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

In one section, for instance, the judges ask why the SEC would have dismissed public comments suggesting that proxy access could exact a significant economic cost to corporations. Judge Ginsburg writes, “One commenter, for example, submitted an empirical study showing that ‘when dissident directors win board seats, those firms underperform peers by 19 to 40% over the two years following the proxy contest.’ ” But hold the phone. Or, better yet: WTF? Ginsburg fails to note here that the “one commenter” in question is one of the plaintiffs, the Business Roundtable. And as for that “empirical study”? It was conducted by an economic consulting group hired by that same plaintiff. In the rest of the decision, Ginsburg appears to ignore the precedent set by the foundational 1984 Chevron case, which, among other things, stressed that judges must afford “deference” to an agency’s interpretation of a statute, especially when it’s “evaluating scientific data within its technical expertise.”

Questionable judicial behavior aside, the Business Roundtable decision marked “the culmination of a trend empowering regulated entities to strike down regulations almost at will,” wrote Bruce Kraus, a former counsel at the SEC, in a subsequent report. For one, it established an inherent bias—reformers cannot, after all, challenge a rule in court to make it stronger. For another, it opened up the floodgates for future suits. If two of the industry’s most powerful organizations could sue the SEC and overturn a rule on such grounds, it was suddenly feasible for industry groups to sue any agency and overturn any new Dodd-Frank rule using the same arguments.

It was a point that did not go unnoticed by industry. “I would hope the agencies are taking to heart the potential consequences for Dodd-Frank rules,” said lead counsel Eugene Scalia, after the case was decided. (Scalia was also lead counsel on the case that overturned the CFTC’s rule on position limits a year later.) Industry groups have since brought a half-dozen more cases against agencies on practically identical grounds.

The Business Roundtable decision had the immediate effect of adding a whole new lethal section to the regulatory gauntlet, this time complete with flypaper and trapdoors. In the months following, the SEC’s progress through the Dodd-Frank rule making is estimated to have slowed by half as they struggled to “bulletproof” their rules from future lawsuits. (“They have to be more than bulletproof,” Chilton told me, when I asked him if that was a factor for the CFTC, too. “They have to be layered in Kevlar. We go way beyond the requirements of the law.”)

The decision also had the effect of tipping the balance of power at independent agencies. By making an agency’s cost-benefit analysis the centerpiece of the litigation, economic models now hold disproportionate weight. If a single economist at an agency produces a report, based on a single model, and “demonstrates” that a rule would exact steep costs from a given industry, it acts like a trump card, according to former staffers at the SEC and the CFTC. Even if the majority of that economist’s colleagues disagree with him, his report will enter the public record, where it can be cited in a subsequent lawsuit and end up determining if a rule is implemented or not. And economic models are like statistics; you can always find one that supports your position.

Along those same lines, in the wake of Business Roundtable a single commissioner—one of five on a bipartisan panel—now has the de facto power to torpedo a rule simply by questioning its economic impact in a public forum. For example, if a Republican commissioner disagrees with a rule, he will, under normal circumstances, be required to compromise with his fellow commissioners, or risk being simply outvoted. If at least three of his colleagues disagree with him, the rule will pass. The Business Roundtable decision seemed to suggest that a single commissioner’s verbal expression of disapproval could be used later as grounds for litigation and as evidence in court. Indeed, a year after the Business Roundtable decision, in the CFTC’s position limits case, part of Scalia’s argument rested on the fact that former CFTC Commissioner Michael Dunn has expressed misgivings about the rule.

“When a commissioner says publicly, ‘I’m concerned about the economic impact of this rule,’ that’s enough to lay the groundwork for a future case,” said Chilton. Several former rule makers and staffers at the CFTC and the SEC told me they would “not be surprised,” given the wording of these public expressions of disapproval, if these commissions were getting their language directly from industry lawyers.

The most profound weapon the Business Roundtable decision introduced into the regulatory gauntlet is stupefying uncertainty. “It has been paralyzing for the agencies,” the former CFTC rule maker told me. How extensive must their cost-benefit analyses be? What kind of costs must be measured? And costs to whom—the industry or the investors? What were the criteria? “It’s like going into a class and not having any idea how your professor grades,” he said. “Everyone is trying to figure out how to move forward without getting sued.”

In the past, when an agency has been sued over a rule, that litigation has often marked the end of the rule altogether. Most are never re-proposed, and those that are often emerge pitifully weak. It also has the effect of sending an agency back to the starting line, where it must run the gauntlet yet again, only this time with more attention from Congress—which is often the most lethal weapon
of all.

The Gauntlet, Stage 3: Congress’s retroactive attacks

Many of us think of Congress as passing a law, shunting it off to the agencies, then wiping its hands of the matter. Not the case. Lawmakers, and particularly those who voted against Dodd-Frank to begin with, have a number of tools up their sleeves, which they’ve been using consistently since 2010 in an attempt to retroactively weaken the act.

One way has been to go after the regulators personally, lambasting them publically, smearing their reputations, and wasting their time. In the wake of the Business Roundtable decision, for example, the House Financial Services Committee summoned former SEC Chairwoman Mary Schapiro to testify before Congress about why the SEC had failed in its cost-benefit analysis. The Senate Banking Committee, obliquely questioning her competency as a leader, also requested a series of investigations into why her agency’s cost-benefit analyses were falling short. While lawmakers have a legitimate right to ask the heads of regulatory agencies to testify, in the past few years Congress has seemed to blur the line between inquiries and something more akin to the Inquisition. All told, since 2009 Schapiro has been called to testify before Congress forty-two times.

“On one hand, those attempts to create a scandal don’t mean anything,” said Lisa Donner, the executive director of Americans for Financial Reform, referring to Congress’s harassment of Schapiro late last year. “But on the other hand, those performances waste an enormous amount of time. It plays a role. It’s intimidating.”

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...