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Financial Reform Confronts Not-So-Blind Justice

Pres. Obama signs Dodd-Frank in July of 2010Everyone with a sufficiently strong constitution to follow the Republican primary campaign and Mitt Romney’s sequel is well-versed on the theory that burdensome regulation hangs around the neck of the economy like a millstone. Rick Perry wanted to obliterate so many federal agencies that he simply could not keep the list in his spacious mind.

The corollary of this demagogic device can be found in the marbled courtroom of the D.C. Circuit Court, currently dominated by Republican appointees because of confirmation tactics in the Senate and mismanagement by the administration. Opinions abound on how the most important court in the land in matters of governance remains so skewed to the right, but these musings really do not matter to the immediate problem. Which is this: It seems that every single one of the 300-plus regulatory rules needed to implement the financial system reform embodied by the Dodd-Frank Act needs to go through some form of cost/benefit analysis performed by the promulgating agency. Inevitably, the applicable statutory provisions are not uniform and each agency’s duty is unique. Well-paid lawyers are able to assert shamelessly that the law applicable to each agency requires a massive economic cost/benefit analysis. Then again, a lawyer’s shame hurdle is fairly high, especially when his or hers client has the fee-paying capacity of Goldman Sachs, et al.

Yesterday, Americans for Financial Reform hosted an informative conference on the legal and quantitative issues of cost/benefit requirements. In summary, the law should require only consideration of costs and benefits focusing on public benefits and costs, and that the agencies have wide discretion in the process. Economists believe that quantitative analysis is difficult, especially as it pertains to benefits. Unfortunately, how things should work is not way the D.C. Circuit approaches the problem.

The cost/benefit challenge to the financial reform rules originated with a 2011 D.C. Circuit decision (Business Roundtable v. SEC) in which a proxy access rule authorized by Dodd-Frank was sent back to the SEC for inadequate cost/benefit analysis. The Court found no substantive problem with the rule or even the outcome of the cost/benefit analysis. The flaw was the omission of quantitative economic analysis of the costs of an obscure and unlikely potential outcome from the rule. Encouraged by their unlikely success, financial industry representatives have now challenged the CFTC’s position limit rules and have overtly threatened to challenge all significant rules.*

The effect of this ruling and the follow-on litigation has been profound. The SEC has ceased proposing and promulgating rules for all intents and purposes. It cowers in a corner contemplating how, given its limited resources, it can possibly undertake the massive enquiries required by the court in dozens of rulemakings on its agenda. The CFTC is far bolder, but perhaps more at risk since its rulemaking burden is much broader and it is far more impoverished. And the Republican CFTC Commissioners have taken to inserting disparaging statements regarding staff cost/benefit analyses in the record for every action on every significant rule. It is almost as if these commissioners were coordinating their efforts with the litigation teams employed by the Chamber of Commerce, SIFMA, ISDA and the Business Roundtable. What an unfortunate coincidence (and I use the term out of an abundance of generosity) for the public and for those who are fighting tirelessly to protect the public from dangerous and predatory banking practices!