March/ April 2013 He Who Makes the Rules

Barack Obama’s biggest second-term challenge isn’t guns or immigration. It’s saving his biggest first-term achievements, like the Dodd-Frank law, from being dismembered by lobbyists and conservative jurists in the shadowy, Byzantine “rule-making” process.

By Haley Sweetland Edwards

For purposes of illustrating the problem, this article will focus on just one of these landmark laws, Dodd-Frank. It passed more than two and a half years ago, in July 2010, but most of its rules have yet to make it through the rule-making gauntlet. While many liberals have already written it off as a total failure—some were, in fact, writing its eulogy the day it passed—it’s time we had some perspective. It’s true that it’s not as strong as many experts on financial markets had called for. It’s true that it doesn’t break up the big banks, nor fundamentally change the structure of our financial system. We may have been hoping for, say, a bulletproof SUV with state-of-the-art airbags; what we got instead are a few seat belts that need to be welded into our old rig. But as of now, those jury-rigged seat belts are the only thing we’ve got, and given the gridlock on the Hill they’re all we’re likely to get. And the truth is that they’re strong enough that the financial industry is willing to spend billions of dollars to keep them from being installed.

As of now, roughly two-thirds of the 400-odd rules expected to come from Dodd-Frank have yet to be finalized. That includes big, potentially game-changing rules governing inappropriate risk taking and international subsidiaries of American banks, and how exactly we’ll go about regulating derivatives. In the next year or so, the vast majority of these rules will be launched down the rule-making gauntlet. The necessary first step in assuring that they come out the other end as strong as they should be—or that they come out the other end at all—is to understand the challenges they’ll face along the way.

The basic rules of rule making

The rule-making process is governed by the Administrative Procedure Act, which became law in 1946, in response to the New Deal-era expansion of the federal bureaucracy. In the late 1930s and early ’40s, all the new agencies were dancing to their own beat; the APA established a system-wide metronome. Since then, a handful of other laws have been passed, including the Regulatory Flexibility Act, Paperwork Reduction Act, Government in the Sunshine Act, and Congressional Review Act, which also govern parts of the process; but for the most part the APA is the foundation.

Every stage in the rule-making process is guided by the APA. It begins the moment a law is passed and shunted off to the regulatory agency that will oversee its implementation. Once it’s in the agency, the APA governs the activities of a team of rule makers—researchers, analysts, economists, and lawyers—who do a bunch of fact gathering, perform studies, and hold a ton of informational meetings in an attempt to get a handle on how best to abide by the intention of the law and how to apply that intention to real life. Since big laws like Obamacare and Dodd-Frank deal with complex issues, Congress often makes the statutes deliberately vague, deferring to rule makers’ technical expertise and policy decisions, and giving them a significant amount of authority on how to interpret a law. All of that interpretation generally happens in the very beginning of the rule-making process, which is called the Notice of Proposed Rulemaking, or, in the acronymic parlance of the federal bureaucracy, NPRM.

After spending months and months in the NPRM process, the agency eventually publishes a proposed rule, on which, the APA stipulates, the public gets an “adequate” amount of time to comment. Usually, that’s about sixty days, but it can be shorter or longer, depending on how complex or controversial a rule is. After that, the rule makers revise the rule again, taking into account concerns raised by regulated industries and the public’s comment letters.

From there, executive branch agencies like the Food and Drug Administration and the Environmental Protection Agency send their rules to the White House Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA), which reviews the projected costs and benefits of those agencies’ major new rules, as well as the suggestions of other agencies, before the final rule is published and implemented. At independent agencies like the Securities and Exchange Commission (SEC) and the CFTC, a bipartisan panel of commissioners publicly debates and votes on the rule—a process that often results in further revisions and compromises.

Like the rest of us, rule makers use the Track Changes feature in Microsoft Word, which assigns a different color font to each contributor. By the time a complex rule has made it through this whole process, it is “lit up like a Christmas tree,” said Leland Beck, who worked for various agencies for thirty years and practiced administrative law. “A rule becomes a decision on all the comments and revisions and compromises between agencies and all the individuals who got their hands on it.” Eventually the agency publishes a final rule, which is implemented and enforced. Voilá .

Or that’s how it’s supposed to work. But like many things in Washington, that’s just half the story. The rule-making process is actually a much messier, much more cacophonous affair, dictated to a large degree by lawmakers who voted against the law to begin with, and by industry groups who would often prefer that no rules be implemented at all. In the last decade, conservative members of Congress have built ever-higher hurdles that agencies must clear, and done so while cutting their staff and budgets.

Meanwhile, since the passage of Dodd-Frank, financial industry groups have also sabotaged parts of the APA’s carefully plodding process, overwhelming rule makers with biased information and fear tactics and threatening to sue the agencies over every perceived infraction. That’s a big reason why agencies have missed so many of their deadlines for implementing Dodd-Frank—a subtlety reporters frequently miss. (See “Why Agencies Are Always Missing Their Deadlines.”)

“It’s just this constant, never-ending onslaught,” a former SEC staffer told me. “You’re doing battle every day.”

The Gauntlet, Stage 1: Asymmetric warfare in rule making

Public interest and consumer advocates tend to describe the fight over the rules of Dodd-Frank in martial terms. “It’s like World War II,” said Dennis Kelleher, the president and CEO of the nonprofit Better Markets. “There’s the Pacific theater, the Atlantic, the European, the African theater—we’re fighting on all fronts.” Former Senator Ted Kaufman, an outspoken advocate for financial reform, says it’s “more like guerrilla warfare.” The reformers are trying “to make it at the margins, but they’re totally outgunned,” he said.

The financial industry certainly has a spectacularly enormous arsenal. Since the passage of Dodd-Frank, the industry has spent an estimated $1.5 billion on registered lobbyists alone—a number that most dismiss as comically low, as it doesn’t take into account the industry’s much more influential allies and proxies, including a battalion of powerful trade groups, like the U.S. Chamber of Commerce, Business Roundtable, and American Bankers Association. It also doesn’t take into account the public relations firms and think tanks, or the silos of campaign cash the industry has dumped into lawmakers’ reelect-
ion campaigns.

Haley Sweetland Edwards is an editor of the Washington Monthly.


  • Anonymous on March 04, 2013 1:07 AM:

    holy crap.
    well, Democracy was a nice idea. Hopefully some other country will take the ball and run with it but it seems pretty much like a dead experiment here.

  • Rabbler on March 04, 2013 11:48 PM:

    Isn't this what happens when one's greatest accomplishments are vaguely written to enable passage? Of course that couldn't be Obama's fault even though they are his greatest accomplishments. 9 pages of excuses. Is it even possible for Obama to fail?

  • Nate on March 05, 2013 7:57 PM:

    Terrific article, thanks Ms. Edwards.

  • ctnyc on March 05, 2013 10:20 PM:

    Rabbler, most congressional bills are and always have been written somewhat vaguely because they have to be or nothing would ever be passed. The expertise and information that the agencies that must write the rules possess far outweighs the kind of expertise than individual members of Congress have about most issues, so Congress leaves it up to the agencies to decide the rule and regulations that will implement the laws. If Congress were to specify exactly how every bit of a several-hundred page law were to be enacted, it would literally take years to pass a single law. This is part of how our system works. These kinds of things are good to know, and were touched on in the article. Or you could just ignorantly blame Obama for everything.

  • Barney Frank on March 07, 2013 3:41 AM:

    Is it at all possible that some of the vast amount of rules the CFTC and SEC are writing are - how to put this - not very good?

    As an example, the article mentions the fact that the swap dealer registration threshold was raised from $100m to $8 billion (it doesn't mention that it will subsequently fall back to the $3 billion level) and says it's a bad thing to exclude all the tiny swaps users that would have been caught at the lower level.

    But is that correct? I don't know - I'm just asking the question - but given that the largest 10 dealers alone are counterparties to something like three-quarters of all trades, maybe it makes sense to catch those guys plus the 200-or-so dealers below them in the food chain, rather than, say, everyone?

  • The Thinker1958 on March 09, 2013 12:13 AM:

    Government for the current political parties is a game. They have the power. If they don't want the other party to do anything they do things like the one explain in this article. While people suffer in a daily basis Politicians keep playing their games. One day it will be enough for the millions (in the future maybe 200millions) poor people that will realize the scam the Politicians are running. Be prepare for home invasions, burning of Gov buildings, and say bye-bye to your way of life... it has happened through history, it will happen again.

  • Darryl on March 18, 2013 6:42 PM:

    Any other famous examples of brazen political word parsing besides those uncited violations committed by Cheney and Yoo? Is there anything that would come to the mind of everyone but the hackiest of hack writers?

    No? Maybe it just depends on what the meaning of "is" is.

  • Imrational on March 19, 2013 12:10 PM:

    I first learned about this kind of racket back when McCain and Kerry were trying to legalize pirate radio. The FCC found that there was plenty of radio spectrum available for public low powered broadcasters. Unfortunately, the law's intent was gutted by major media who, against all available science, said such stations would give too much interference to their stations.

    I've also dealt with "negotiations " at the municipal level. It's there too.

    It's all about people pushing their own self interest. The only solution is to push transperancy and place average Americans in places to act.

  • Dianna jacskon on March 20, 2013 11:20 AM:

    What a fabulous article. Thank you for writing it.

    What will it take? A total collapse of the system before the banksters and right wing judges and the GOP understand that what they are doing is destructive and against the will of the people? I'm just glad we cashed in securities to own the roof over our heads and buy our car. The whole system has the capacity to go up in smoke because of Wall Street. The aforementioned groups remind me of moths sitting on a carpet. They see the pieces of wool as individual pieces to be eaten but they don't see the entirety of the pattern on the rug, the big picture. All these people chipping away at the legislation in their various suits and robes don't see that by enabling the banks to do whatever the heck they want will result in another Wall St. debacle.

    One final point. This convinces me that we need publicly financed elections. Now.

  • Brian T. Raven on March 22, 2013 2:58 PM:

    A fine piece of work Ms. Edwards. Thank-you.

  • ezra abrams on March 25, 2013 12:08 PM:

    like many liberal commentators in the beltway, you are under the mistaken impression that Dodd Frank was actually *intended* to do good.
    Au contraire: the explicit purpoise of DF was to block any real reform by rule hell: DF was designed to look good, but all actuall decisions would be watered down by regualtory death

    Don't you get it ?? Frank and Dodd, sure as sin, are gonna get pay from the bankers; we already know that Frank takes trips on a hedge fund private jet.

  • rd on March 25, 2013 2:36 PM:

    You would think that even Repubicans would find the banks actions a complete perversion of their so called belief in markets - but no. They only conclusion is that they are totally bought.

  • Bruce on March 25, 2013 6:32 PM:

    ``It is in some ways a Sisyphean task. Here you have a group of rule makers' lawyers, economists, analysts, and specialists sitting around a table. On one side, they've got the language of Dodd-Frank, which requires them, by congressional mandate, to effectively regulate new, never-before-regulated products in never-before-regulated markets that change by the month.''

    These are the things that FDIC insured banks are allowed to do: a)... b) ... c) ...
    anything else is prohibited. What am I missing?

  • JC on April 10, 2013 1:22 PM:

    Incredibly well-written article. I wonder if there might be a 'reality show' in this. I mean, there is a "Hell's Kitchen", where a well-spoken and dramatic English chap, goes into a kitchen and blasts the egregious violations, laziness, and thoughtlessness of that kitchen apart.

    Can you imagine a John Stewart, or someone similar, pushing a new show, all about the 'Sausage Making Process', where this gets exposed on a daily basis, but with an aim to IMPROVE the process, so that recommendations are forecefully made? (Again, similar to Hell's Kitchen.)

    Right now, the 'good government' shows are boring as hell.

    Put in a derring-do Gordon Ramsay, write good and dramatic reality scripts, spice up the 'boring' government work, with a very interesting show about the PROCESS of goverment, in the bowels of the rule-making departments.

    It would work!! It still would be a show with small ratings, but, it could be fascinating enough, if well-written and the star interesting enough, that it would shine enough of a light, to intimidate the lobbying to scurry away back into the darkness.

  • wow'ed by this on April 11, 2013 1:34 PM:

    I think if Obama had the guts, he would have written the rule like this:

    " if your bank has asset value that is more than 0.5 percent of GDP goes bankrupt, all director and officer plus their spouse and children automatically go bankrupt".

    There would be no need to run economic models or be interpreted by lawyers. I would say this would even create smaller government.

  • wow'ed by this on April 11, 2013 1:48 PM:

    Actually I don't even think the law needs to be that draconian. It could just be:

    " If you are a director or officer of a bank with asset value greater than 0.5 percent of GDP, all your asset and your wife and your child can only consist of shares in the bank".

    You then get the incentive both ways.

  • Minz on April 20, 2013 11:19 PM:

    Instead of writing "better" laws (which will be torn apart by lawyers regardless), how about treating the problem at the root - by about banning all campaign contributions to political parties and politicians, and all outside funding of politicians (as a starter).

    Too many outside interests get in and politics is too incentivised by cash to be honest. Take away the cash as a root cause...