The Doors Revolve While We Devolve

Can you remember as far back as the US federal government’s sequestration-induced temporary shutdown of services?  (‘Government services’ – now there’s a juicy oxymoron.)  The best part of the sequester and forced furloughs was that it gave the US financial regulators a credible excuse for further delays in producing missing tesserae critical to providing clarity to the post-crisis regulatory mosaic.  (Don’t you feel just the slightest bit manipulated that the media focused all of our attention on the sequester spectacle, and now our gaze is being directed on yet another crisis du jour, while the last one has been deposited safely into the memory hole?)

Indeed, federal financial regulators were uncharacteristically quick out of the blocks to blame the looming US Government sequester as a major obstacle to timely completion of their regulatory mandate.  To tap into the riches of the memory hole for just a moment, the US Government shutdown lasted from 1 – 17 October, a fortnight of ennui.

On 30 September, Reuters and other business media relayed a feisty message from SEC Public Relations Head John Nester that business at the flagship financial regulator would go on as usual, sequesters and shutdowns notwithstanding.  But on the same day, Bloomberg Business Week ran a piece with the ominous title: ‘There Will Be Fraud: A Shutdown Could Provide a Madoff Moment.’  Well, so much for Mr. Nester’s stiff upper lip.  The Business Week article carried a statement by Bart ‘Beach Boy’ Chilton, who was then still active as a Commissioner of the CFTC, as predicting ‘disastrous impacts’ for consumers: ‘You can bet the do-badders are licking their chops,’ his statement read.  Well, OK, so let’s scare the horses.

In what must have been a tactical decision to wallow in its weakness, the CFTC detailed the extent of forced lay-offs among its ranks: 650 investigative and enforcement personnel would be furloughed, leaving a ‘skeleton staff’ of thirty – thirty!! – to put their shoulders to ‘a bare minimum level of oversight and surveillance.’  Translation:  Davey Crockett is headed for The Alamo.

Not to be outdone, the SEC released dour predictions that anticipated IPOs by Twitter and Chrysler could be delayed.  But the real pay dirt came for the monks in the scriptorium bent over the finer details of the Volcker Rule.

As detailed in my immediately previous blog, the Volcker Rule rode a tidal wave of exuberance that crashed against the craggy shoreline cliffs of dithering and delay.  On the same day as SEC’s feisty Mr. Nestor was informing the markets about the SEC’s stoic preparedness for a long winter’s shutdown, and while the CFTC was publicly wringing its hands about getting by with a staff of thirty stalwarts, Bloomberg ran a lengthy analysis of the Volcker Rule conveying, inter alia, the idea that President Obama had demanded closure on the Volcker Rule ‘in three months’ – meaning, by year-end.  But that this go / no-go decision turned on a delicate and complex cost-benefit calculation being undertaken by a committee of 50 blue-chip economists ‘led by Craig M. Lewis, a veteran finance professor on leave from Vanderbilt University,’ which was coming under ‘increased pressure’ so as to – now reading from the obvious sub-text between the lines – do poor quality work in order to meet an artificial White House-imposed deadline.  Characteristically, the French have a lovely sounding word for such slapdash work: le bricolage.   And for Bloomberg readers insusceptible to such hints, the article’s authors kindly added that previous similar exercises in regulatory bricolage resulted in ‘court challenges that overturned other Dodd-Frank regulations because of faulty cost-benefit analysis.’

So you see, Mr. President, the nation’s finest minds are developing an adequate solution, and we must be patient.  In this light, the federal government shutdown could not have been better timed or more welcome.  It provided breathing room for these well-meaning but highly pressured financial regulators to … find new jobs.

The proverbial Revolving Door between Washington and Wall Street had already begun spinning earlier this year.  The first storm petrels were SEC Chairman Mary Schapiro and the Treasury’s Timothy Geithner, an unrivalled master of the revolving door career.

SEC Chairman Schapiro’s resignation was essentially stale news on the day of its announcement in November 2012; her management of this lynch-pin financial regulator was deemed lackluster by general consensus.  But Timothy Geithner, the godfather of TARP (Troubled Asset Relief Program) and subsequent mega-bucks mega-legislation such as Dodd-Frank, left the Obama Administration in late January 2013 with upbeat walking papers.  While some of this turnover was attributable to the tradition of renewing the blood supply of a second-term administration, the emerging trend was to declare victory and head through the revolving door.

As the year’s events lurched nervously toward the gridlock dénouement in October, the CFTC seemed to take the hint and head – almost en masse – for the exits.  Chairman Gary Gensler and Commissioner Bart Chilton announced their plans to step down in quick succession.  These followed on earlier resignations of Jill Sommers, a Republican commissioner, and the CFTC’s enforcement chief, David Meister.   As a result, only two of five commissioner positions remained actively occupied at a time when the CFTC’s scope of regulatory authority was expanding significantly.

Rapidly replenishing the empty CFTC commission seats does not seem to be a likely prospect.  When the Obama Administration submitted the candidacy of Timothy Massad, who has been managing TARP for three years, as Chairman Gensler’s chosen replacement, the Senate Agriculture Committee (the CFTC’s oversight committee) responded that this would be an agenda item for the next year.

So the general picture remains unfinished and even unclear.  Together with Congress, the Obama Administration hailed the post-crisis reforms – primarily, Dodd-Frank and FATCA – as adequate full-scale machinery for accomplishing the necessary heavy lifting.   Three years later, there doesn’t seem to be a quorum of senior federal regulators left in place to see the job through, or – far less likely – perhaps articulate a rational build-down of legislative-regulatory sweep.

*The author’s views and opinions are entirely his or her own and may not reflect the views and opinions of 360factors.