MF Global Holdings Ltd. argued in a December 2010 letter to regulators that futures brokers didn’t need tighter restrictions on how they invest client funds. Ten months later, as MF Global filed for bankruptcy, about $1.6 billion in customer accounts was missing.
Within weeks, U.S. derivatives regulators approved a measure, dubbed the “MF rule,” designed to limit the kinds of transactions firms could make using client funds. The rule had been on the regulatory backburner as lobbyists sought to stall or alter new curbs proposed after the 2008 financial crisis.
Along with JPMorgan Chase & Co.’s recent $2 billion loss, MF Global’s case demonstrates that an army of Washington lobbyists can sometimes succeed in rolling back or delaying U.S. rules and regulations to the detriment of investors and depositors, with rippling effects on the broader economy. Also, their actions can backfire on the businesses that hired them in the first place.
“This is a classic example of how industry claims to know better than the bothersome bureaucrats in Washington,” said Nancy Watzman, a consultant for the Sunlight Foundation, a Washington-based group that advocates open government records.
The group documented nine meetings between MF Global officials and staff from the U.S. Commodity Futures Trading Commission about the financial overhaul. The meetings focused on such topics as money market mutual funds and provisions for compiling information from various accounts, according to the foundation.
“The paper trail companies have left pleading their cases becomes an embarrassment,” Watzman said.
JPMorgan’s loss follows lobbying by its chief executive, Jamie Dimon, to weaken the 2010 Dodd-Frank financial overhaul, which he has referred to as “Dodd Frankenstein.” Dimon’s criticism of regulatory efforts may come back to haunt him and the firm as lawmakers in Washington are pointing to the $2 billion loss as evidence that tougher regulation is needed.
Both examples illustrate former Federal Reserve Chairman Paul Volcker’s comment to reporters following a May 9 Senate hearing that there’s “no question” that lobbying from banks contributed to the complexity of the initial 298-page Dodd-Frank proposal, including many rules that have been delayed.
“I could give you stories all day about lobbyists making things more complicated because they may do it for reasons they want to disrupt the whole process,” Volcker said at the time.
‘Intent’ of Volcker Rule
JPMorgan spokeswoman Jennifer Zuccarelli declined to comment, referring to Dimon’s March 30 annual letter to shareholders in which he said he didn’t “disagree with the intent of the Volcker rule.” At the same time, he was critical of the financial regulatory overhaul.
“As a result of Dodd-Frank, we now have multiple regulatory agencies with overlapping rules and oversight responsibilities,” Dimon said in the letter. “We now have allowed regulation to become politicized, which we believe will likely lead to some bad outcomes.”
JPMorgan employs 12 lobbyists and spent $7.6 million on lobbying in 2011, according to the Center for Responsive Politics in Washington, which tracks spending on Lobbying.
Lobbying topics included patent reform and helping refinance Fannie Mae and Freddie Mac-held mortgages, according to the group. Commercial banks spent a combined $61.8 million in that period, employing 456 lobbyists, compared with the steel industry’s 107 lobbyists and the airline industry’s 198 paid representatives.
Jon S. Corzine, the former New Jersey governor and U.S. senator, was MF Global’s chairman and chief executive officer. Executive Vice President Laurie Ferber said in the Dec. 2, 2010, letter to the U.S. derivatives regulator that it would be “unnecessary” to block futures firms from investing funds from customer segregated accounts. The letter said such restrictions would “eliminate a liquid, secure, profitable and necessary category of investment.”
Gary Gensler, chairman of the Commodity Futures Trading Commission, delayed the rule after a lobbying push by MF Global and another firm, Newedge USA LLC, saying the agency needed more time to assess the proposal. MF Global, the first Wall Street firm to fail since the Dodd-Frank Act became law in July 2010, filed for bankruptcy protection Oct. 31 after making wrong-way bets on European sovereign debt.
‘Time of Stress’
Corzine, who resigned on Nov. 4, later gave testimony that endorsed Gensler’s assessment that the new rule would help protect client funds held by futures firms. “At a time of stress, his arguments may be much stronger,” Corzine said Dec. 8 before the House Agriculture Committee.
Corzine said he was “more in support of” the CFTC’s recommendations for tighter controls. He said he thought “they should be modified a bit.”
Diana DeSocio, an MF Global spokeswoman, declined to comment.
It was hardly the first time high-powered Washington lobbyists, who often are former lawmakers or government officials, succeeded in forestalling rules and regulations or helped broker a policy that backfired on their clients.
The Pharmaceutical Research and Manufacturers of America, the industry’s lobbying group, supported President Barack Obama’s health care proposal after the group’s then-Chief Executive Billy Tauzin negotiated agreements with the White House. The group agreed to $80 billion in discounts and rebates while some provisions it opposed were dropped from the legislation.
PhRMA also sought for the administration to block the importation of less expensive drugs because of safety concerns. “They and everybody else was hoping that by being cooperative they could negotiate certain specifics that would be a little more beneficial to them,” said Joseph Antos, a health care and retirement fellow at the American Enterprise Institute, a Washington group that favors free enterprise and smaller government.
Since then John Castellani, PhRMA’s current chief executive, has said Obama’s proposals cutting billions of dollars from Medicare and Medicaid spending on drugs would hurt his groups. Taking more money from drug companies would result in lost jobs and fewer cures, Castellani said.
“I see our critics and their one-dimensional focus on costs, and I say: ‘How dare they?’” he said in a speech at the group’s annual meeting last month.
Medicare Part D
Matt Bennett, a spokesman for PhRMA, said the group discourages any cuts to Medicare Part D, the drug program for senior citizens. “This does not appear to be the right place to cut,” he said.
The pharmaceutical industry group has continued to lobby on the issue, spending $240 million in 2011 and registering more than 1,500 lobbyists, according to the Center for Responsive Politics.
Another illustration of U.S. companies complaining of Washington regulation is the Environmental Protection Agency and the Obama administration’s efforts to promote clean air policies.
Lobbyists for coal producers such as Arch Coal Inc. and Southern Co. opposed a measure in the U.S. House of Representatives in 2009 that would have capped greenhouse gases from power plants and provided credits that could be traded. The measure also would have provided government investments in technology to capture carbon dioxide from power plants.
Following the legislation’s failure, the EPA is now moving to regulate power plant emissions in a way that may preclude the construction of new coal-fired power plants, without providing the credits or government investments. The EPA pointed to its statement in March that the standard was a “common-sense step” that would minimize carbon pollution and ensure progress toward cleaner and more modern power.
Officials at American Coalition for Clean Coal Electricity, a trade association representing the coal industry, didn’t return messages seeking comment.
“Because these coal interests got their wish, there is little investment in this so-called ‘clean coal’ technology,” said Daniel J. Weiss, director of climate change at the Center for American Progress in Washington.
“Instead, utilities are switching from dirty coal to cleaner-burning, cheaper natural gas,” he said. “Coal and utility companies have no one to blame but themselves for helping strangle legislation that would have invested in ‘clean coal.’”
Examples of lobbying efforts gone awry go back decades and aren’t limited to corporations, said Clyde Wilcox, a political science professor at Georgetown University in Washington.
In 1971, with robust membership and plenty of cash to invest, labor unions backed the Federal Election Campaign Act, which allowed corporations and unions to pay the administrative costs of political action committees. At the time, companies were barred from making direct political donations and unions were more active with PACs.
Unions assumed they would have the upper hand, Wilcox said. Since then, their financial resources and membership have dwindled and they’ve been outspent by companies, with pro-business PACs outnumbering union PACs by more than six-to-one, Wilcox said.
“Almost immediately, the Chamber of Commerce and National Association of Manufacturers encouraged companies to organize PACs,” he said. “Within two years, the unions regretted it.”