Home > Legislation > The Fabulous Fab-FTC Connection

The Fabulous Fab-FTC Connection

Post updated @ 4:45 PDT

Today, all ears and eyes were on the Senate hearing (and interrogation) of Goldman Sachs executives, regarding questionable mortgage lending and investment practices at the investment bank.  The witnesses included Fabulous Fab aka Fabricio Tourre, the Goldman trader who deemed himself as the only survivor of certain “complex, highly-leveraged, exotic trades” that were created without his “fully understanding all of the implications of these monstrosities.”  Tourre was instrumental in creating and selling mortgage investments in the now famous “Abacus” transactions.  According to the SEC, he committed fraud by failing to disclose to Abacus investors a material fact: that the hedge fund that chose the mortgage-backed securities going into the Abacus investments, was the same hedge fund betting against that deal.  Ultimately, Paulson & Co., the hedge fund in question, made over $1 billion in profit when the sub-prime mortgage market collapsed.  The investors made nothing.  According to Senator Carl Levin, chair of the Senate Permanent Subcommittee on Investigations, such practices “contributed to the economic collapse” of 2008.

If the story of Fabulous Fab and his fellow Goldman traders strikes a nerve, it’s likely that the Democrats will eventually get the votes they need to halt debate and put financial reform legislation to a vote.  Despite Senate Republican efforts to block a vote on the bill (for two days in a row), the legislation appears to have widespread public support – a much-cited poll finds that two-thirds of Americans now support financial reform.

Even the little provisions in this bill could have an enormous impact.  For those of us following Internet regulation, I’m referring to the provisions in the financial reform bill that would expand the FTC’s civil penalty and rulemaking authority.  Since I first blogged about this issue last week, the lobbying effort aimed at removing these provisions from the final bill has intensified almost exponentially.  Here as with the financial reform bill, the US Chamber is at the forefront of an alliance that includes IAB as well as many online advertisers and businesses.  Their concerns are outlined in this letter, sent last Thursday, to Senators Harry Reid and Mitch McConnell, the majority and minority leaders of the Senate.

The question of whether financial reform is also the right vehicle to effect FTC reform looms large.  Will consumers – who overwhelmingly appear to support financial reform – also support an expansion in the FTC’s authority?  Is financial reform legislation the right place to grant expanded power to an agency that will lose its consumer financial protection authority under the proposed legislation anyway?

Whether the FTC provisions will prevail will depend on whose lobbying effort is better: business, (as represented by the Chamber and its alliance of internet advertising and marketing businesses), or the FTC (as represented by Senator Jay Rockefeller, chair of the Senate Commerce committee and FTC Chairman, Jon Leibowitz).  Leibowitz has argued that an expansion of FTC power is “critical” to protecting consumers on the internet; similarly Rockefeller has stated that the new Consumer Financial Protection Bureau and the FTC need the right tools to “stop bad actors and protect Americans from fraudulent financial services and practices.”  And at least one commentator – Jeff Chester of the Center for Digital Democracy – has argued that there is a link between financial reform and a stronger, more effective FTC.  “Online advertisers want the same kind of lax oversight that led to the financial crisis, Chester recently told Internet News.  “They are truly terrified that an FTC with normal rulemaking power will force the industry to treat consumers responsibly.”

Which takes us back to the Goldman Senate hearing and Fabulous Fab.  Could his testimony, along with that of his other colleagues earlier today, be the tipping point that drives greater public support – not just for financial reform but also for general consumer protection enforcement?

If so, we may be looking at an FTC with expanded authority within the month.

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