There is a well-worn Washington playbook that the financial industry and Republicans use when they want to kill a proposal meant to protect households from dodgy financial practices: They claim the costs of the proposal exceed its benefits.
On Tuesday that strategy appeared to blow up in their faces when Sen. Elizabeth Warren (D-Mass.) spent seven minutes skewering a former senior regulator at the Federal Reserve who she claimed played a "key role in blowing up the economy." Warren accused Leonard Chanin, a financial industry lawyer critical of post-crisis rules, of failing to police suspect subprime mortgage lending in the runup to the 2007-2009 financial crisis.
The breathtaking exchange captivated the audience of an otherwise unremarkable Senate banking committee hearing meant to highlight the costs of rules targeting abusive practices, part of a years-long Republican effort to ultimately repeal the 2010 financial reform law known as Dodd-Frank.
The law's supporters say that when Republicans and the financial industry criticize the cost of new rules, they ignore the tremendous cost of the financial crisis -- it required trillions of dollars in taxpayer-backed bailouts and exacerbated the Great Recession, costing millions of jobs. Preventing another financial crisis is a benefit of these rules, Warren and other advocates say.
Chanin got caught in the middle.
"It was a pretty strong attack," Chanin later said. "It says more about her and the way she deals with individuals than it does about anything else."
Senate Republicans had asked Chanin to testify about the effects of various rules and misconduct penalties pursued by the federal Consumer Financial Protection Bureau, which was established as a response to the Fed's pre-crisis failure to protect consumers.
Warren conceived of the bureau, helped convince the Obama administration and Congress to create it, and later set it up by hiring its senior staff.
Chanin was one of Warren's first hires. He had spent about 20 years at the Fed, interrupted by a six-year term working for his current law firm, Morrison & Foerster, in the early 2000s. Warren hired him in 2010 to be the consumer bureau's chief rule-writer.
Chanin left the consumer bureau less than two years later, frustrated by what he perceived to be the bureau's activist approach to supervising consumer credit products such as home mortgages, credit cards and payday loans.
He now advises banks and other financial institutions on how to comply with federal rules governing those products, part of a coterie of former regulators who now make a living counseling industries and institutions they formerly regulated.
For much of Tuesday's hearing, Chanin criticized the federal consumer bureau by claiming that its rules and actions have distorted some markets and led financial institutions to curtail the products they offer to households.
Then Warren launched her cross examination.
She began by citing the Financial Crisis Inquiry Commission, a congressionally created bipartisan group charged with determining what caused the financial crisis. The commission, Warren noted, said that the Federal Reserve's failure to stem the flow of toxic mortgages was "the prime example" of the many ways in which Washington regulators failed to prevent the financial crisis.
Chanin was a top official at the Fed's consumer division from 2005 until he joined the federal consumer bureau in 2011. The crisis commission said that the Fed was the only agency empowered to limit the amount of toxic mortgages made in the years leading up to the crisis.
Warren said Chanin's tenure at the Fed was a "disaster." His "failure" to act had "devastating consequences." Despite calls from consumer groups to stamp out deceptive and dangerous mortgages, Warren said, Chanin "did essentially nothing."
"Given your track record at the Fed, why should anyone take you seriously now?" Warren asked Chanin.
Chanin tried to defend himself, arguing that the Fed didn't receive any data suggesting that the mortgage market was melting down until 2008. The Fed received anecdotal evidence, Chanin said, "but there was no hard data."
The Fed took some steps during Chanin's tenure to limit the flow of unaffordable mortgages. From 2006 to 2008, the Fed and other agencies issued guidance documents, made statements, and proposed rules meant to deter lenders from giving mortgages to borrowers who either couldn't afford them or understand them.
In a 2006 statement about home mortgages that allowed borrowers to postpone repayment, the Fed and other regulators said they were "concerned that some borrowers may not fully understand the risks of these products."
Chanin said these public statements reflected the Fed's view at the time: There was some unsafe mortgage lending going on, but little evidence that it was a system-wide problem. He disputed Warren's description of the Fed's alleged inaction.
"What they did is what I would stand behind," Chanin said of his former bosses at the Fed after Tuesday's Senate hearing. He declined to say whether he privately urged a more forceful response to dodgy mortgage lending while at the Fed.
Ultimately, the Fed did little to combat suspect lending practices.
In an interview, Chanin acknowledged that regulators shared blame for the financial crisis, along with lenders that didn't properly underwrite loans, borrowers who took on obligations they should've known they couldn't afford, and the U.S. government that encouraged Americans to purchase homes.
"Could the Fed have done more? Sure," Chanin said in the interview.
His main concern now is that the federal consumer bureau's zeal to police potential misconduct in various markets may be constraining low-income households' access to credit.
The total amount of credit extended to consumers is up 43 percent compared to January 2007, near the height of the pre-crash market, Fed data show. But much of that growth is due to federal student loans. Regulators and the Obama administration have acknowledged that lenders are still too tight with their cash. It's unclear whether that's due to new federal rules, a lack of demand for credit, an unwillingness to lend, or a combination of all three.
Chanin said the consumer bureau in particular should publicly state whether it is comfortable with some lenders restricting credit as a result of its rules.
Warren's sharp questioning of Chanin suggests she regretted hiring him. She told him on Tuesday that she was urged to hire him for a senior role at the federal consumer bureau because he was one of the few government officials with the expertise needed to write new rules governing household financial products.
"People said that you and your team made a terrible decision that helped crash the economy, but we needed to keep you all around because you were the only ones who really understood the mistakes that had been made," Warren said to Chanin.
But today, in light of Chanin's experience and advocacy, Warren said, he's ill-suited to be advising Congress on the costs and benefits of consumer finance rules.
Chanin, Warren said, "might have one of the worst track records in history on this issue."