Sen. Shelby Warns of Overregulation In Reaction to the Subprime Crisis
WASHINGTON -- As the ranking Republican on the Senate Banking Committee, Sen. Richard Shelby is his party's point person on issues relating to financial services and other economic policy-related matters.
Shelby (R-Ala.), a former practicing lawyer and magistrate, started his career in elective office as a Democrat, switching parties in 1994. He has been a senator since 1987, and before that served in the U.S. House for eight years. He was chairman of the Banking Committee for four years until the GOP lost control of the Senate in 2006. Given the rules of the Senate, members of the minority party often can stop legislation from passing, even if a majority of members support it.
Credit Union Times sat down with him in his Capitol Hill office to discuss a range of subjects of interest to the financial services industry in general and credit unions in particular.
CU Times: The subprime crisis has focused a lot of attention on the financial services industry. Talk about what you think Congress should be doing to regulate certain parts of the industry. Or, as some people say about credit unions, provide regulatory relief.
Shelby: First of all, let's talk about the subprime problem. People should make prudent loans, and they didn't in a lot of cases. It is my understanding, and I haven't seen any problems in the credit union field. Most credit unions know who they are making loans to. Secondly, they are mostly well-secured. And I haven't seen any run on credit unions. We have seen runs on credit unions before, and problems, but I haven't seen that. So they have been doing some things right, it seems. I hope this to be true. But some of the banks have made loans that have caused them problems, caused them heartburn and headaches. When you put together a bunch of securities based on questionable loans with questionable credit, nothing down, you're asking for problems. To say otherwise would defy logic. And so we've got problems in our financial centers today. Not every bank is in trouble, but there are going to be some banks that will fail. Every bank that I know of, their stock is down. But we go through this every 15 years or so, a financial crisis.
CU Times: What should Congress do? The Treasury responded with its Financial Blueprint. What do you think of that?
Shelby: Are you talking about the future?
CU Times: Yes.
Shelby: I think we ought to be careful. Secretary Paulson has made some sweeping recommendations to centralize a lot of the bank regulation under the Federal Reserve. We have today a lot of bank regulators, financial regulators. They seem to be doing pretty well, and I think nothing will happen this year on the [Banking] Committee. We will take all these things into consideration. Because we have seen sweeping things happen in the financial markets. Look at the Bear Stearns bailout by the Fed, $29 billion, unprecedented. [The questions we'll ask are,] "What's the role of the Fed going to be there? What's the Fed's role going to be in a lot of areas?" We have to be very careful about passing sweeping regulations.
Some countries have one powerful regulator, that's not the way we have operated. You have one regulator for the credit unions, one for the community banks and the Federal Reserve for the holding companies, and you've got the FDIC which has a piece of a lot of things. Then you have a lot of state banking regulators. And you've got the SEC. And what's their role now and what will be their role in the future? We'll weigh all this, and I don't think we should rush to judgment and consider everything because we don't know where our financial institutions are going to be in a year. Some institutions will be strong and surviving, but there will be institutions that won't be.
CU Times: Some credit unions are pushing for regulatory relief. They have talked about lifting the cap on member business loans.
Shelby: I know, and we haven't rushed to do that. I think right now with the problems in the financial sector, we should be very careful what we do for credit unions or anybody, and how we do it. Because there's always risk. When you expand powers you create more risk. So let's be careful about what we do. I don't say don't do it, I say let's be careful. Credit unions have not been banks before, a lot of people blur it. They are nonprofit. Banks pay taxes. Credit unions are basically mutually owned. So that's going to be part of the debate.
CU Times: Mission creep, some call it.
CU Times: Does that concern you, as somebody who sets policy?
Shelby: It doesn't concern me politically. I think there is a role for credit unions. I listen. I'm not up here to confirm or deny what some credit unions or what some banks want. What you've got to look at is what's best for the financial system, what's best for the economy and what poses less of a risk for the taxpayer.
CU Times: Having been one at one point, you know that Democrats have a tendency to regulate more. If the current polls are correct, there is a strong likelihood you will have a Democratic president and Democratic Congress next year. What do you fear might come out of that?
Shelby: Let's see what happens. We have to wait for the election.
CU Times: Are you afraid they might overreach?
Shelby: I don't want to condemn or support anything at this point because it's all speculation.
CU Times: In that situation, the Republicans would to some extent be playing defense, to prevent what you think are bad things from happening.
Shelby: I think that's why the Senate was created by our forefathers, to keep things from happening, not always to make things happen.
CU Times: When you have talked to Republicans on the committee or in the caucus, is there a united front or common agreement on many of these [financial services] issues?
Shelby: I haven't talked to people about what might come next year. We've got a full agenda now. We haven't had discussions, any meaningful discussions, on things like credit unions' or anyone else's powers. Until we do, I think it's premature.
CU Times: What do you make of the regulatory environment right now? Some have said that with the Democrats in control of Congress, there has already been more aggression in pushing regulation and pushing oversight. What is your assessment?
Shelby: Oversight is very important and regulation is important at times. But I'm not an overregulator. Where you have a bank charter, you have FDIC insurance. You have GSEs. You have credit unions. You have a federal charter. It's important because you have taxpayer money. So you need keen and strong oversight. You need strong regulation over credit unions [and] over banks. All of them have to have sufficient capital and make prudent loan decisions.
CU Times: Has Congress struck a good balance recently? Are there things that Democrats have pushed recently that you are concerned about?
Shelby: I haven't felt any push by the Democrats to regulate anything. I think you've got to wait to see what happens. We react to the real, maybe not the apparent.
CU Times: You mentioned that the subprime crisis has hurt a lot of people.
Shelby: It's hurt a lot of banks, too.
CU Times: You can't always create rules that will prevent that in the future. Are there things Congress ought to be doing down the pike?
Shelby: Transparency was a problem. The rating agencies played a big role in the debacle there. Rating junk and calling it investment grade. We have never before had the problems with securitization because we were not securitizing plain junk. Once they started securitizing junk, whipping it up, decorating it, it was just a question of when the rains came. And they did. And washed a lot of the paint off it, and we see now what it is.
CU Times: Are you optimistic that most banks will recover?
Shelby: There will be bank failures. The FDIC Chairwoman [Sheila Bair] has said that. Others have said that. I don't know how many banks will fail, but some are in trouble. A lot of our banks are very strong and did not get into the subprime thing. A lot of our banks are not overexposed in real estate. But some are, especially in Florida and on the West Coast and stuff like that. They will ultimately pay a price. There are laws of economics. But overall, I think our banking system's in pretty good shape, even though there is a lot of strain and stress on it.
CU Times: Is that the nature of the capitalist system? It has its ebbs and flows?
Shelby: It is. People make bad choices. We all make them at times. But I've never seen any problems as we've had with securitization. I want to go back to that, because they were packaged in junk. And there are problems with the bond insurers, and they are regulated by the states, not the federal government.
CU Times: When you go back to Alabama and talk to constituents--especially in financial services--what do they tell you they'd like you to do? What are their regulatory concerns?
Shelby: Our economy is good. It's still good, knock on wood. They are concerned about the price of gasoline. And some wonder why haven't we drilled everywhere and that would have created a bigger supply. That's the No. 1 thing on people's minds.
CU Times: What about financial services executives? When you talk to them here or in Alabama what do they request you to do?
Shelby: They haven't. We're in touch with them. They know the economy's tough, that the housing industry is overbuilt. They are trying to work things out. Our economy in Alabama is good, and we hope to keep it that way. And our credit unions are doing well. We have one credit union [Redstone Federal Credit Union in Huntsville] with over $1 billion in assets. It's strong.