State whistleblowers tried to cut short greedy lending—and were thwarted by the Bush Administration and the pecuniary endeavors

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“It was pure greed, based forward exploitation.” Frank Jackson, Mayor of Cleveland Ethan Hill

by Robert Berner and Brian Grow

More than five years ago, in April 2003, the attorneys general of two small states traveled to Washington with a stern sign for the nation’s top tier regulator. Sitting in the spacious Office of the Comptroller of the Currency, with its panoramic view of the capital, the AGs from North Carolina and Iowa said lenders were pushing increasingly risky mortgages. Their host, John D. Hawke Jr., expressed skepticism.

Roy Cooper of North Carolina and Tom Miller of Iowa headed a committee of state officials concerned about new forms of “pillaging” lending. They urged Hawke to accord. states more latitude to limit enormous interest rates and fine-print fees. “People out there are struggling with oppressive loans,” Cooper recalls saying.

Hawke, a veteran banking industry lawyer appointed to head the OCC by President Bill Clinton in 1998, wouldn’t budge. He said he would reinforce federal policies that hindered states from reining in lenders. The AGs left the tense hour-long meeting realizing that Washington had become a foe in the initiatory fight close up to reckless real fortune finance. The OCC “took 50 sheriffs off the job for the time of the time the mortgage lending labor was becoming the Wild West,” Cooper says.

This was but one of many instances of state posses sounding early alarms about the irresponsible lending at the resolution of the common monetary critical juncture. Federal officials brushed apart their concerns. The OCC and its sister agency, the Office of Thrift Supervision (OTS), instead sided with lenders. The beneficiaries ranged from now-defunct subprime factories, such as First Franklin Financial, to a savings and loan owned by Lehman Brothers, the collapsed investment heap.

Some states, including North Carolina and Georgia, passed laws aimed at deterring rash loans only to have founded forward authorities undercut them. In Iowa and other states, pledge mills arranged to be acquired by nationally regulated banks and in the process fended off more-assertive state supervision. In Ohio the story took a different twist: State lawmakers acting at the behest of lenders squelched an attempt by the agency of dint of. the Cleveland City Council to slow the subprime frenzy.

A run over of factors contributed to the pledge disaster and credit crunch. Interest vilify cuts and unprecedented outward prime infusions fueled thoughtless lending on Main Street and arrogant gambling on Wall Street. The trading of esoteric derivatives amplified risks it was supposed to mute.

One cause, though, has been largely overlooked: the stifling of prescient state enforcers and legislators who tried to contain the greed and foolishness. They were thwarted in many cases by Washington officials hostile to regulation and a financial industry doctor at exploiting this ideology.

The Bush Administration and many banks clung to the kind of is known as “preemption.” It is a lawful doctrine that can have existence invoked in court and at the rulemaking syllabus to assert that, when federal and state authority over business interfere, the feds prevail—even if it means little or not one regulation.

“There is no discussion that preemption was a significant contributor to the subprime meltdown,” says Kathleen E. Keest, a former assistant attorney commander-in-chief in Iowa who now works against the Center for Responsible Lending, a nonprofit in Durham, N.C. “It pushed aside commonwealth laws and state law enforcement that would have sent the message that there were still standards in place, and it was a big part of the intimation to the industry that it could methodize itself lacking rules.”

“That’s bull—-,” says Hawke, the former comptroller. He returned to private law practice in late 2004 with the prominent Washington firm Arnold & Porter. Once again representing lenders as clients, he confirms the substance and tone of the April 2003 meeting with the state AGs, saying they “simply had a fundamental disagreement.” But he denies that federal preemption played a role in the subprime debacle.