Cheers to Mick Mulvaney for Neutering What Was Always Superfluous
In Setting the Table, Danny Meyer’s endlessly interesting 2008 book about hospitality, the now-global restaurateur explained his reason for banning smoking at Union Square Cafe in 1990; 12 years ahead of a 2002 New York City law. He did so on his own for a variety of reasons, including the fact that smoke drifts to the dining detriment of non-smokers. As he put it, “It’s my opinion that you can do anything you want in your own place of business. I didn’t need a law.”
Back in the late 1990s when he was Vice Chairman at Goldman Sachs, Henry Paulson had a ready answer when asked what worried him, or what kept him up at night (full disclosure: yours truly worked at GS from 1997 to 2001). At the time Goldman had roughly 10,000 employees, and Paulson’s biggest fear was that the errors of one or two bad apples could bring the financial powerhouse down in total.
To state what’s obvious, Goldman Sachs, like Meyer, didn’t need a law, or regulations. It has long had a robust compliance operation simply because honest dealings with clients were crucial to the firm’s ongoing success. That’s paradoxically why Goldman’s well-known comment that it is “long-term greedy” is needless. The firm has to have the client’s best interest in mind when dealing with same simply because a failure to serve the customer well will result in that customer’s departure.
Restaurants are competitive, and so is finance. So is any lucrative industry. Precisely because the profits can be enormous, so is the competition for the customers who make those profits possible. The best of the best don’t get that way by responding to government decrees. They’re usually well ahead of always-backwards-looking government rules and regulations, and they are by necessity.
Which brings us to the Consumer Financial Protection Bureau (CFPB). As a recent piece in the New Yorker explained it, it was created in 2010 “with the intended goal of protecting consumers from abusive practices by banks, mortgage lenders, and other financial institutions.” Its purpose speaks to why interim director Mick Mulvaney requested $0 to fund the agency (for the next 90 days) last month. His stated reason was that the CFPB already had enough in the way of operating funds, but a more realistic answer would have been that the CFPB is superfluous. The latter is presumably Mulvaney’s implicit point, and if so, good for him.
Whether it’s Goldman Sachs or E*Trade, each has long been robust in terms of compliance. In the hypercompetitive world of finance, each understands that protection of the customer amounts to protection of the firm itself. Profitable customers are hard won, and as such, those same customers are regularly courted by those who would like to serve them. If readers doubt the previous statement as applied to E*Trade’s retail base of customers, they need only turn on the television, or pick up a newspaper or financial magazine. The ads touting low-cost trading are many. If E*Trade does badly by its customers, they have options.
In Goldman’s case, the firm serves the richest individual investors, the biggest institutional investors, and the best companies in the world. That every other financial service entity wants its book of clients is a statement of the obvious. That it is reminds us why Mulvaney is so correct in neutering the Bureau that he’s overseeing.
Indeed, if Goldman does badly by its clients, the list of firms willing to fill in for it is endless. As for the notion that it could dupe its clients with “abusive practices,” let’s be serious for a moment. Hard as this is to imagine, Goldman’s clients are quite a bit more sophisticated than the wildly bright individuals in the firm’s employ. The notion that Goldman’s employees could bilk the firm’s client base presumes that the richest, biggest and best are easy marks. On its face the latter is silly, not to mention that the quality of Goldman’s clients speaks to why it must go out of its way to give them the best service possible: if the firm fails, there are countless competitors eager to take the place of GS. The quality of its client base is regulation par excellence. After all that, readers should never forget that if Goldman’s competition doesn’t expose wrongdoing, the firm once again has a massive compliance operation in place to police any unfortunate treatment of clients, along with any false promotion of the firm’s products.
To all this, some will respond that financial firms need policing as a way of stopping “exploitative loans” made by those same firms. This was Sheelah Kolhatkar’s recent argument in the New Yorker, and it’s one without merit. Seemingly missed by the doubtless well-meaning Kolhatkar is that financial firms won’t be in business long if they’re pursuing borrowers who lack the capability to pay the funds borrowed back. Kolhatkar’s support of the CFPB is rooted in her fear that “exploitative loans” can damage “people’s economic and mental health,” but if so, her compassion speaks to precisely why we don’t need the agency she’s so supportive of. Indeed, lenders who search for borrowers set to be wrecked by loans won’t be lenders for long. The failed loans will quickly put them out of business, thus calling for lenders to be discerning about whom they lend to.
Interesting about the above is that Kolhatkar and other emotional supporters of the CFPB seemingly want it both ways. They bemoan allegedly “exploitative loans” with the left side of their forked tongues, then with the right side they call for the CFPB to “pursue settlements with lenders accused of discriminating against borrowers” (Kolhatkar once again). Ok, but which is it? Are financial firms guilty of actively seeking out borrowers incapable of paying back monies borrowed, or do they discriminate against those who seemingly lack the means? The answer to all this is that competition in the financial space ensures neither. Lest we forget, whether it’s banks, investment banks, or non-bank sources of credit, they don’t pay interest on dollars in order to stare lovingly at them. Instead, they pay interest on money entrusted them on the assumption that they can find creditworthy borrowers who will pay a higher interest rate in return for accessing the funds they have in their coffers.
Let’s never forget that financial firms are in the business of putting money to work profitably. Only in escapist Hollywood scripts, or in New Yorker analyses, do financial firms actively lend money to individuals in the hope that the unpaid loan will ruin them. As for any presumed discrimination, here lies the beauty of free markets: precisely because the competition to put money to work profitably is so great, the ability to discriminate for any other reason than one’s presumed ability to pay the money back is the path to insolvency.
What about having the CFPB around to protect financial firms from their mistakes? It all sounds nice, but if federal workers had the skills necessary to help finance companies see around the proverbial corner, they wouldn’t work for the federal government to begin with. They’d be working for the companies whose ankles they’re presently biting. Furthermore, it’s not healthy for government to presume to protect businesses from their errors in the first place. Too often forgotten is that it’s the failures – including company failures – that drive progress.
Bringing all of this back to Danny Meyer, the greats of commerce don’t need laws to serve their customers and clients well. More realistically, they’re well ahead of the law. Cheers to Mick Mulvaney for implicitly acknowledging the previous point. In de-clawing what is a non-sequitur, Mulvaney is actually helping customer and financial firm alike. For the good and great of finance, they already have internal controls that render the CFPB the picture definition of superfluous. For those that don’t, competition will soon put them out of business as is, and most likely long before the always-late-to-the-accident federal government discovers them.