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.
Also in the wake of Business Roundtable, Alabama Republican Senator Richard Shelby, as if on cue, wielded another of Congress’s favorite weapons to kill a law in the regulatory process. He introduced a bill suspending all the independent agencies’ major rules until they could be subjected to OIRA, the Office of Management and Budget’s subsidiary, which vets the cost-benefit analyses for new executive branch rules. Had that bill passed, it would have had the effect of stopping all Dodd-Frank rule making in its tracks indefinitely. It didn’t pass, but last summer a similar bill—this one bipartisan—the Independent Agency Regulatory Analysis Act, was introduced and passed in the House, before failing, in the nick of time, in the Senate.
In the two and a half years since Dodd-Frank passed, lawmakers have introduced dozens of other such bills, so-called “technical amendments,” that purport to change or clarify certain sections of Dodd-Frank but would actually gut, defang, or kill the act entirely. Because the bills are presented as mere tweaks to an existing law, and because industry cash is the only way many of these congressmen will get reelected, the bills are often voted on quickly, sometimes even coming up for a voice vote—a procedure usually reserved for uncontroversial issues.
Take the Swap Jurisdiction Certainty Act, for example. That bipartisan bill would have prevented the CFTC and the SEC from regulating derivatives trades conducted by American companies’ subsidiaries overseas. That’s insanity. First, if any of those subsidiaries—much less hundreds of them at once—were to fail, they would threaten and potentially take down the U.S. market. (Indeed, during the 2008 crash, U.S. taxpayer money was used to bail out those foreign-based subsidiaries too, for precisely that reason.) And second, if you only regulate the derivatives traded by American institutions on U.S. soil, American traders will simply scoot their business over to the thousands of subsidiaries abroad, making those unregulated markets even larger and more dangerous. In other words, had this bipartisan, innocent-looking bill passed, it would have undermined all the provisions in Dodd-Frank that attempt to regulate the derivatives market at all.
While the efforts of public interest groups and financial reform advocates, like Americans for Financial Reform, have succeeded thus far in keeping any of these bills from passing, they still have an effect behind the scenes. “There are instances where regulators say, ‘I know what we want to do with this, but if we go too far, Congress is just going to wipe out the whole thing, and I want what we’re doing to last,’ ” said Stanley, the policy director at Americans for Financial Reform. “That’s a calculation.”
A much more common weapon congressional opponents can wield after a law has been passed is a little less dramatic. By attaching riders to appropriations bills, Congress can simply forbid an agency from using its money to enforce one specific rule or another—and, of course, an unenforced rule is a dead rule. Lawmakers can do that even if Congress has passed another law that pointedly mandates that an agency take the action in question. In 2011, for instance, the House Appropriations Committee, which is dominated by Republicans, attached a rider to its funding bill preventing the U.S. Department of Agriculture from using its funds to finalize and implement a series of specific rules helping small farmers fight back against big livestock and poultry corporations. Despite the Obama administration’s attempts to get those exact rules implemented, the rider passed, tying the USDA’s hands and sending small farmers adrift. (For more on this, see Lina Khan, “Obama’s Game of Chicken.”)
Using the same mechanism, Congress also has the power to defund or severely underfund any agency that relies on congressional appropriations, including the CFTC and the SEC—a guillotine it has successfully used for decades. Just last year, for instance, the House Appropriations Committee cut the CFTC’s annual budget by $25 million, leaving it with an anemic $180 million. (For a sense of how little money this is, consider that San Bernardino, a county of about two million people in California, spends more than $180 million just on its public works department.) In 2011, congressional opponents of financial regulation blocked any increase in the SEC’s budget, despite or perhaps because of the agency’s massive new workload with Dodd-Frank. The Republicans’ argument against funding the independent agencies is delightfully absurd: since the agencies have not written and enforced rules fast enough, Congress should “punish” them, rather than “reward” them with adequate funding.
Yet another weapon Congress uses to retroactively kill bills in the rule-making process is to block presidential appointments. In January, another three-judge panel at the D.C. Circuit, led by the same conservative crusader who voted to overturn the SEC’s proxy access rule, Judge Sentelle, ruled that Obama’s recess appointments were unconstitutional. It was a radical decision that has the potential to invalidate rules and guidelines promulgated by the National Labor Relations Board and the Consumer Financial Protection Bureau for the previous year. The decision may be reconsidered (and, heaven help us, affirmed) by the Supreme Court, but in the meantime it brings the independent agencies further into Congress’s orbit.
Congressional Republicans are already using the decision to strong-arm Congress into weakening the CFPB’s independence. The only way Congress will allow Obama to reappoint CFPB Director Richard Cordray, or to install another head, Republican lawmakers say, is if the agency’s funding is brought under congressional appropriations controls. It’s an underhanded move that would eliminate the CFPB’s strongest asset—that it’s not subject to Congress’s manipulative purse strings—and may have the effect of gutting the entire agency, one of the strongest things that’s come out of Dodd-Frank thus far.
Gunning for the finish line
It’s true that Dodd-Frank started out as a compromise. “It was compromise on top of a compromise—a pile of compromises,” said Kelleher of Better Markets. And that’s what we can expect from the rule-making process too, he said. As it stands, how the law has fared in its journey down the regulatory gauntlet has been mixed.
Some rules have been spectacularly hacked to death. Take, for example, a joint rule by the SEC and the CFTC, which was intended to force swaps dealers into maintaining more capital and to prevent horrible scenarios, like the collapse of AIG, from ever happening again. When it was first proposed, the rule required that every dealer trading more than $100 million in swaps should be subject to regulatory oversight. A bill proposed by Illinois Republican Representative Randy Hultgren raised that threshold to $3 billion, but the agencies, intimidated by lobbyists’ doomsday scenarios and under the constant threat of litigation, raised it again: to $8 billion. The rule that eventually emerged now exempts about two-thirds of all swaps dealers from new capital requirements.
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