Nice if depressing peek inside the sausage factory of regulation.
Banks: Why Too-Big-To-Fail Is Not Over http://www.forbes.com/sites/stevedenning/2013/04/04/banks-why-too-big-to-fail-is-not-over/ “The Debate on Bank Size Is Over,” writes Simon Johnson in his New York Times column. “The decision to cap the size of the largest banks has been made. All that remains is to work out the details.” Johnson’s optimism was prompted by the recent 99-0 vote on a Senate resolution calling for an end to the subsidy for big banks as a result of their perceived “too-big-to-fail” status. He also took heart from Fed Chairman Ben Bernanke’s comments at a press conference to the effect that unspecified “additional measures” might be necessary to deal with “too-big-to-fail”. “Lobbyists,” Johnson writes, “were, naturally, apoplectic.” A check on Washington hospitals adjacent to K-Street however has yet to detect a single case of apoplexy. If there was widespread apoplexy among Washington lobbyists at news of the Senate resolution, it must have been exceptionally gentle. Indeed, it seems more likely that Washington’s lobbyists would have been celebrating and toasting with champagne the opening of yet another lucrative campaign aimed at ensuring that “the details” of implementing an ill-considered Senate resolution will never actually happen. Details, details, details. It’s not only the devil that is in them. When it comes to banking legislation, there is also a massive army of lobbyists particularly skilled in ensuring that no misguided Senate resolution will ever bother the bottom line of any big bank. Worse than Dante’s Inferno One need only review what is happening to the rule-making process under the Dodd-Frank law, which explicitly directs the administration to implement a wide range of measures to strengthen the financial regulations in the wake of the 2008 meltdown. Three years later, most of the rule-making is bogged down in a massive well-coordinated effort by the financial sector to prevent any meaningful regulations seeing the light of day. The horror story is told in a brilliant article by Haley Sweetland Edwards in the Washington Monthly, It’s a process worse than Dante’s Inferno. Although Dodd-Frank is technically the law of the land, the law means nothing until the “details” are sorted out and it is implemented in effective rules and enforced by an agency. Edwards concludes, correctly, that “As of now, there’s no guarantee or even likelihood that much of the Dodd-Frank law will be made into rules that actually do what lawmakers intended. The rule-making process is not “a boring assembly line with gray-faced bureaucrats diligently stamping laws into rules”. Instead, it’s ‘more of a treacherous, whirling-hatchet-lined gauntlet’. “ She explains that there are three main phases where regulations are “sliced, diced, gouged, or otherwise weakened beyond recognition.” Phase 1: Asymmetric warfare: block, twist or gut the rule The first phase is in the agency itself, where industry lobbyists enjoy outsized influence in meetings and comment letters, on rule makers’ access to vital information, and on the interpretation of the law itself. She explains that it is “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. On the other side, they’ve got a pile of reports, nine out of ten of which were provided by the same industry they’re trying to rein in. Meanwhile, industry lobbyists and lawyers are crowding into their conference rooms on a nearly daily basis, flooding their in-boxes with comment letters, and telling them that if they do something wrong, they’ll be personally responsible for squelching financial innovation and destroying the economy.” The financial sector has a well-disciplined army and a massive home-field advantage. “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.” It’s not just the quantity of access: it’s the quality, too. Thus while public interest organizations met with agencies in giant group meetings on the same day, executives from the industry often met with the agencies’ top staff alone. It would be unthinkable for the heads of firms like JPMorgan [JPM] or Goldman Sachs [GS] to undergo the indignity of a public meeting. Industry lobbyists know 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 maimed than dead: 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. Phase 2: Gut the rule in court The second phase is in court, where industry groups can sue an agency and have a rule killed on a variety of grounds, some sensible, some not. Lobbyists destroy them by subtle, nuanced, backdoor means, such as quibbling over the meaning of phrases such as “as appropriate” or other ambiguities, or by crafting crafty legal arguments and drowning understaffed rule makers in industry-funded hogwash. Thus “a law ends: not with a bang but with a whimper.” For instance, Dodd-Frank explicitly authorizes the SEC to establish a proxy access rule. The SEC issued a rule, but in Business Roundtable vs. SEC, a three-judge panel killed the rule on the grounds that the agency’s cost-benefit analysis was inadequate. As Edwards notes, what sent shockwaves through the rule-making agencies was that this judgment didn’t have anything to do with cost-benefit analysis at all. In the vitriolic decision, the panel of judges, all of whom were appointed by Republican presidents, simply disagreed with the intent of the law and the agency’s policy choice—and that was enough to overturn the rule. The decision has opened up the floodgates for suits to kill any meaningful regulation. If a single economist at an agency produces a report, based on a single model, and “demonstrates” that a rule would exact costs from a given industry, it can be used as a trump card to kill the rule. Moreover the study can come from anywhere, even from the very plaintiff who Is suing to have the rule struck down. All the judge has to conclude is that the cost-benefit isn’t proven, and hey presto, the rule is dead. Stage 3: Retroactively gut the rule in Congress The third is in Congress, where an entire law can be retroactively gutted or poked through with loopholes, or where an agency can be quietly starved to death through appropriations bills. Ever 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. Modus operandi: operate in the dark But the really alarming part of the banks’ home-field advantage is, as Edwards points out, that the process operates largely behind closed doors, supervised by people we don’t elect, whose names we don’t know, while neither the media nor great swaths of the otherwise informed public are paying any attention at all. The Dodd-Frank rules already amount to some 9,000 pages and, as of now, roughly two-thirds of the rules expected to come from Dodd-Frank have yet to be finalized. That includes big, potentially game-changing rules governing inappropriate risk taking and international subsidiaries of American banks, and how exactly we’ll go about regulating derivatives. “It’s just this constant, never-ending onslaught,” a former SEC staffer told Edwards. “You’re doing battle every day.” A premature celebration of the death of too-big-to-fail Thus the celebration for the Senate resolution that gives Simon Johnson so much hope is just a tad premature. The “details” of implementing the resolution entail massive challenges in general as well issues related to this particular proposal. First, the resolution didn’t mention the amount of the implied subsidy and left this “detail” to be sorted out elsewhere. The subsidy will always be an estimate and estimates will inevitably differ depending on the assumptions. Second, there is not even any consensus that size is the real issue with the big banks. Even a liberal critic like Nobel-Prize winning economist, Paul Krugman, has argued that size isn’t the problem. Many argue that it’s the nature of the activities in which the big banks are engaged—gambling in derivatives—which are unsafe at any scale, not the size of the banks that is the issue. Third, studies suggest that larger banks are more robust in coping with crises. In fact, all the financial crashes have been sparked by problems in smaller financial institutions, not big banks. Fourth, financial sector lobbyists will exploit all the preceding issues in a furious counter-action that will likely end in a stalemate. Finally, even if the amount of the subsidy were to be agreed and immune from substantive challenge in the courts, imposing a tax on the big banks would be a massive problem in today’s gridlocked tax-averse Congresss. Solving too-big-to-fail The answer to too-big-to-fail isn’t a new tax or a direct attack on size of the banks. As Albert Einstein observed, we can’t solve complex problems by using the same kind of thinking we used when we created them. We have to think differently. As I have suggested in earlier articles, the answer lies elsewhere:: transparency. Shed as much light as possible on, and let as many people as possible see, what’s going on, with maximum possible opportunities to redress errors. And read also: Why the banks always win: the home-team advantage Big banks and derivatives: why another financial crisis inevitable Banks still too big to fail: six things the Fed must do Banks: From Bubbles & Nuclear Winters To Golden Eras The five surprises of radical management _________ Steve Denning’s most recent book is: The Leader’s Guide to Radical Management (Jossey-Bass, 2010). 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