How Wall Street Defanged Dodd-Frank
Gensler’s Open-Door Transparency
The financial industry started huddling in meetings even before Dodd-Frank was signed into law. So, too, did Gensler, who was determined to prepare his agency for the assault he knew was coming. Well before Congress had finalized Dodd-Frank, he and his top people created thirty working groups inside the CFTC, each focused on a different aspect of the bill. Gensler, the Goldman Sachs alum, would take an investment banker’s approach, making each team leader responsible for a missed deadline or botched report. The day before the Dodd-Frank signing ceremony, Gensler gathered his team leaders and told them they’d have just ten days to submit a memo laying out the key challenges they faced in implementing their piece of the puzzle. They’d have until the end of August—five weeks—to rework that plan after receiving feedback. Congress had given them twelve months to finalize sixty rules, and even if that deadline was absurdly ambitious, Gensler wouldn’t let anyone say he hadn’t tried.
Early on, Gensler announced that he would meet with anyone in the financial industry who requested his time. (He recuses himself from meetings with Goldman reps, who meet with his top deputies instead.) The catch was this: his agency would publish every visitor’s name on its website, along with a synopsis of what was discussed. “There was a lot of grumbling for a week or two, but they got over it,” Gensler says. The resulting calendar offers a startling glimpse into the kind of access the industry is given in Washington these days: the CFTC’s records show that Goldman had thirty-one meetings in the first five months after Dodd-Frank became law, or more than one a week. Morgan Stanley, another huge derivatives player, had twenty meetings. As Gensler describes them, every meeting felt more or less the same: “Invariably, they’d all start off ‘We’re all for reform,’ but then it’s ‘But we’re concerned that you don’t appreciate a rule will have this unintended consequence,’” he says. “Or they’d say something like, ‘We need to clarify this,’ which usually meant they want an exception because it threatened a piece of their business.”
Gensler recognized that his open-door policy would favor industry. While Lisa Donner and Ed Mierzwinski and the Consumer Federation’s Barbara Roper were as free to walk through that same open door as the industry representatives, they were all pretty much armies of one. Indeed, a single private equity firm, BlackRock Inc., logged more meetings with the CFTC in those crucial first five months after Dodd-Frank’s passage than the top four consumer advocates, unions and investor protection groups combined. To date, the CFTC has held more than 2,000 meetings inside the agency, almost all with the industry and its highly paid representatives.
The CFTC started publishing draft rules nine months after Dodd-Frank’s passage, offering another chance for the industry to muck up the works. This was the “comments letter” part of the process. Again, consumer advocates and union representatives were free to share their views on whatever the CFTC was proposing, but their lack of resources and boots on the ground meant picking their battles carefully. The big banks, hedge funds and financial trade associations, by contrast, would simply pay a law firm up to $100,000 to research and comment on each proposed rule in letters that ran as long as 300 pages. Savvy financial players know that the 1946 Administrative Procedures Act requires federal agencies to catalog the issues raised and spell out why they are accepting or rejecting each point. The more pages submitted to the CFTC, the more time it would take to methodically sift through every letter. To date, the CFTC has received more than 39,000 reaction letters from the industry, comprising roughly 1 million pages of commentary.
Scalia: ‘An Absolute Bulldog’
And when Wall Street doesn’t win—when, despite everything, an agency writes a rule the industry doesn’t like—there’s always its secret weapon: Eugene Scalia. A partner at the powerhouse DC law firm Gibson, Dunn & Crutcher and the top lawyer in the Labor Department under George W. Bush, Scalia is a thin-faced version of his old man: he has the same dark eyes and heavy brows, the same perpetual five o’clock shadow. Is he as smart as his dad? I ask a congressional staffer whose boss was a key architect of Dodd-Frank. “Probably smarter,” the staffer responds.
Scalia filed his first Dodd-Frank-related suit in September 2010—two months after the signing ceremony. The lawsuit focused on a seemingly trivial matter: a new SEC rule requiring publicly traded companies to pick up the costs of sending out voting materials not just for their own slate of candidates for the board of directors, but for anyone nominated by at least 3 percent of the shareholders. The change seemed one explicitly dictated by law, but Scalia argued that the SEC’s rule was “arbitrary and capricious” and favored special interest investors like state and union pension funds. The DC Court of Appeals, a notoriously conservative body, ruled against the SEC, which chose not to appeal.
The ruling stirred up profound anxieties within the CFTC. It wasn’t the ruling itself, says Andrei Kirilenko, the agency’s chief economist, so much as the court’s rationale. The court, following Scalia’s technocratic argument, found that the SEC had considered some, but not all, studies in its cost-benefit analysis. The judges revealed that they were troubled by the SEC’s out-of-hand dismissal of one study in particular—a study funded, it turned out, by the Business Roundtable, which was one of the two trade associations funding Scalia’s suit.
The ruling hit like a punch to the gut. “The SEC had been working pretty systematically through the rules, but then, when they lost that lawsuit, everything just ground to a halt,” says the Consumer Federation’s Barbara Roper. The SEC claimed to have devoted 21,000 staff hours to writing this one simple directive. It still had another ninety-plus rules to go. And with this precedent, every new rule—whether issued by the SEC, the CFTC, the Federal Reserve or any other agency—would require a massive cost-benefit analysis. Whereas the typical CFTC directive might have included several paragraphs of cost-benefit analysis in the past, says Kirilenko, who left the agency at the end of last year for a teaching post at MIT, eighty pages would now be the norm.
Yet even that wouldn’t be enough. The cost-benefit argument would be central to all seven of the Dodd-Frank-related suits that Scalia has filed so far. Four of those were filed against the CFTC, including a successful challenge that has resulted, at the moment, in the “position limits” aspect of Dodd-Frank being left up in the air. “An absolute bulldog,” Jim Collura says when asked to describe Scalia’s style in oral arguments over the CFTC’s position-limits rule. “I thought he was going to karate-chop the podium in half.” The CFTC has appealed the ruling.