STEP 4: BULLY THE REGULATORS
A seldom-considered factor in Dodd-Frank is that Congress controls the funding for the federal regulators who are charged with carrying out the new law. Last year, after Republicans attempted to slash the CFTC's funding by more than 33 percent, Congress settled for freezing the agency's budget, despite the fact that under Dodd-Frank, the market that the CFTC is responsible for overseeing soared from $40 trillion to $340 trillion. That same year, Republicans tried to cut the SEC's budget by more than $25 million.
This results in a curious dynamic: When Wall Street is frustrated by regulators in the rule-making process, it can simply lobby Congress to rein them in. The regulators are then forced to strategically surrender on the rules in order to stave off budget cuts, Eugene Scalia or whatever other horror-show phenomena Congress and the financial industry might throw their way.
Take those huge Paul Ryan-led budget cuts that the House passed in April, scrapping the entire bailout portion of Dodd-Frank. The cuts may not survive in the Senate, which is still controlled by Democrats. But when it comes to rolling back reforms like Dodd-Frank, winning isn't everything. These continual whippings of the new law in the House serve a larger purpose, which is to frighten and intimidate regulators like the SEC and the CFTC, who aren't even finished writing the law's actual rules. The message is clear: If you don't write the rules in the weakest way possible, we have the juice to overturn you in Congress.
"What this is, above all else, is a play to put the House on record," says one congressional staffer familiar with the budget-cuttingbattle. "It's a leverage tactic. If they have 75 percent of the Financial Services Committee that says, 'You've made mistakes,' or 'This is too gray,' that is a huge hole card."
Even the CFTC admits this pressure exists: Commissioner Bart Chilton warned in March that his regulators risk being "scared into making rules and regulations that are weak or ineffective because we are overly concerned about what we call 'litigation risk.'" According to Marcus Stanley, policy director for Americans for Financial Reform, one regulator admitted that he worries in advance about Wall Street going over his head. "If we make this rule too tough," the regulator told Stanley, "industry is just going to go to Congress and punch it full of holes."
A prime example of the crack suicide-squad preemptive-surrender strategy practiced by regulators involves the provisions of Dodd-Frank designed to curtail complex derivatives, like swaps, which caused disasters like the crash of AIG and the bankruptcy of Jefferson County, Alabama. Under the law, the SEC and the CFTC must decide which swaps dealers will be governed by new rules, requiring them to maintain more capital and collateral. Originally, the agencies were thinking of regulating any dealer who manages more than $100 million in swaps. But then Rep. Randy Hultgren, a Republican from Illinois, proposed H.R. 3727 – one of the nine GOP-sponsored bills to kill Dodd-Frank – that would raise the threshold to $3 billion in swaps. Overreacting to industry pressure, both the SEC and the CFTC then volunteered to raise the threshold to $8 billion. That means at least two-thirds of all swaps dealers in America will now be exempt from Dodd-Frank. Given the new threshold, consumer advocates calculate, you could make 1,600 swaps transactions a year, each worth $5 million, and still not have to so much as register as a swaps dealer.
The thought provokes something verging on despair in those who have devoted themselves to fighting for real financial reform. "If I didn't have to spend my whole life in this," Stanley says sadly, "it would be funny."
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