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

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.

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...