Penny-Wise, Wall Street-Foolish
Both Republicans and Democrats won a little and lost a little in this week’s $1.1 trillion spending agreement, as congressional negotiators reached compromises that were mostly reasonable.
Except in one area. Lawmakers unwisely denied funding increases to financial regulatory agencies, which need more resources to finish and enforce the Dodd-Frank financial reforms. This stinginess is what Wall Street wanted, of course. But it won’t protect the financial industry from regulation; it will only make the process more frustrating.
Under the 2014 spending agreement, the Securities and Exchange Commission will get $1.35 billion, which is $324 million below President Barack Obama’s budget request. The Commodity Futures Trading Commission, which oversees commodities and futures transactions worth $400 trillion in notional value - - up from $40 trillion before Dodd-Frank -- gets a mere $215 million, or $100 million less than what the president sought.
This isn’t fiscal prudence. Both agencies return money to the U.S. Treasury in the form of fines and penalties in excess of what they spend. Presumably, better funding would result in more proficient enforcement and even fatter returns to taxpayers.
And the penny-pinching can’t stop the agencies from implementing Dodd-Frank. The 2010 law offers no leeway on whether to regulate. Tight budgets just mean the work must be done by fewer staff, making it harder for industry representatives to get appointments to discuss the rules or enforcement cases.
Nor will fewer resources mean less vigorous enforcement. Instead, the agencies will have to view alleged violations in black-and-white terms: You’re either in compliance or you’re not. Wall Street firms shouldn’t expect flexibility or forbearance when they miss deadlines.
One of the biggest problems in financial regulation today is the lack of cross-border coordination. The conferences and other arenas where regulators from around the globe meet to improve cooperation are now off-limits to the SEC and CFTC staffs. They simply can’t afford the airfares.
Consumers and investors will be less protected, too. The Dodd-Frank law requires the CFTC to create a new regulatory system for interest-rate swaps and other derivatives that contributed to the 2008 financial crisis. But examinations to make sure trading desks are following the rules will take longer than they should. JPMorgan Chase & Co., the U.S.’s largest derivatives dealer, for example, may come up for examination only once every five years.
All the better, some in the industry may say. Keep in mind, however, that it was the CFTC that originated the investigation of interest-rate fixing in the London interbank offered rate market, in which banks were ripping off other banks and their customers. We now know that similar shenanigans were taking place in currency, energy and other markets that depend on benchmark pricing.
With such tight-fisted budgets, the industry will get exactly what it pays for -- regulators who must work nights and weekends to keep up, resulting in morale problems. Even worse, the agencies won’t be able to recruit the best and brightest.
There is a better way. Congress could make the SEC and CFTC self-funded -- as bank regulatory agencies are -- by imposing user fees. (The SEC is partially self-funded now.) Congress should ask securities, futures and derivatives traders to pay a small fee when they execute or clear trades. It’s to their benefit, after all, to keep charlatans out of their profession.
Self-funding is something every president has asked for since the CFTC was created in 1974. Lawmakers have said no, for fear of losing campaign contributions from Wall Street. But it’s in no one’s interest to have less flexible, less informed and less confident regulators doing a less efficient job.
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