House GOP Move to Hobble Wall Street Regulator

We’ve heard much talk from President Obama and House Majority Leader Eric Cantor, among others, about the need to axe burdensome federal regulations to help get the economy going again.  That lofty goal is the stated rationale for new House GOP legislation (HR 2308) requiring the Securities and Exchange Commission (SEC) to conduct a formal cost-benefit analysis – including a report by economists – before it issues a new rule or launches an enforcement action. 

The future of this legislation — overlooked by mainstream media — could have a very real impact on the well-being of tens of millions of American households who depend upon the already tenuous financial security of their homes and expect a fair marketplace for their investments.

The Cost-Benefits bill was discussed at a September 15 House Financial Services hearing where a former Goldman Sachs VP – now a Democratic Congressman from Connecticut — and SEC chairman Mary Schapiro were among those worrying that the legislation would tie the Wall Street crime fighting Commission’s hands in red tape, risking a repeat of the “catastrophic” weakening of investor protection that led to the financial meltdown. 

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Nevertheless, the legislation has high-level sponsors, including House Financial Services Chairman Spencer Bachus (R-AL, 6th District), a lawyer and former State Senator who on September 8 cited confusing environmental rules faced by cement companies in his district as prime examples of “federal regulatory burdens being imposed on employers.”  See here.

 “Liberating Small Business”;  the Ghost of Former SEC Chairman Chris Cox

The primary sponsor of the SEC cost-benefits’ legislation, Rep. Scott Garrett (R-NJ, 5th Dist.), is a lawyer and former state assemblyman who represents the rolling, affluent countryside of north western New Jersey and chairs the House Capital Markets Subcommittee. On his Web site, Rep. Garrett says the most important thing we can do right now to help the economy is “foster an economic environment that’s accommodating to the American small business community and encourages private-sector job creation.”  The way to do that is by “liberating small businesses from intrusive government regulation and eliminating excessive government spending.” See here.

Thirteen other Financial Services Committee Republicans cosponsored the legislation, which would, in the words of Rep. Garrett, ensure the SEC issues “reasonable rules that do not unduly burden registered companies or negatively impact job creation.”  (See here) Interestingly, one co-sponsor, Rep. John Campbell (R-CA, 48th Dist.) represents the same wealthy Newport Beach district as former Congressman Chris Cox (R-CA).

Some will recall that during the 1990s Rep. Cox, a former corporate securities attorney, championed financial deregulation and cosponsored a controversial law that made it more difficult for investors to recover fraud losses in court.  Later, as President George W. Bush’s SEC chairman, Cox hobbled SEC enforcement activity in the years prior to and during the great financial meltdown by requiring enforcement staff to gain time-consuming clearance from the full Commission before launching investor protection actions. Cox’s requirement was one reason the SEC failed to protect Americans from systemic fraud in the mortgage-backed securities markets, the Madoff Ponzi scheme and much, much more Wall Street wrongdoing in those eventful years.

Former Goldman Sachs VP & Rhodes Scholar Says:  Do “Everything to Avoid Household Wealth Destruction we saw in the Meltdown”

While leading Financial Services Committee Republicans worry about regulation as the country wallows in a finance industry-led economic contraction, at the September 15 hearing several Committee Democrats focused on what went wrong. Rep. Jim Himes (D-CT, 4th District), who represents Westport, Bridgeport and Stamford and is a former Goldman Sachs VP and Rhodes scholar to Oxford, quickly put regulatory costs and benefits into a real world context:

I’ve been uncomfortable sitting here listening to [the merits of] traditional industry cost-benefit analysis.  The financial industry is different [from automobile or other manufacturers]. We are talking about truly catastrophic events if we get it wrong — events that we’ve all lived through. And I’m not sure you can analyze the cost associated with the incredible destruction of American wealth; the millions of people out of work that can happen when you get what statisticians call a ‘tail event.’ It may not happen very often, but when it happens, it’s devastating. 

Since the Glass-Steagall Act was weakened [by permitting commercial banks to engage in risky securities underwriting activities] and a variety of our other financial services regulations were lightened. . . starting in the ’90s, we saw emerging market crises in [in the late 1990s; the Internet bubble [and Enron, WorldCom scandals]; and now the truly catastrophic tail event in which Americans lost tens of trillions of dollars of wealth; millions of Americans thrown out of work partly because we got the regulation wrong.   We should now be prudent and do almost everything to avoid the destruction of household wealth that we saw in the meltdown.

[A full transcript of the hearing is available for purchase from Congressional Quarterly]

“$7.8 Trillion of Wealth Evaporated when Cops were Taken off the Beat”

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Following up on Rep. Hime’s history lesson, another Committee Member, Rep. Ed Perlmutter (D-CO, 7th Dist), went into more detail:

Between July of 2008 and January of 2009 the market dropped 6,000 points. It’s $1.3 billion per point when the cops were taken off the beat and we had a catastrophe . . . That’s $7.8 trillion dollars of wealth that evaporated.  . . . For every man, woman and child in America, that was $26,000 of wealth that evaporated in the stock market during that period of time. So now let’s try to do the cost-benefit analysis of that catastrophe.

To Rep. Perlmutter’s constituents in Denver suburbs and the towns of Golden and Lakewood, the loss of $26,000 in wealth is a lot of money.  Surely, many of his people have lost much more than that in plunging real estate value.  As a measure of what Rep. Perlmutter hears at home, consider an interactive survey on his website.  Most respondents believe repealing tax cuts for millionaires and billionaires (37.9 percent) and ending the wars in Iraq and Afghanistan (20.5 percent) are the most “responsible ways to balance the federal budget.”

 SEC Chair Mary Schapiro: “Costs of Regulation Easier to Quantify Than Benefits”

SEC chair Mary Schapiro, who is not known for overzealous law enforcement, told Committee Members that requiring the Commission to conduct lengthy cost benefit analyses before every enforcement action would harm investor protection.  In her words:

The costs [of regulation] are almost always easier to quantify than the benefits.  And, failure to act has a cost as well that we often don’t quantify. . . [I]f we don’t act, what are the potential ramifications of that if other events come to pass?  My fear about this legislation is that it layers so many analyses on top of what we already do, that we’re — we’re set up to fail. . . . — all of these things, some of which conflict, some of which seek to protect market participants [brokers, investment bankers] — well, sometimes we need to protect market investors from market participants.

Committee Members Michele Bachman and Ron Paul Otherwise Engaged

While their attendance would have made it a more lively hearing, House Financial Services Members Bachman and Paul were unfortunately too busy out beyond the Capitol Beltway to weigh-in at this time.

Whether the SEC Cost-Benefits legislation advances or sinks, its fortunes mirror the larger ideological and fact-based arguments that elude resolution in today’s Washington.  And, like the macro-economic theoretical fights and fiscal policy paralysis in our nation’s capital, the outcome will affect the financial security of all Americans.