April 12, 2016 by New Pilgrim
Unmaking of Dodd-Frank”: a perfect case study of the ways an industry with nearly unlimited resources can avoid a set of tough-minded reforms it doesn’t like.
Battalions of regulatory lawyers burrowed deep in the federal bureaucracy to foil reform.
This is how the miracle that was the making of Dodd-Frank—hailed as the most comprehensive financial reform since the 1930s—became a slow-moving horror movie called “The Unmaking of Dodd-Frank”: a perfect case study of the ways an industry with nearly unlimited resources can avoid a set of tough-minded reforms it doesn’t like.
some 3,000 lobbyists had swarmed the Capitol in hopes of killing off pieces of the proposed bill—nearly six lobbyists for every member of Congress. For Michael Barr, then an assistant secretary at the Treasury Department, the trench warfare spurred by Dodd-Frank left him shellshocked.
By Gary Rivlin
APRIL 30, 2013
—A former top official at the Securities and Exchange Commission whose firm counts JPMorgan Chase and Goldman Sachs among its clients—had already sent off a heavily annotated copy of the 848-page bill to colleagues at her old agency. According to a congressional staffer whose boss was a key architect of Dodd-Frank, Nazareth is one of two “generals” running the campaign to undo the bill. The other is Eugene Scalia, a fearsome litigator and son of the Supreme Court justice.
In the months leading up to Dodd-Frank’s passage,clly increased its spending after Dodd-Frank was signed. Whereas commercial banks such as Wells Fargo, Citigroup and JPMorgan Chase, along with their trade groups, spent $55 million lobbying in 2010 (the year Dodd-Frank became law), they would collectively spend $61 million in 2011 and again in 2012, according to OpenSecrets.org. The twenty-eight lobbyists Talbott has on the payroll at the Financial Services Roundtable makes it relative small fry. The American Bankers Association has ninety-one lobbyists representing its interests, while the US Chamber of Commerce has 183. Goldman Sachs has fifty-one lobbyists, JPMorgan Chase sixty, and even the obscure-sounding Securities Industry and Financial Markets Association is armed to the teeth, hiring the services of forty-nine lobbyists.
Even so, those numbers don’t begin to capture the army of people being paid exorbitant sums to beat back reform. “The lobbyists are just the point of the spear,” said Ed Mierzwinski, director of consumer programs for the US Public Interest Research Group (PIRG). “There are also the regulatory lawyers, the research staffs, the PR people and all those loyal think tank supporters shilling for the banks.”
Dodd-Frank’s Achilles’ heel is that it leaves the tough work of writing the actual regulations to existing federal agencies like the Federal Reserve and the Securities and Exchange Commission, which had failed so miserably at protecting the public interest in the run-up to the 2008 crash, as well as to backwater independent agencies like the Commodity Futures Trading Commission (CFTC), which was tasked with regulating a derivatives market that played a central role in the collapse of the global economy.
The story of how Wall Street lobbyists worked the halls of Congress, blocking the appointment of Elizabeth Warren, Obama’s first choice to head the CFPB, or pushing bills aimed at defanging Dodd-Frank, is fairly well-known by now. But it was the stealthy work of battalions of regulatory lawyers, who descended on the private offices of regulators deep inside the bureaucracy, that has proven more crucial to the industry’s effort to pick off pieces of Dodd-Frank. There, a kind of ground war has been going on for almost three years, with the regulators waging hand-to-hand combat to defend every clause and comma in Dodd-Frank, and the lawyers fighting to insert any loophole they can to protect their clients’ extraordinary profits. This is how the miracle that was the making of Dodd-Frank—hailed as the most comprehensive financial reform since the 1930s—became a slow-moving horror movie called “The Unmaking of Dodd-Frank”: a perfect case study of the ways an industry with nearly unlimited resources can avoid a set of tough-minded reforms it doesn’t like.
Price manipulations of basic commodities such as oil and grains through derivatives are another target of Dodd-Frank, which instructs the CTFC to create “position limits”—caps on the portion of a market that financial speculators can own. The need for this check on financial speculators has never been clearer than in recent years, given the wild fluctuations in the price of oil in 2008, when a barrel of crude rose to $145 before whipsawing back to $37 in early 2009, and a spike in the price of wheat and other basic grains that caused rioting around the world.
The push to regulate a new breed of ever more complex derivatives goes back to the 1990s. The catalyst was the central role these instruments played in the financial collapse of Orange County, California, which in 1994 became the largest municipal entity ever to declare bankruptcy. Those in favor of derivatives reform would find their champion in Brooksley Born, who headed the CFTC under Bill Clinton. Think of most derivatives as a bet on the price of something going up or down—an interest rate, say, or mortgage defaults. Her agency was already in the business of regulating the futures markets for commodities such as corn and soybeans, Brucksley Born argued, so why not add this new breed of financial derivatives to the CFTC’s portfolio? But this was in the Clinton era, when Democrats worked overtime to win the affections of Wall Street, and Wall Street knew that transparency would only spoil a good thing.
Clinton’s top economic advisers, including Treasury Secretary Robert Rubin and Lawrence Summers, the deputy who would take his place in 1999, overruled Born and worked with Congress to pass what became the Commodity Futures Modernization Act of 2000, which had the effect of deregulating much of the derivatives market along with basic commodities like oil. Just eight years later, the world economy was in tatters, in no small part because of that decision.