John Dugan: Why It's So Hard to Hold Wall Street Accountable

The Financial Crisis Inquiry Commission hearings continue to be a
broad, boring failure, peppered with a few moments of significant
insight. Throughout most of yesterday's hearing featuring the nation's
top bank regulator, Comptroller of the Currency John Dugan,
Commissioners treated their witness as a credible expert, rather than
a culpable catalyst of the crash.

You'd never know it from Dugan's calm, mousey demeanor before the
FCIC, but he spent several years working as a high-powered bank
lobbyist before being appointed to his current job by George W. Bush
in 2005. Since then, he's been a major defender of big banks, pushing
to defang consumer protection regulations and provide legal cover for
subprime predators.

Nobody on the Commission ever pressed Dugan on his lobbyist
background. Who he lobbied for, what he lobbied for, and how much he
got paid were never under discussion. Nobody asked him why he's been
receiving lobbying talking points from major bank executives in secret
during the debate over financial reform. Nobody asked him what sort of
job he's likely to take after his term as Comptroller expires in
August. This is a tremendous problem: Wall Street's political
influence is so tremendous that they can secure top-level regulatory
jobs for their own lobbyists. It's as if someone appointed Billy
Tauzin head of the FDA.

And in Dugan's warped history of the past decade, both he and the
banks he regulates never really did anything wrong. "We made very
clear that predatory lending . . . was not something we would
tolerate," Dugan said. "Honestly, those practices never really took

This astounding claim is impossible to square with any credible
account of the explosion in subprime lending over the past decade, an
explosion in which Dugan's banks were some of the top players. In a
2007 speech, FDIC Vice Chairman Martin J. Gruenberg said, "It now
appears that the most elementary notion of predatory lending--failure
to underwrite based on the borrower's ability to pay--became prevalent
in the subprime mortgage market."

Throughout his testimony, Dugan claimed it was not banks, but
independent mortgage companies like New Century and Ameriquest who
created the subprime debacle. These other companies that didn't accept
consumer deposits, and thus were not subject to bank regulations, were
able to get away with terrible practices, but the banks were generally

Yet according to an analysis by the National Consumer Law Center,
Dugan's banks issued 31.5% of all subprime mortgages in 2006, along
with 40.1% of exotic Alt-A mortgages, and 51% of tricky option-ARM
loans (Alt-A and option-ARMs were often worse for consumers than
subprime). Late in the hearing, FCIC Chairman Phil Angelides hammered
home an equally important point: the Ameriquests and the New Centurys
were being directly supported by the banks Dugan regulates. In fact,
21 of the 25 largest subprime lenders relied directly on support
financing from national banks. The Wall Street behemoths were fueling
the subprime machine, even when they weren't issuing the loans

But the gravest sin committed by Dugan's agency, the Office of the
Comptroller of the Currency (OCC), was an aggressive effort to block
state regulators from enforcing consumer protection laws against big
banks. The OCC regulates federally chartered banks, but until 2004,
states still had the right to enforce their own laws against national
banks operating within their borders. That meant that for national
banks, the OCC's rules served as a regulatory floor-- state regulators
couldn't enforce weaker standards than those imposed by the OCC, but
they could enforce stronger rules.

That changed when Dugan's predecessor, John Hawke Jr., asserted
sweeping preemption powers, insisting that the states' authority was
invalid. Dugan continued this crusade throughout his time as
Comptroller, and at yesterday's hearing, he defended the move in his
opening statement.

"If it were true that federal preemption caused the subprime mortgage
crisis by preventing states from applying more rigorous lending
standards to national banks, one would expect that most subprime
lending would have migrated from state regulated lenders to national
banks. One would also expect that all bank holding companies engaging
in these activities that owned national banks would carry out the
business through their national bank subsidiaries subject to federal
preemption, rather than their nonbank subsidiaries that were subject
to state law . . . neither of these conjectures is accurate."

In fact, preemption spurred a race-to-the-bottom in regulatory
standards, and was a major cause of the subprime explosion. But nobody
challenged Dugan on the assertion seriously until Angelides took the
reins around 3:00 p.m., two-and-a-half hours after the hearing began.

"You tied the hands of the states and then you sat on your hands,"
Angelides said.

Angelides was exactly right. State and federal bank regulators are
funded by taxes they levy against the banks they regulate. Banks game
this system, flocking to whatever regulator will give them the most
leeway. Preemption sent a clear message to the states: if they want to
keep their bank tax revenue, they have to go easy on their banks. And
so about half of all states in fact lay off after preemption came

But another half of the states decided at some point or another to go
after predatory national banks. Anytime that happened, the OCC would
intervene, deploying every legal excuse it could come up with to
protect the bank. There are dozens of examples of the OCC engaging in
this activity, but the most egregious case is its lawsuit against
First Franklin, a bank whose sole raison d'etre was subprime lending.
There is no way to construe the OCC's assault on First Franklin's
state regulator as anything other than an attempt to protect a
subprime predator.