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

“The amount of money and resources they’re willing to deploy to protect the status quo is unlimited,” said Kelleher. His company, Better Markets—one of the slickest and most vocal financial reform shops in town—has a $2 million annual budget, Kelleher said, which is about how much the financial industry spends on its lobbying team every day and a half.

While there’s no record of the total amount the industry has spent, it’s clear that there’s no shortage of money in its war chest. In the last quarter of 2010, just a few months after Dodd-Frank passed, the financial industry raked in nearly $58 billion in profits alone—about 30 percent of all U.S. profits that quarter. With that sort of bottom line, spending a hundred million or so to kill a single rule that could “cost” them a couple billion in profits is a pretty good return on investment.

In 2009, researchers at the University of Kansas and Washington and Lee University studied the return on corporations’ investment in lobbying for the American Jobs Creation Act, which included a one-time corporate tax break, and found that it was a staggering 22,000 percent. That means that for every dollar the corporations spent lobbying, they got $220 in tax benefits. Based on the billions Wall Street has spent to weaken Dodd-Frank, it seems that they have done similar math.

One thing all that industry money buys is a well-disciplined army. According to public records, representatives from the financial industry have met with the dozen or so agencies that regulate them thousands of times in the past two and a half years. According to the Sunlight Foundation, the top twenty banks and banking associations met with just three agencies—the Treasury, the Federal Reserve, and the CFTC—an average of 12.5 times per week, for a total of 1,298 meetings over the two-year period from July 2010 to July 2012. JPMorgan Chase and Goldman Sachs alone met with those agencies 356 times. That’s 114 more times than all the financial reform groups combined.

“For every one hundred meetings I have, only one of them is with a consumer group or citizens’ organization,” said Chilton. While it’s good that regulated industries have a chance to express their opinions and concerns to those who regulate them, he said, “the deck is just stacked so heavily against average people.”

It’s not just the quantity of meetings, it’s the quality, too. Kimberly Krawiec, a professor at Duke Law School, published a study last year analyzing the role of external influence during the NPRM period of Dodd-Frank’s Volcker Rule. (The Volcker Rule would ban proprietary trading, which is when banks trade for their own profits, and not on behalf of their customers, making them more likely to fail.) In her study, Krawiec found that while public interest organizations met with agencies in giant group meetings on the same day, head honchos from the industry often met with the agencies’ top staff alone. Former Goldman Sachs CEO Lloyd Blankfein, for instance, was not expected to share the floor.

That’s not an insignificant advantage, considering that the NPRM period is when “the majority of the actual agenda setting and rule making happens,” Krawiec said. Because APA stipulations require that the public get a fair shake at commenting on a rule before it is implemented, a proposed rule can’t be too different from the final rule or an agency can get sued, she explained. That has the effect of pushing most of the rule making to the very beginning of the process, which is also the least transparent, since agencies don’t have to publish what they’re up to or who their staff is meeting with during this time. Because of increased transparency efforts surrounding Dodd-Frank, agencies have been encouraged to publish all of the meetings that occur during the NPRM period—hence Krawiec’s study.

Krawiec has also found that after the Volcker Rule was proposed the vast majority of substantive public comment letters were from the financial industry, trade groups, and their various proxies—lawyers, lobbyists, and under-written think tanks—all of whom have the time and money to present extensive, if wildly biased, legal and economic arguments. Often, industry lawyers will simply rewrite entire paragraphs of the proposed rule, fashioning loopholes or limiting an agency’s scope with a single, well-placed adjective or an ambiguous verb. Whether a rule survives that change, whether it then can be effectively implemented and enforced, really does come down to such trivialities. In the rule-making process, the minutiae aren’t incidental to the rule; they are the rule. (Don’t believe me? The U.S. Supreme Court recently heard a case on a 1934 SEC rule on fraud that centered entirely on different definitions of the verb “to make.”)

Industry lobbyists are well aware that they don’t need to outright kill a rule; they need only to maim it, and it’s as good as dead. In fact, it’s better than that: it’s on the books, the newspapers cover it—it looks like a success for financial reform—but industry remains as unfettered as it was before. “That happens all the time,” said a former rule maker at the CFTC, who spoke on the condition of anonymity. “The public interest groups get the headline, but if you look at the details, the industry group has actually won. There’s an order of magnitude between the public interest groups’ and the industry groups’ attention to detail.” When I spoke to an industry lobbyist in mid-January, he put that another way. “We can’t kill it, but we can try to keep it from doing any damage,” he said.

Jeff Connaughton, a lobbyist turned crusader for financial reform, said that the “ubiquitous presence of Wall Street” goes beyond meetings and legalese in comment letters. In his book The Payoff: Why Wall Street Always Wins, he describes the tight-knit relationships between industry lobbyists and proxies and government officials as the “Blob,” which, in his experience, “oozed through the halls of government and immobilized the legislative and regulatory apparatus, thereby preserving the status quo.” Many in the Blob are married to one another and move fluidly from industry to government and back again, he told me. For example, CFTC Commissioner Jill Sommers, who recently announced her resignation, is married to Speaker of the House John Boehner’s top aide. She used to work at the Chicago Mercantile Exchange, one of the biggest exchanges in the world, which is overseen by the CFTC; she also worked at the International Swaps and Derivatives Association, the organization that later sued the CFTC to overturn the rule on position limits.

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...