The New Consumer Protection Agency and Bureaucratic Reality

Now that Congress has passed legislation creating a new Consumer Financial Protection Bureau in the Treasury Department, attention has shifted to how the Obama Administration will implement the new law.

The issue of who President Obama should appoint to head the new agency is now front and center. Consumer groups and many members of Congress believe that Professor Elizabeth Warren, who came up with the idea for a consumer protection agency for the financial sector and has been an aggressive consumer advocate during the entire financial crisis, should be the President’s choice. The banking industry’s position is “anyone but Warren.”

Elizabeth Warren (who was my colleague at the University of Texas for many years) is the most qualified candidate. Although she would inevitably have to make compromises in launching the new agency, she is a charismatic leader who would remain a strong consumer advocate and will not be bullied or hoodwinked by the banking industry.

As importantly, the appointment will make a strong symbolic statement about the President’s priorities. The appointment offers a unique opportunity for the President to demonstrate to the American public that he is on the side of consumers and not Wall Street.

We should bear in mind, however, that the future of this important agency also depends on other decisions that are being made in the Administration over the next few months. The bureaucratic realities facing a new agency may have as great an impact on its future as the credentials and personality of its first leader.

First, partisan gridlock in the Senate will ensure that the confirmation hearings for the head of this new agency will be lengthy and controversial. The Republican minority in the Senate has successfully delayed confirmation of many far less consequential appointees during the first 18 months of the Obama Administration. Given the upcoming Senate recess and the realities of the fall political campaign season, it could take more than six months to get the president’s nominee confirmed.

In the meantime, since Congress placed the agency within the Treasury Department, all of the important decisions will be made by Secretary Timothy Geithner or one his subordinates. Those who are interested in the future of this agency should keep a close eye on the upper levels of the Treasury Department, where decisions are being made right now that are likely to bind the hands of whoever officially heads the agency at the end of the confirmation battle. Pressing issues that probably cannot await the conclusion of a lengthy confirmation process include how the agency is organized, how its budget will be allocated among its various functions, and whether decisions will be made from the bottom up through working groups or hierarchically from the top down. Given that the new agency must meet statutory deadlines, some regulatory initiatives will probably be underway when the new agency head arrives. Once many of these implementing decisions are made, it will be difficult to undo them.

Second, the new agency will need a highly qualified staff if it is to take on the sophisticated Wall Street bankers and lawyers who are at this moment searching for every conceivable loophole and permutation of the corporate form capable of minimizing the impact of the new law’s protections on the banking industry.

Unfortunately, the new agency head will not get to choose the staff from scratch. Most of the lower level officials who write the implementing regulations, draft the interpretative guidelines and bring the enforcement actions will come from existing federal agencies, most likely in the Treasury Department.

In the past, old-line federal agencies have used the creation of a new agency as an opportunity to unload unwanted staff. It is therefore not surprising that new agencies often get off to slow starts. While the new Consumer Financial Protection Bureau leader is awaiting confirmation, someone needs to be looking out for the interests of the new agency in the bureaucratic maneuvering that is probably going on right now.

At the end of the day, what is happening behind the imposing façade of the Treasury Building may affect consumers of financial services as much as what is happening in the West Wing of the White House.