Shortchanging a Wall Street Watchdog

A key Wall Street regulator is running out of cash and no one is doing anything about it.

By SHARE
WideModern_131101_bank.jpg
In this Wednesday, March 27, 2013 photo, the Bank of America logo is displayed on the facade of the Bank of America Building in downtown Providence, R.I. The Art Deco-style skyscraper, tallest in the state, is losing its last tenant when the bank’s lease expires in April. The building is known to some as the “Superman building,” for its similarity to the Daily Planet headquarters in the old Superman TV show.

There are several reasons why it wasn't until last week that a major U.S. bank was found guilty of fraud stemming from the financial crisis. The outrage-inducing first of these is that the banks have simply become "too big to jail"; the Department of Justice has been wary of prosecutions because it feared huge penalties would cause some firms to teeter back towards the edge of collapse in a sequel to 2008.

But another reason is one of resources, or rather, the lack thereof. Going toe to toe with Wall Street's legal machine requires a lot of money that federal regulators, at the moment anyway, just don't have.

Case in point, the outgoing enforcement head of the Commodity Futures Trading Commission, which is responsible for policing the country's commodities, derivatives and swaps markets, told the Wall Street Journal that investigations and charges against some traders have been dropped, in part, because there simply isn't enough cash to get them across the finish line:

In an interview, David Meister, who stepped down this week as the CFTC's enforcement chief, said the agency is "absolutely undersized" for the sprawling futures and options markets it must police.

The funding squeeze is forcing the CFTC to make "some very tough choices" about its work, Mr. Meister said. One example: the agency's decision not to charge Julien Grout and Javier Martin-Artajo, the two former J.P. Morgan traders accused by the government of hiding multibillion-dollar losses.

[See a collection of political cartoons on the economy.]

In a speech at Harvard University this week, CFTC Chairman Gary Gensler made similar remarks about his agency's lack of resources. "At 675 people, we are only slightly larger than we were 20 years ago. Since then though, Congress gave us the job of overseeing the $400 trillion swaps market, which is more than 10 times the market we oversaw just four years ago. Further, the futures market itself has grown fivefold since the 1990s," he said. "We need more enforcement staff to ensure this vast market actually comes into compliance and go after bad actors in the futures and swaps markets."

While the attempt to defund Obamacare via the appropriations process and then a government shutdown has garnered all the headlines, Republicans have tried a similar trick with the Dodd-Frank financial reform law of 2010, refusing to give regulators the money they need to implement it, slowing down both rule-writing and enforcement. For several years now, in fact, they've shortchanged not just the CFTC but the Securities and Exchange Commission, which also gained new responsibilities under the law.

This year, President Obama requested more than $300 million for the CFTC; the agency received less than $200 million thanks to a combination of House Republican intransigence and cuts under the so-called sequester. In a piece this week, Businessweek called the CFTC "woefully understaffed, underfunded, and outmatched" in its tangle with Wall Street. The agency will be furloughing workers soon due to budget constraints, despite its massive new responsibilities.

[See a collection of political cartoons on the budget and deficit.]

Lest you think this isn't an explicit strategy on the part of the GOP, here's what Senate Minority Leader Mitch McConnell, R-Ky., said in 2011: "Any move to slow down the agencies' ability to implement rules stemming from the Dodd-Frank law is good for the country … The less we fund those agencies, the better America will be." Rep. Spencer Bachus, R-Ala., former chairman of the House Financial Services Committee, even admitted that financial market regulators didn't have enough money to do their jobs (which didn't stop him from moving more cuts through his committee anyway).

In the perverse world in which House Republicans reside, the fact that regulators didn't stop the 2008 financial crisis means they deserve these budget cuts. "Why are we rewarding the agency that failed so miserably on so many fronts?" asked Rep. Scott Garrett, R-N.J., in 2010. It's a common conservative trick: render government incapable of functioning and then use its inability to function as justification to cut it further.

But this is a debate that's vital to the economic future of the country, as five years after the financial crisis it's still unclear whether or not reforming the financial system will be a successful project. That's due to a variety of factors, but among them is that regulators can't even implement new laws because Republicans have realized that they can block via the funding process that which they couldn't stop either on the floor of Congress or at the ballot box.

In the meantime, Wall Street is back to making huge profits and the financial system is not a whole lot safer for everybody else.

  • Read Ford O'Connell: President Obama Lied About Obamacare – But Will It Matter?
  • Read Susan Milligan: 'Double Down' Reveals the High School Antics of the 2012 Presidential Campaign
  • Check out U.S. News Weekly, now available on iPad