When a crew that calls themselves the "Systemic Risk Council" speaks, it's a good idea to pay attention. After all, the last time people pooh-poohed deep seated problems within the financial system, trillions of dollars vanished into thin air and millions of people were thrown out of work.
Since its creation last year by the Pew Charitable Trusts and CFA Institute, the Systemic Risk Council -- which is chaired by former FDIC head Sheila Bair and advised by Paul Volcker -- has sought to keep up the pressure for financial reform. That's important because a) many of the rules mandated by Dodd-Frank haven't actually been written yet; b) Wall Street is working every day to weaken that law; and c) additional reforms, beyond Dodd-Frank, are still needed.
Yet unfortunately, as Thomas Hedges wrote recently here in Policyshop, sequestration cuts are going to set back the entire process of financial regulation. The SEC and CFTC were already struggling to find the staff capacity to write mandated rules under Dodd-Frank and implement those already written. Now both agenices, facing big budget cuts, will have even fewer bodies to do this crucial work.
All of which underscores the importance of a recommendation made yesterday in Politico by two members of the Systemic Risk Council, William Donaldson and Brooksly Born, to make the SEC and CFTC self-funding agencies.
Donaldson and Born are former chairs of the SEC and CFTC respectively, and they know first-hand how vulnerable these agencies are to Congressional pressures and whims. When key regulators rely on lawmakers for their funding, and those lawmakers, in turn, rely on industry for campaign donations, bad things can happen. And bad things can happen, too, when all of government faces downsizing because of some monumental screwup by the nation's political leaders.
A number of other financial regulatory agencies fund their operations with fees from the businesses they regulate and fines they collect from enforcement cases. The SEC already keeps the fines it exacts, but still depends on appropriations from Congress. Moving to a fully self-funded model for the SEC and CFTC would include a range of benefits:
Self-funding helps agencies hire and retain good staff and insulates them from political pressure exerted by the deep-pocketed institutions they regulate. It also allows them to make and implement strategic decisions to adapt to changing markets and build needed information technology to become more effective and efficient, all of which require multiyear budget certainty. The SEC and the CFTC have none of those advantages.
Another point the authors make -- and this is an obvious one -- is that having the CFTC and SEC fully self fund themselves would reduce costs to taxpayers. There's also a basic fairness in directly passing along regulatory costs to industry, much as motorists finance the DMV with various fees.
The financial industry would have blown itself to smithermeens long ago without oversight, and taken the rest of us with it. It's fitting that Wall Street should pick up the tab for keeping its watchdogs well fed.