Saturday, August 22, 2015

There’s a Shortage of Cops on Wall Street — and New Trouble Brewing

By David Dayen
August 21, 2015

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.


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.

[Since President Obama knows Shelby will block his nominations, it is not irrational that he's not spending a lot of time on this.]

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.

[When interest rates rise, unemployment goes up. This is really not a good time for that to happen.]


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.

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