack of consumer protection allowed opportunistic entities to “undermine the mortgage system,” with Chopra adding that “consumer abuses played a starring role, and there was no agency truly accountable for it.”
The enforcement posture of the CFPB also goes beyond just consumers, Chopra said, since “the consumer financial protection laws enforced by the CFPB serve as catalysts for long-term economic growth, and defend against the buildup of systemic risk – just like the buildup of risky subprime loans,” he added. “That’s why the CFPB is not just looking out for consumers, but it is ensuring that risks to consumers do not spread and infect entire markets or economies.”
The timing of Chopra’s remarks coincide with an impending decision by the U.S. Supreme Court that could see the funding structure of the Bureau constitutionally invalidated, putting the bureau itself in existential danger. Chopra acknowledged the impending ruling and what he sees as the potential consequences of a ruling that would find the CFPB’s funding structure unconstitutional.
“Vacating or calling into question the CFPB’s past actions and rulemaking could be destabilizing, as the agency has issued more than 200 changes to the rules, many of them required by Congress, implementing laws such as the Truth in Lending Act, the Fair Credit Reporting Act, and the Electronic Fund Transfer Act,” he said. “These rules affect the way millions of people borrow and send trillions of dollars every year, and uncertainty could have real consequences.”
Questions about the rules administered by the CFPB could “raise significant concerns for the stability of the nation’s financial system,” he added.
Time will tell if CFPB has been operating illegally and is a case study of mission creep.