Elizabeth Warren likes to refer to financial regulators as “cops on the beat.” If that’s the case, we’re having a cop shortage.
Numerous high-level positions at multiple federal agencies overseeing the banks have gone unfilled since Republicans took over the Senate. This increases the power of habitually more conservative and bank-friendly staff, creates delays on the still-unfinished Dodd-Frank reform law and has stymied positive policy shifts. Given election-season pressures and ever-present gridlock, there’s only a short window of action before these key regulatory positions remain vacant for the rest of the Obama presidency.
Let’s go down the list. Mark Wetjen, a moderate Democrat, announced his resignation as a member of the Commodity Futures Trading Commission (CFTC), which regulates the giant derivatives market. Republican Scott O’Malia has already left, reducing the five-member panel to three. The Federal Reserve Board of Governors has had two vacancies for over a year: Bank of Hawaii CEO Allan Landon and economics professor Kathryn Dominguez are awaiting action on their nominations by the Senate Banking Committee. Landon has been waiting since January.
At the Securities and Exchange Commission (SEC), two commissioners, Republican Daniel Gallagher and Democrat Luis Aguilar, have announced their resignations. They both promised to stay on until a replacement is named, but one wonders how long that will persist if the nomination process stretches on.
There are open lower-level jobs. The Senate Banking Committee is sitting on 11 nominations, including high-ranking positions at the Treasury Department, the Securities Investor Protection Commission, Federal Deposit Insurance Corporation and more. A nomination hearing on Sept. 10 for a Treasury undersecretary for terrorism and financial crimes will be the first since Republican Richard Shelby of Alabama took the gavel of the committee.
It’s true that the Obama administration has taken its sweet time with naming replacements for financial regulators. They still have yet to name a Fed vice chair of financial supervision, a position created five years ago by Dodd-Frank. But Shelby is unquestionably sitting on the nominations. The Wall Street Journal has speculated that Shelby is waiting for the White House to name one of his former aides, Hester Peirce, to an open SEC slot.
So what is the effect of all these vacancies? First of all, there remains plenty of unfinished business in Dodd-Frank rulemaking. According to law firm Davis Polk & Wardwell, 143 of the 390 total rules in Dodd-Frank, over 35 percent of the total, have yet to be finalized. Vacant seats reduce the ability to complete those rules.
It also increases the power of those who haven’t left, which can be a problem. For instance, the Federal Reserve Board of Governors has had two open spots for well over a year. But the Federal Open Market Committee (FOMC), which sets monetary and bank regulatory policy, includes five of the 12 regional Federal Reserve Bank presidents. Vacancies on the Board of Governors translate into disproportionate power for the regional presidents. And three of the 12 regional presidents, including recent selection Robert Kaplan, formerly held high-level positions at Goldman Sachs. Kaplan believes interest rates should rise and that Dodd-Frank should be streamlined, with hundreds of regulations tossed out.
Top-level vacancies also push more and more responsibilities to the staff level, without as much interference from the principals at the top of the agencies. That has a deregulatory effect. We don’t need a Federal Reserve with more power moving to General Counsel Scott Alvarez, an Alan Greenspan acolyte and anti-regulation promoter, for example.
And then there are the changing policy concerns of short-timers waiting around at the financial regulators for their replacements. Luis Aguilar at the SEC is a good example. For a year or so, Aguilar joined Kara Stein in denying waivers to big banks for automatic penalties incurred when they commit fraud. This week, Citigroup, which the SEC fined $180 million on charges that it defrauded investors in two hedge fund subsidiaries, sought the same kind of waiver. And Republican Michael Piwowar actually agreed with Stein in dissenting from granting the waiver. But Aguilar changed his position, voting with the majority to issue it.
There’s no official explanation for why Aguilar, who was staunchly opposed to removing consequences for fraudulent banks, reversed this viewpoint. But if he’s looking for his next job after the SEC, helping get banks off the hook might look good on a resume for Wall Street.
If Piwowar continues his dissents, that could upset the balance of power on the waiver issue once Aguilar leaves. But Aguilar’s replacement would have to be confirmed for that to transpire.
There’s never a good time for a backlog of empty seats at the financial regulators. But with foreclosure filings inching up for the last five months, bubble-era states like Florida showing inflated home prices and the return of the private-label mortgage-backed securities that drove the financial crisis, fears of a regulatory apparatus asleep at the wheel are justified, if at a lower level than 2008.
And that just covers the concerns of the last crisis. There are other trouble spots out there, from high leverage in energy-sector loans and rising defaults to instability in China and emerging markets infecting domestic financial firms. The shadow banking sector has still yet to be tamed by any rulemaking or supervision. The distortions and power shifts caused by vacancies make it difficult for an already-stressed regulatory apparatus to deal with fast-moving changes and tamp down threats to safety.
Unfortunately, there’s not much reason to believe that this will get worked out. Senate Republicans have little incentive to work to confirm a Democratic president’s nominees. The White House, knowing this, has little incentive to nominate anyone. And so everything just drags along, like a hockey team playing with one man in the penalty box for period after period.
One under-appreciated aspect of our broken governmental system is how it drives incompetence, through petty politics and devolutions in power. Priorities of the people at the top of the regulatory agencies do matter, but so does filling out the roster to attract a wider range of opinions and expertise. Regulators already have one hand tied behind their backs going up against the biggest banks; they don’t need to hamper themselves further.