Arriving late but safe at American financial reform

FT.com

We are going to sort out the US financial system. This might seem a bold statement when, two and a half years after the Dodd-Frank Act was signed into law, much necessary regulation is still not on the books. But with the re-election of Barack Obama, I have no doubt that the necessary new rules will be in place in good time. While I share the frustration that many feel about our slow progress, I do not share the angst that often accompanies it. Some of the factors responsible for the pace were inherent in the task.

Some critics have complained that we overloaded the agencies’ circuits with a law that was much too long. The 124-page Dodd-Frank Act is, sceptics note, rather longer than the 30 pages of Glass-Steagall, the financial reform bill passed in 1933 in the wake of the Wall Street crash. But our bill covered more subjects.

A fairer comparison would be with the laws establishing federal deposit insurance, the Securities and Exchange Commission, the investment company acts and many others. We decided to cover all interrelated issues in a financial system vastly more complex than that which existed in the 1930s, and to do it in one bill that treated the system as an integrated whole.

A second complaint is that we left too much to regulators. Trying to be prescriptive would have required setting rules in concrete that we should allow to evolve with experience. Specificity without discretion would have been an invitation to evasion.

A third criticism is both wholly valid and wholly unavoidable. Responsibility for regulating derivatives is divided between two separate agencies: the SEC and the Commodity Futures Trading Commission. This division is both irrational and impossible to fix without a major legislative fight.

The good news is there is a growing bipartisan interest in taking on this task. Until that is done, much important regulation will require the two five-member commissions to agree on a single set of rules. If the new SEC chair is quickly confirmed, the requisite decisions will be made soon.

This brings us to the set of obstacles to filling out the rule book caused by opponents of new regulation. The first of these is the resistance by financial businesses. This should be abating. The clear preference of many of these was not to have any new rules, and from the signing of the bill in 2010 until last November’s election, many hoped that a Republican president would rescue them. With that hope gone, it is no longer in their interest to delay getting rules adopted.

This will mean a shift from efforts to filibuster the administrative process to working seriously for the adoption of appropriate rules (with an effort to lighten them). But this still means a heavy paper flow from regulatees to regulators, and this has given those opposed to the new law their leverage for a combination of partisan and ideological reasons.

With Republican control of the house of representatives – which we had not anticipated when passing the bill – combined with defective rightwing Republican control of the District of Columbia Circuit Court of Appeals, regulators have been hit with what readers of the old Li’l Abner comic strip will recognise as the 'double whammy'.

First, the SEC and the CFTC receive vast amounts of comments for each proposed rule, which they must process. Meanwhile, the Republican House appropriations committee starves them of money. Unlike the bank regulators, the SEC and CFTC have no independent funding.

This is where the DC courts come in. Not only do these agencies have to go through comments, the court then grades their work with a strictness that belies conservatives’ professed opposition to 'judicial activism'. On several occasions, DC courts have struck down SEC and CFTC rules, not because of any constitutional problem, but because the conservative judges think the agencies have given too little deference to the financial industry’s arguments.

Documenting decisions to the degree that the court requires would be difficult in any circumstance. Doing so with the lack of staff and the resources resulting from Republican underfunding is impossible.

This was, in part, what was at stake when the Republican senate minority filibustered to death an Obama appointee to the DC circuit. It will be exacerbated if house Republicans continue to block funding for the agencies. The amounts concerned are too small to be caused by deficit concern. The CFTC funding is in the hundreds of millions of dollars, and fines and fees that it levies cover its costs.

The rules will be completed in time to prevent the type of crises that they are intended to prevent, but later than they should be. But the fault for that will rest with Republican appropriators withholding adequate funding and Republican senators filibustering to maintain the DC circuit as a rightwing bastion.

Barney Frank is a former chair of the House financial services committee and a sponsor of the Dodd-Frank Act.

Copyright The Financial Times Limited 2013.