Political sleaze hurting financial regulation
WASHINGTON – While the presidential primary campaigns, especially on the Republican side, are giving us a particularly sordid version of American politics, what is going on behind the scenes in financial regulation is every bit as sleazy.
Bernie Sanders, the Vermont senator who is seeking the Democratic nomination, has been railing against a “rigged economy” and “a corrupt campaign finance system,” and the financial industry seems keen on proving him right.
Two episodes in recent weeks illustrate Sanders’s point only too well.
One is an effort by a Republican member of the Commodity Futures Trading Commission to derail that agency’s proposal to curb speculative trading in commodities futures. The other is an attempt in Congress to gut new rules by the Consumer Finance Protection Agency aimed at stopping abuses by payday lenders.
The restrictions on commodities trading were mandated by the Dodd-Frank financial reform to stop the speculation that drives wild swings in food and oil prices, among others, harming consumers and distorting markets.
Christopher Giancarlo, who headed a futures trading firm before joining the CFTC as a Republican appointee in 2014, packed a bogus “advisory committee” with industry representatives and this panel, not surprisingly, released a report late last month claiming these curbs were unnecessary.
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The panel, the Energy and Environmental Markets Advisory Committee (EEMAC), found “scant evidence that the proposed rule is necessary or would be effective to limit excessive speculation in energy markets.”
The proposed rule concerns “position limits” – the number of contracts a trader can hold on a particular commodity – and is the second effort by the regulatory agency to put the curbs in place after the first was torpedoed by an industry lawsuit in 2012.
The industry’s counter-argument is that a certain amount of speculation is necessary to create the liquidity end users of the commodities need to legitimately hedge their exposure.
According to a dissent by the only non-industry member of the nine-person EEMAC, the report itself was not discussed at either of the committee’s two meetings last year but “was produced at the initiative of only two people.”
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Those two are committee member James Allison, a former executive of the ConocoPhillips oil giant, and Craig Pirrong, a University of Houston professor who is a paid consultant for the industry group that manages trading in derivatives like futures and swaps.
Tyson Slocum, the Public Citizen representative on the panel who wrote the dissent, said the “majority report’s conclusion that position limits are unnecessary relies on selective arguments while ignoring significant research” that supports the need for such limits.
This not an arcane debate about obscure rules, Slocum said in a statement releasing his dissent.
“The heart of the situation is whether the agency will do its job and protect consumers,” he said.
Dodd-Frank “clearly ordered the CFTC to establish position limits as a primary tool to combat the excessive speculation that had been harming consumers and hindering market integrity.”
Massachusetts Sen. Elizabeth Warren, an advocate for consumer rights and financial regulation, urged Giancarlo in a letter to withdraw the report because it “is little more than a list of talking points for an industry that hopes to escape meaningful regulation.”
The lopsided composition of the committee itself, she continued, appears to be a “direct violation” of Dodd-Frank, which created the committee but specified it should represent a “wide diversity of opinion.”
The other sleazy episode in financial regulation also brought a scathing riposte from Warren.
While Republicans have routinely attacked the CFPB, Warren’s brainchild to centralize regulation of consumer financial products in one agency, the latest broadside against its proposed rules came from a Democratic lawmaker – and not just any Democrat, but the chair of the Democratic National Committee, Debbie Wasserman Schultz.
The Florida congresswoman has lent her support to a Republican-backed bill to delay CFPB rules against payday lender abuses for two years and to exempt states – like Florida – which have their own laws regulating the activity.
But that legislation has been opposed by more than 500 civil rights leaders, consumer organizations and other advocates because the Florida law, written largely by the industry, has been a failure.
The new bill in Congress, now cosponsored by Wasserman Schultz, “would allow the payday industry to avoid federal regulation altogether by pushing an industry-backed proposal based on a Florida law that has proven ineffective at stopping the payday loan debt trap,” the opponents said in a letter to lawmakers.
Not surprisingly, Wasserman Schultz was one of the prime movers in getting the Florida law passed when she was a state lawmaker, and, equally unsurprisingly, she still receives substantial campaign donations from the financial services industry, including payday lenders.
Wasserman Schultz has come under heavy criticism for her blatant efforts to promote Hillary Clinton’s candidacy for the Democratic nomination. She is also facing a challenge for re-election, with populist Tim Canova taking her on in the state’s Democratic primary.
Warren defended the CFPB and the proposed payday lender rules. Without mentioning Wasserman Schultz by name, she complained last week about the system that hobbles financial regulation efforts in words that could be part of Sanders’s stump speech.
“When it comes to undue industry influence, our rule-making process is broken from start to finish,” she said at a Washington conference on regulation. “At every stage – from the months before a rule is proposed to the final decision of a court hearing a challenge to that rule – the existing process is loaded with opportunities for powerful industry groups to tilt the scales in their favor.”
So if the presidential debates at times seem squalid and shameful, it may be because they reflect the corruption eating away at our political system.
Columnist Darrell Delamaide — @ddelamaide on Twitter — has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service among others.