3 Reasons Elizabeth Warren Could Be Good for Banks

Obama's consumer protection advisor backs sensible changes

     

The idea of a “zero sum game” where you have to outlaw the worst financial instruments or force banks to lose ground for consumers to gain ground is an oversimplification that serves no one, Warren told me.

“It’s not good for it to be industry vs. consumers,” she said. “Competitive markets work well for consumers and for competitors who offer products the consumers want. And they do not work for those who build business models around fooling people.”

That makes sense for both Wall Street – and Main Street.

3. What Some Banks Lose, Others Will Gain

As she addressed members of the finance summit further, Warren zeroed in specifically on the ins-and-outs of the financial sector and its recent lack of competitiveness due to the size and scale of behemoths like Bank of America (NYSE:BAC), Citigroup (NYSE:C) and others.

“In a noncompetitive market, (small banks) are competing with issuers who appear to be much cheaper. Community banks lost lots of business to mortgage brokers down the street giving a much cheaper product,” Warren said. She added that they had little choice but to throw their hat into the subprime mortgage mess by offering loans consumers thought were a better deal “but risk-adjusted, were not a cheaper product at all.”

If prices are clear up front, and back-end fees or warnings of high risk are not tucked under the rug, then smaller financial stocks actually gain a big competitive advantage. It’s no longer just the reach you have – but the value you can provide to an individual consumer.

What’s more, simplified mortgage documents and processing will enable banks with smaller loan departments to do more with less. Paperwork will be “cheaper to process, cheaper to fill out, and cheaper for regulators.”

True, the big banks with their big lobbies may not like some of these moves. But there are a host of smaller, publicly traded banks out there – not just private credit unions – that will gain a competitive advantage if Warren’s aims are achieved.

Bottom line: There are always reasons to be skeptical of governmental interference. And with many banks off 20% or more so far in 2011 despite gains for the broader market, it would appear that this is not the time to mess with their revenue streams.

But I believe that the idea of building trust through regulations, as the government did with the FDA, is crucial in these times when lenders are seen by many as an economic ill and not our economic solution. I also believe that the idea of a true free market based on more information will help not just consumers, but smaller banks that have trouble competing with the big guys in the current model.

“We live in a world where ‘disclosure’ became an ugly term and it turned into a million words on paper constructed by a lawyer,” Warren told me. If she can change that so consumers clearly know what they’re buying, and even small banks can compete to provide a good deal, everyone wins.

Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

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