Viewpoint: Electoral Tide, a Warning on Preemption

Article excerpt

The oral arguments did not go well for preemption in the case of Watters v. Wachovia. Ten years ago the Supreme Court would have rubber-stamped another victory for the federal regulators and their licensee banks.

This time enough justices to provide a majority wondered aloud whether the time has come to let the states share more of the regulation of national banks.

Although the court might not decide that way, a new Congress almost certainly will. If the recent elections tell us anything -- in particular, Eliot Spitzer's landslide election as governor of New York -- the public wants the states to play a greater role in regulating the business sector.

They want their legislators to be like Spitzer -- defiant of the power of big business and its protectors in government.

This should be a warning to banks, because Gov. Spitzer undoubtedly will propose tough legislation to continue the effort to break the OCC's preemption power. Because of his tremendous national popularity, Congress will take action to facilitate his efforts.

To minimize the consequences of these risks, the banking industry has to adopt new strategies.

For starters, it must not try to save the status quo by flooding Congress or the states with PAC money. Virtually every post-election analysis identified political corruption -- the sale of government favors to corporate interests -- as the overwhelming reason voters stripped Republicans of control of Congress.

To regain the public's good will and command the respect the industry desperately needs in the coming legislative season, banks should ditch their PACs altogether.

The industry should also distance itself, as best it can, from the federal regulators, especially the OCC. The Spitzer position -- that the agency repeatedly abused its preemption authority -- will prevail in Congress. To argue otherwise is to invite Congress to investigate the role banks played in generating the abuse.

The industry's best strategy is to negotiate a shared preemption system -- a mix of federal control in some areas, state control in others, and whatever self-reforms the politics will bear.

By agreeing to a reduction of federal preemption, the industry will also be agreeing that states can require various changes to their products and business practices. But this should not be cause for excessive worry. Millions of other businesses accommodate a vast array of state laws governing contracts, fraud, advertising, disclosure, servicing, warranties, compliance audits, and so on.

Although the OCC is supposed to audit for compliance with state law, it has never taken the job seriously. In fact, it has never assembled the staff, budget, or skill base to do it even modestly.

Proof of the pudding was the Providian Bank meltdown five years ago that exposed the agency's failure to detect a decade of state and federal infractions. That failure largely explains why preemption is now threatened in the Supreme Court and Congress.

To save federal preemption, even in a reduced form, the industry has only two viable options. One is to accept more federal control; the other is to self-reform quickly.

The "more federal control" approach is crazy. Federal domination is the reason banks are in so much trouble. It is the source of many of their worst practices, from facilitating disclosure deceptions contrary to the Truth-in-Lending Act to usurping state laws that protect consumers and promote competition. …