On March 12, the Senate Banking Committee held a confirmation hearing to consider appointments to head two financial regulatory agencies. The nominees are Mary Jo White, former U.S. Attorney for Manhattan, to succeed Mary Schapiro as head of the Securities and Exchange Commission (SEC) and Richard Cordray, former attorney general of Ohio, as the first director of the Consumer Financial Protection Bureau (CFPB).
The hearing provided further evidence, if any is needed, as to why the nation remains mired in a financial crisis that began more than 40 years ago.
In the case of the CFPB, the administration did something good, but did it in a bad way. The Dodd-Frank Act responded to the fact that banking regulators, especially the Federal Reserve and Comptroller of the Currency, failed to implement legislation that would have enabled them to head off the mortgage crisis by regulating the underwriting practices of mortgage originators.
Therefore, consumer protection authority was stripped from the banking regulators and concentrated in a new regulator, the CFPB, which would be headed by a single director.
Republicans opposed this provision because the industry wanted the power to remain with friendly bank regulators. For some reason, the administration decided to appoint a politician, Cordray, to head the agency after it was unable to appoint its first choice, Harvard Law Professor Elizabeth Warren, now a Sen. Warren, D-Mass., a member of the Senate Banking Committee.
Cordray is acknowledged to be competent and energetic, and he has been doing so much to ingratiate himself with the industry that they might be wise to support him. Rep. Steve Stivers, R-Ohio, a member of the House Financial Services Committee, has written a letter of support.
However, the administration attempted to install Cordray as a “recess” appointment, even though the Senate was not actually in recess when the appointment was made, and a federal court has ruled to this effect on another appointment made the same day.
So Republicans may be committed to opposing Cordray and trying to force him out. Democrats are screaming that the Republicans are playing politics with this appointment, but they were the ones who chose to use a process they must have known would force Cordray to operate under a cloud. This job, for however long it lasts, would give Cordray a useful platform, and he may one day take a seat next to Warren.
But wait, there’s more. The nominee to lead the stalled SEC is the diminutive White, who has made a dynamic record as a federal prosecutor of the terrorists who attacked Wall Street. But when it comes to prosecuting financial institutions and their managers, not so much, as documented in a March 13 New York Times article by Gretchen Morgenson.
Amazingly, for aficionados of captured financial regulation, White’s husband, John, is a securities lawyer in private practice who formerly served as a compliant division head at the SEC.
I have been saying that it’s almost a misnomer to refer to financial services as a regulated industry, because the people who regulate it are the industry’s own lawyers, who go back and forth between the government and private practice through the proverbial revolving door.
For those of you keeping score at home, when Schapiro was appointed, she had been chairman of the SEC’s sister agency, the Commodity Futures Trading Commission (CFTC), and of the securities industry’s friendly self-regulator, the Financial Industry Regulatory Authority. When chairmen of these agencies are appointed, no one can be found who doesn’t have tight industry connections.
Among the current members of the CFTC, Chairman Gary Gensler, serving past the expiration of his term, is a former subordinate of Jon Corzine at Goldman Sachs who acquiesced when Corzine proposed to apply the Goldman Sachs business model to a company he had joined as CEO called MF Global. Three of the other four members of the CFTC are former industry lobbyists, and one worked for two industry groups.
One of the key issues senators asked about during the hearing was whether White will help to get through a regulation friendly to money market mutual funds so it doesn’t have to be done by the less-friendly Financial Services Oversight Council. White said she would get to work on the entire Dodd-Frank agenda.
However, for the purpose of this discussion, it is noteworthy that the reason the Commission is hung up is due to the opposition of a Democrat, Luis Aguilar, who would normally be expected to back the chairman’s proposal, except that before joining the Commission, he worked for the mutual fund lobby, the Investment Company Institute.
Technically, White will be replacing Elisse Walter, who has been serving in an acting capacity since the end of last year and plans to retire from the Commission at the end of this year. For some reason, Walter gave a press interview in which she asserted that she would make a serious effort to move the regulatory agenda and not act as a mere “caretaker.” Why she said that, no one can know, because it is obviously untrue. She must have known that White would be moving into the job in a matter of weeks, now possibly days.
The term of a Republican on the Commission, Troy Paredes, expires this summer, and Walter will be leaving, so it could be another year until the SEC has a full, stable complement of members. The SEC would probably be best served if it could somehow buy out Walter whenever Paredes leaves. However, it looks like the Commission will at least start meeting on Dodd-Frank regulations once White arrives.
Finally, one of the most intriguing colloquies occurred when Sen. Sherrod Brown, D-Ohio, asked a series of tough questions about White’s relationship to the industry. Kudos to him for doing that, given that White is an industry appointee and Brown has a big investment in the cause of the other nominee, Cordray.
Brown explored with White the question of whether the biggest financial institutions are free of any realistic risk of tough enforcement action by virtue of their size. By the time she finished dancing around the issue, giving piecemeal explanations of how the system takes into account who might be affected by, for example, prosecution of a company or its managers, an alert reader would conclude that the answer is yes.
These companies are not necessarily immune from indictment, but the cases tend to languish once the agency has taken credit for bringing the case. Sen. Jack Reed, D-R.I., thought it was germane to tell White on behalf of Jamie Dimon, CEO of JPM Chase, a client of White’s firm, “You’ve done a great job.”
One is reminded of a remark about Warren Christopher, a former Secretary of State: “Warren Christopher is a brilliant lawyer. The question is, who is the client?”
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