Politics & Policy

Starving the Regulators


When Congress overhauled the financial regulation system last year, it handed the U.S. Commodity Futures Trading Commission the tough task of policing the bulk of the derivatives business. Then lawmakers refused to give the tiny agency extra money to hire staff or upgrade its computer systems. The CFTC has been limping along on the same $169 million budget it had before its portfolio ballooned to include nearly $300 trillion in U.S. derivatives trades. It's a little like arming a big-game hunter with a pea shooter.

Six months after the Dodd-Frank law was enacted, the CFTC is struggling under the weight of its expanded duties. The agency has missed several deadlines as it tries to craft dozens of rules to make the derivatives market more transparent. It has restricted staff travel and cut $11 million from its technology budget. On Feb. 4, Chairman Gary Gensler had to address derivatives lawyers in Naples, Fla., by videoconference.

The agency recently warned Congress it may be forced to lay off at least 35 from a staff of about 700 next month unless it gets an emergency infusion of $31 million, according to two people familiar with the commission's budget problems. Even that small boost may never materialize, with Republican lawmakers and President Barack Obama girding for battle over how much to slice from the fiscal 2012 budget, which the President will release on Feb. 14. Representative Barney Frank (D-Mass.), a co-author of the financial overhaul, says the budget standoff could gut much of the law. "Let me be clear," says Frank. "This is a serious, serious threat."

The Securities and Exchange Commission is better off, though not by much. It's operating on a $1.1 billion budget, frozen at the 2010 level. Unable to afford new employees, SEC Chairman Mary Schapiro halted the creation of five offices required by the law, including units to supervise credit-rating firms, encourage whistle-blowers, and oversee municipal bonds. In a Feb. 4 speech, she said the funding problems were impeding the SEC's "core mission" of enforcing securities laws. The head of the SEC division that reviews company disclosures, Meredith Cross, says she's been unable to replace workers who have left and now looks out on 20 empty desks she hoped to fill. The SEC enforcement chief, Robert Khuzami, says he told his attorneys to interview witnesses by videoconference because of budget constraints. He says the agency can't afford technology upgrades to process the electronic tips and other evidence it receives.

Regulators are trying to balance congressional deadlines with writing sensible, practical rules, says Neal Wolin, deputy Treasury secretary. "There has not been any compromise thus far on getting it done right," he says. Frank sees the hand of Wall Street at work. "There is no question," he says, that Republicans are aiming their scalpels at the CFTC and the SEC to slow the derivatives rules that would harm bank profits more than any other new regulation. Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Bank of America (BAC), and Citigroup (C) earned a combined $28 billion on derivatives trades in 2009, the year before the law passed, according to market sources and Federal Reserve data. Those profits are likely to decline as the complex securities are traded more in the open as required by the new law.

Republicans deny they are trying to help the banks. "It wouldn't be all that inappropriate to hit the pause button or extend some of those regulatory deadlines or requirements until we get our arms around where we're headed," says Randy Neugebauer (R-Tex.), who sits on the House Financial Services Committee.

Even without budget politics, the agencies would have had a tough time following the Dodd-Frank law's timetable. The act requires 243 new rules, 67 one-time studies, and 22 recurring reports. Most of the work is supposed to be completed in July, one year after the President signed the measure.

There have been some notable successes. The new Consumer Financial Protection Bureau, still operating within the Treasury Dept., has hired 150 employees and is beginning to focus on two priorities: making credit cards and mortgages more consumer-friendly. Its interim leader, Presidential adviser Elizabeth Warren, has set a goal of creating new loan forms that will eliminate 80 percent of the paperwork involved in buying a home.

Across the bureaucracy, most of the rules that are on track are at the earliest and least controversial proposal stage and could still encounter snags. Others are already provoking fierce opposition. Banks are fighting a Federal Reserve proposal to cap the debit-card fees retail merchants pay to banks that issue the cards. Some analysts have estimated the rule could drain $12 billion in revenue from banks. Camden Fine, head of a trade group for community banks, says he is usually fighting the large banks, but in this case they have banded together to stop the rule. "This has united the entire industry," he says.

While Wall Street firms and their trade associations say they're not asking Republicans to cut agency budgets, there's no denying they want to slow-walk the process. Timothy Ryan, president of the Securities Industry and Financial Markets Assn., cautioned Treasury Secretary Timothy Geithner in a letter earlier this month that the rule-making pace could disrupt markets. "In the balance between strict adherence to deadlines and creating regulations that work to the benefit of the broader economy," Ryan wrote, "I come down on the side of doing it right, rather than doing it fast." Doing it fast may no longer be a worry.

The bottom line: Instead of unleashing a regulatory tsunami, financial agencies are slowing the creation of new rules and warning of layoffs as funds run out.

Schmidt is a reporter for Bloomberg News in Washington.

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