Dumb Math and Regulatory Wipeout

The TakeAway: House Republicans efforts to reduce the deficit will gut regulation of financial markets and put the nation at risk, so it’s time for investors and the public to fight back.

You’d think that by now, as we try to regain our economic footing in the midst of the Great Recession, with so many people out of work and in horrible financial shape, there would be widespread support for better oversight and regulation of the very financial markets that created this mess.  Or at least support for enacting new rules to clean it up.  But you’d be wrong.  In a stunning reversal of policy making after last year’s historic financial reform, the pendulum has swung back in favor of Wall Street as Congress debates the budget for both the rest of this year and next.  Last night, despite valiant efforts to increase funding for the Securities and Exchange Commission (SEC) by Rep. Barney Frank (D-MA) – who co-authored the Dodd-Frank Wall Street Reform and Consumer Protection Act – the House voted to cut the SEC’s budget for the remainder of FY 2011.  Today the House will vote on other amendments to H.R. 1, a measure to keep the US government funded and operating past March 4 when current funding expires.

As for fiscal year 2012, on Valentine’s Day the White House proposed a $3.7 trillion federal budget that put forth $1.1 trillion in deficit reductions over 10 years, but added billions for regulatory implementation and enforcement.  House leaders weren’t impressed, declaring it dead on arrival.

Level funding is not an option, says House Speaker John Boehner (R-Ohio).  “Our goal here is to cut spending. I’m not going to move any kind of short-term [continuing resolution] at current levels,” Speaker Boehner said yesterday.  In addition to cuts affecting the FBI and Head Start are proposals that neuter financial watchdogsincluding the Consumer Financial Protection Bureau (CFPB) – empowered to protect investors and the general public, thus restoring Wall Street to its glory days of unfettered speculation.

In the name of austerity, these cuts end up restoring power to a handful of oligarchs and shadow financiers that threaten the American way of life.  At a time when Mideast youth are toppling political tyrants, America’s elected officials are delivering us back into the clutches of economic tyrants.

In the memorable words of Talking Heads’ David Byrne, it’s the “same as it ever was”.  That’s why a coalition of activists are calling upon investors and the general public to speak out, letting Congress know that proposed spending cuts within the stopgap 2011 continuing resolution (CR) will cost America much more than they save.

On Wednesday, ShareOwners.org, in cooperation with the Consumer Federation of America (CFA) and the Council of Institutional Investors (CII) launched a Web-based campaign to spare two agencies chiefly responsible for implementing and enforcing Dodd-Frank: the SEC and the chronically underfunded Commodity Futures Trading Commission (CFTC), charged with reducing risk for the over $1 trillion derivatives market.

“Trillions of dollars are at stake in equity belonging to the retirements and savings of Americans,” said Tracy Stewart, Executive Director of Shareowners.org, a nonprofit and nonpartisan organization that educates and organizes US investors to support both short- and long-term financial market reforms.  “The House-proposed budget cuts for 2011 and what is under discussion for 2012 are an invitation to disaster in terms of financial market integrity and efforts to restore investor confidence.

Given the need for the SEC and CFTC to oversee the most sweeping financial reforms since the Great Depression, it is absolutely essential to all Americans that the Senate and the Administration insist that the agencies that protect our financial well-being and the health of the economy be adequately funded to perform their crucial work. We urge all concerned investors to speak out and let Congress know that these cuts will cost Americans much more than they appear to save. They must not gut these agencies in the midst of critical reforms.

Investors and the public are urged to go to http://www.ShareOwners.org to send a message to their members of the U.S. House of Representatives and the U.S. Senate to oppose funding cuts for the SEC and CFTC.

What’s Going On?

Despite the expanded enforcement authority granted by last year’s Dodd-Frank Act (signed by President Obama in July), and last month’s  bipartisan Financial Crisis Inquiry Commission (FCIC) report (already a modest best-seller, which declared the financial crisis “avoidable” and partly caused by a culture of deregulation), last Friday House Republicans proposed $100 billion in 2011 non-security discretionary spending cuts that, among other things, erode the ability of the SEC and the CFTC to do their job.

For the past four days, the House has debated hundreds of amendments contained in this continuing resolution, introduced by the House Appropriations Committee and Rep. Harold Rogers (R-KY).  Among them are provisions that decimate climate change, energy and environmental programs, as well as education, health, and human services – even net neutrality and military bands – leading some veteran GOP observers to say the Tea Partiers may later regret their stance.

Why is this happening? Before last November’s elections, the Democrat-controlled Congress failed to finish its budget process for fiscal 2011, leaving everybody’s budget, including the SEC and CFTC, frozen at 2010 levels through March 4th.  The election of a large group of Tea Party activists whose “Pledge to America” involved cutting the federal deficit means that Republicans must now deliver on their promise.  It also puts Congress and the White House on a political collision course: on Tuesday Obama threatened to veto the GOP’s spending proposals.  And earlier today, Politico reports that a high-ranking aide to House Minority Leader Nancy Pelosi (D-CA) predicts a government shutdown due to inaction before the money’s gone.  (Cue David Byrne.)  Next week, both the House and Senate are scheduled to be in recess.

Neutering Regulators Means…

Despite their new Dodd-Frank obligations, without increased funding the SEC and CFTC won’t be able to upgrade their technologies or hire new staff.  House lawmakers said they wanted to slash $56.8 million from the CFTC’s current funding of $168.8 million for 2011, while the SEC’s budget would fall $25 million from the current level of $1.1 billion.

Rather than saving the government money, these actions are really an attempt “to re-deregulate the economy,” Barney Frank told CNBC on Wednesday. “This is not a budget-deficit issue. It’s an ideological fight.”  Last Sunday, the New York Times opined that the Republican move is “absurd”, especially since taxpayers don’t fund the SEC—Wall Street does.  Since 1996, Congress put the SEC on an entirely self-financed program based on registration and filing fees—a model other financial regulators use.

But unlike those other agencies, the SEC has only partial fiscal autonomy, like a teenager old enough to drive whose parents won’t let her.  Even though it’s funded by user fees, the SEC, unlike the Federal Deposit Insurance Corporation (FDIC) and other bank regulators, can’t set its own budget—Congress does.  An attempt to grant the SEC budget authority was stricken from the proposed Dodd-Frank legislation during the final hours of last summer’s deliberations, when lawmakers eliminated a provision that would have given the SEC the same budgeting power.

As for FY 2012, on Monday President Obama proposed adding $6.5 billion to the budgets of financial regulators, enabling eight agencies to hire 5,000 people to implement provisions of Dodd-Frank, ranging from ”policing derivatives to unwinding collapsed firms deemed too big to fail,” according to CFOWorld. The President’s budget increases the SEC and CFTC budgets for fiscal 2012 (beginning on October 1st), bringing the SEC’s budget to $1.4 billion (up 27% from 2010) and the CFTC’s to $308 million (an 82% increase).  In a statement, SEC Chair Mary Schapiro said, “These funds will provide the SEC with the resources needed to carry out both our longstanding core mission as well as our new responsibilities for derivatives, hedge fund advisers and credit rating agencies.  By law, the 2012 funding is entirely offset by transaction fees such that the SEC budget will not add to the deficit.”

CFOWorld Joshua Gallu puts the cost of reform in context: “Overall, Obama’s plan for implementing the [Dodd-Frank] rules would add about $4.8 billion from taxpayers and another $1.7 billion at agencies that are self-funded through fees, according to a preliminary analysis by Bloomberg Government analyst Cady North. The cost would be roughly equivalent to adding another Army Corps of Engineers to the federal budget.”  Meanwhile, Forbes blogger Halah Touryalai writes about the “pathetic” comparison of the SEC’s budget to the expense accounts of Wall Street entities they’re supposed to regulate.

Some critics claim the President is in a race to the bottom with Republicans that puts the nation at risk.  Meanwhile, Republicans claim Obama’s proposed 2012 budget reductions don’t go far enough, and want to wipe out another $60 billion.  As the Times reports, “If House Republicans get their way and roll back spending to 2008 levels, the SEC budget would fall to $906 million.” Meanwhile, the SEC’s Schapiro has repeatedly said that the agency is nearly broke, and many Wall Street firms agree.  The SEC needs at least 800 more employees to implement Dodd-Frank, and better technology to address events such as May 2010’s “Flash Crash”.

…Crime Does Pay.

Financial crimes are real, even though, as Matt Taibbi writes in the current issue of Rolling Stone, you don’t seek crooks waving guns in liquor stores or dragging coeds into bushes.  But these crimes are worse because the damage is so widespread.  Deliberately preventing those entities charged with protecting us from doing their job is unconscionable.  Without adequate protection, those who benefited from the financial crisis will continue to benefit, and strike again.  This is economic tyranny at its worst.

Taibbi has it right when he says financial crimes are “crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let’s steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy.

They’re attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone’s claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.

Where’s the outrage?


Editor’s Note: Special thanks to Marketplace‘s New York bureau chief Heidi Moore, who coined the term “dumb math” in reference to the House lawmaker expectations that the SEC do more with less.

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