The Scholars Who Shill for Wall Street
Professor Todd Zywicki is vying to be the toughest critic of the Consumer Financial Protection Bureau, the new agency set up by the landmark Dodd-Frank financial reform law to monitor predatory lending practices. In research papers and speeches, Zywicki not only routinely slams the CFPB’s attempts to regulate bank overdraft fees and payday lenders; he depicts the agency as a “parochial” bureaucracy that is “guaranteed to run off the rails.” He has also become one of the leading detractors of the CFPB’s primary architect, Elizabeth Warren, questioning her seminal research on medical bankruptcies and slamming her for once claiming Native American heritage to gain “an edge in hiring.”
Zywicki’s withering arguments against financial reform have earned him guest columns in The Wall Street Journal, The Washington Times and on The New York Times’s website. Lobbyists representing the largest consumer finance companies in the country have cited his writings in letters to regulators, and the number of times he has testified before Congress is prominently displayed on his academic website at the George Mason University School of Law.
What isn’t contained in Zywicki’s university profile, CV, byline or congressional testimony is the law professor’s other job: he is a director of the Global Economics Group, a consulting business that boasts in a brochure that its experts have been hired by industry to influence the CFPB and other regulatory agencies. Nor does Zywicki advertise Global’s client list, which includes some of the biggest names in the financial industry, among them Visa, Bank of America and Citigroup.
Last summer, Zywicki’s firm was retained for $500 an hour on behalf of Morgan Drexen, a debt-relief company accused by the CFPB of deceiving consumers and charging illegal upfront fees. None of these potential conflicts of interest, however, have been disclosed during the course of Zywicki’s anti-CFPB advocacy in the media or in government.
After the financial industry lost the battle to defeat Dodd-Frank, it moved quickly to minimize the law’s impact during the long slog of implementation [see Gary Rivlin, “How Wall Street Defanged Dodd-Frank,” May 20]. Academics like Zywicki have played a key role in this process. As Wall Street firms seek to beat back hundreds of rules still under consideration, sponsored scholars have been at the front lines of obstructing reform.
While sponsored research groups are something of a mainstay of Beltway lobbying campaigns, Dodd-Frank has created unique incentives for companies to hire professors to represent their point of view. The first reason is that Dodd-Frank delegates broad rulemaking power for some 400 regulations to a variety of agencies, giving lawyers and lobbyists the opportunity to flood policy-makers with comments, studies and testimony that could be used to affect the outcome of the proposed rules. The Volcker Rule alone—a regulation to prevent federally insured banks from making risky investments with depositors’ money—attracted more than 17,000 comments, including many from professors submitting their research.
Several of the anti–Volcker Rule academics providing comments to regulators, such as Harvard Law School professor Hal Scott, have been paid by investment banks seeking to block the rule. A nonprofit financed by Citigroup, JPMorgan Chase, Wells Fargo and other investment banks has paid Scott nearly $1.3 million in compensation since 2007, as Reuters reported in 2010. Separately, Scott has received more than $1.7 million in cash and stock from Lazard since 2006, when he was elected to the company’s board. Scott’s submissions to regulators neglect to mention these payments and other consulting jobs, including one for State Street Corporation, that may color the professor’s outlook.
“If someone is commenting on a regulation,” says the Sunlight Foundation’s Bill Allison, “there’s no requirement for disclosure.”
The same problem exists with congressional testimony thanks to an ethics procedure change by House Republicans in 2011, which removed a requirement that those giving expert testimony reveal their private sector ties. So-called “Truth in Testimony” forms now ask only if an expert witness has received earmarks or government grants, allowing many Wall Street–sponsored professors to assume the guise of academic neutrality. Jeff Connaughton, who worked on financial reform as the chief of staff to then-Senator Ted Kaufman, says that professors receiving undisclosed payments has become a significant issue. “Academics are hired guns like anyone else,” he says.
The second, and related, reason for the rising demand for sponsored academic research stems from a court ruling that has come to define financial reform implementation. In a decision handed down a year and a day after the Dodd-Frank legislation was signed by President Barack Obama, the DC Circuit Court scolded regulators for failing “adequately to assess the economic effects” of the Securities and Exchange Commission’s proxy access rule, which was mandated by Dodd-Frank.
The plaintiff in the case, the Business Roundtable, was represented by Gibson, Dunn & Crutcher’s Eugene Scalia, a prominent attorney and the son of Supreme Court Justice Antonin Scalia.
The decision—by a panel of Republican judges on a court that has been a hotbed of conservative legal activism—claimed that regulators had “failed to respond to substantial problems raised” by all of the comments submitted by various parties. The decision marked a new standard for financial regulators, who in the past have been given discretion to choose which comments to take into consideration when promulgating a new rule. Though the SEC had produced a detailed sixty-page analysis, this was not enough for the court. Every new rule since then has faced a heightened standard of scrutiny on economic cost-benefit analysis. As a result, financial firms have a new incentive to hire academics to flood the rulemaking process with studies arguing for modifications that will serve their interests.
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