Jul 12 2011
By Senator Richard Shelby
By Richard Shelby
In the wake of the 2008 financial crisis, there was broad bipartisan consensus that our financial regulators had failed. There was no consensus, however, on whether the regulators themselves had failed or the regulatory structure had failed them.
This presented Congress with a unique opportunity to examine the crisis, determine its causes, assign accountability and, where necessary, change the law. Regrettably, Democrats skipped the first three steps and unilaterally proceeded directly to the fourth in an effort to enact every item on their, as yet, unfulfilled regulatory wish list. The result was the Dodd-Frank Act comprising over 2,300 pages of some of the least-considered statutory language in recent history.
Congress should have undertaken the difficult work of understanding exactly what factors contributed to the crisis, which could have been addressed by regulators and current law, and whether new laws or structures were needed. There was precedent for such an investigation. What is now called the Senate Committee on Banking, Housing and Urban Affairs conducted a two-year investigation of abuses in the financial industry following the stock market crash of 1929. It became known as the Pecora Commission, named after its aggressive chief counsel, Ferdinand Pecora.
The Pecora Commission subpoenaed corporate records and heard testimony from hundreds of witnesses, producing nearly 12,000 pages of transcripts from more than 100 hearings. The investigative staff of lawyers, accountants and statisticians conducted scores of interviews and sworn depositions.
This record, totaling 171 boxes in the National Archives, ultimately laid the groundwork for the passage of the Securities Act of 1933, the Securities Exchange Act of 1934 and the creation of the Securities and Exchange Commission.
I called for a similar investigation on Feb. 4, 2009. Because the most recent crisis is widely regarded as the worst since the Great Depression, Congress should have responded with the same seriousness it did in 1932. This type of thorough approach would have produced a comprehensive record upon which to base targeted legislation.
Instead, Democrats ignored this common-sense proposal and passed the Dodd-Frank Wall Street Reform and Consumer Protection Act without conducting an investigation. They didn’t issue a single subpoena. They didn’t conduct a single deposition. They didn’t hire a single expert. They didn’t even interview a single person who worked in AIG’s Financial Products group, which they credited with being at the center of the financial meltdown.
This missed opportunity is magnified by the scope of the legislation it produced. Dodd-Frank affects not just Wall Street banks but Main Street businesses, consumers and investors across the country. At the very least, Congress should have studied the potential economic effect of the legislation. It did not.
Lacking the necessary information to provide clear directives, Congress granted expansive new authorities to unelected regulators — the very same regulators who failed to do their jobs before the crisis.
They are now entrusted with writing more than 300 new regulations. And given the complexity of the issues, the regulators are understandably struggling to meet the unrealistic statutory deadlines given them in the new Dodd-Frank law.
In this mad rush, the regulators are not devoting the time and effort to determine the costs for businesses or the implications for economic growth and job creation. In other words, a rushed rulemaking process is following a rushed legislative process — and nowhere along the way has anyone stopped to understand how this new tsunami of regulations will affect the real economy. In fact, if anyone within the regulatory structure even suggests such heresy, they’ll be met with calls for their resignation by the proponents of this deeply flawed law.
Democrats seem content to wait until after the adoption of the rules to see their economic implications. Republicans are not approaching the implementation of Dodd-Frank with such a cavalier wait-and-see attitude.
In February, Republican members of the Banking Committee wrote to financial regulators urging them to extend public comment periods and undertake meaningful economic analysis. We also asked them whether they needed more time for rulemaking.
In response, the inspectors general of all the financial regulators issued reports about the economic analysis their agencies are conducting in connection with Dodd-Frank rules. Their reports confirmed my concerns that economic analysis is not being done thoroughly or with a real intent to understand how the rules will affect regulated entities and the economy at large.
A more deliberative rulemaking process would enable potentially affected parties to prepare thoughtful comments. Many businesses across the country are overwhelmed by the volume of proposals that will affect their ability to access credit, allocate capital and manage risk. Others are still unaware that they will be affected at all.
These comments would assist regulators in crafting more effective and efficient final rules. More time and greater consideration of economic impact would facilitate better understanding of how the regulations will work together and allow for a more ordered and deliberate rulemaking process.
Those who have called for a slower pace and more consideration of economic effects are often accused of being in league with Wall Street. The irony is that “Wall Street” banks and large special interests can afford the armies of lawyers and lobbyists to keep pace. The rule-writing process should favor all Americans and the economy as a whole, not just the titans.
The Dodd-Frank Act and the method by which it came to be is the epitome of a ready-fire-aim approach to legislating. For the sake of our economy, regulators must not implement the law in the same fashion it was drafted.