Will Wall Street prevail?

Dodd-Frank financial regulation bill could face a Supreme Court test similar to the Affordable Care Act

October 08, 2012|By Michael Greenberger

Corporate-sponsored groups have launched a campaign of litigation in the lower federal courts challenging the legality of the second major piece of President Barack Obama's legislative program, one that received a lot of attention in last week's first presidential debate: the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. When these cases reach the Supreme Court, we could very well see a reprise of the drama surrounding its decision on the Affordable Care Act at the end of this past term.

As was true of the ACA, a Democratic-controlled Congress passed Dodd-Frank over almost universal Republican opposition, including a Senate filibuster. Unlike the ACA, however, Dodd-Frank — while monumental in its regulatory scope — was enacted with relatively little fanfare or controversy among the general public. The statute's essential purpose is to prevent the kind of reckless and wholly unregulated financial shenanigans that led to the 2008 financial meltdown.

While Dodd-Frank may not be as well-known or as controversial as the ACA, the public is certainly aware that highly speculative and undercapitalized betting on the success of subprime mortgages by the "too big to fail" banks caused the crisis, and that when those banks couldn't pay off their bets, the American taxpayer was called on as the lender of last resort, to the tune of trillions of dollars. Those banks survived and prospered, but the U.S. economy as a whole did not.

Even though the second Great Depression was prevented by taxpayer bailouts, the pain to those taxpayers was dire. In the financial meltdown's immediate wake, $19 trillion of household wealth was lost, 8.7 million jobs disappeared, and 6.3 million more Americans sank below the poverty line.

The Dodd-Frank Act has been hailed by most financial market reformers as a way to provide the regulatory weapons to stop these opaque, reckless and undercapitalized casino operations by the big banks. Unfortunately, unlike key provisions of the ACA, Dodd-Frank is not self-executing; almost all of its provisions must be implemented by agency rule-making done in compliance with the rigorous standards dictated by the Administrative Procedure Act.

For example, Dodd-Frank requires the Commodity Futures Trading Commission for the first time to police the previously unregulated and highly toxic derivatives market, which has a notional value of $300 trillion. That includes the now infamous multitrillion-dollar "naked" credit default swaps market, in which the big banks bet on whether the subprime mortgages held by low-income borrowers whose houses were financially underwater would be paid off. The CFTC must implement by year's end well more than 50 rules consistent with both Dodd-Frank and the Administrative Procedure Act to put itself in a position to ┬┐stabilize these "too big to fail" gambling ventures.

Having failed to block the passage of Dodd-Frank, the Republicans, who control the House of Representatives, have aggressively sought to repeal the act or, failing that, to starve the regulators financially so that they cannot enforce the law. Also prominent in this strategy is the flood of lawsuits in federal courts challenging the Dodd-Frank rules by claiming that regulators have used improper cost-benefit analyses.

As interpreted by every administration since President Ronald Reagan's, cost-benefit analysis has entailed a pseudo-scientific algorithmic "test" that foregrounds the costs of business compliance with a given regulation and minimizes its social and economic benefits. Moreover, Wall Street's champions argue that such cost-benefit analyses may be applied only prospectively, meaning that the trillions of dollars in costs that taxpayers have already borne because of a lack of regulation will never be considered.

The Wall Street strategy of using cost-benefit analysis to overturn Dodd-Frank was clearly revealed in a July 2011 decision by a panel of three conservative judges on the Court of Appeals for the D.C. Circuit in Business Roundtable & U.S. Chamber of Commerce v. the Securities and Exchange Commission. Lawyers for the Roundtable and the Chamber argued that an SEC "proxy access" rule mandated by Dodd-Frank failed a cost-benefit test. (The SEC rule requires public companies to provide shareholders with sufficient information to choose among candidates for corporate boards nominated by the shareholders themselves.)

Dodd-Frank has no requirement that a regulatory agency conduct cost-benefit analyses when promulgating a rule, but that did not trouble the appellate panel. It interpreted a very general and highly ambiguous requirement in the SEC's general governing statute — that the commission consider "whether [its] action will promote efficiency, competition, and capital formation" — as mandating that it consider "the economic implications" of its actions and therefore carry out a strict cost-benefit analysis.

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