The quasi re-regulation of finance is less than two years old, but it’s already facing the rollback from leadership in a Republican House of Representatives hostile to the very idea and, not coincidentally, friendly with financial interests.
A couple of reports out Monday illustrate the shifting winds, and these developments have implications for the press itself.
Alabama Republican Spencer Bachus is set to take over as chairman of the powerful House Financial Committee from Democrat Barney Frank. Here’s what Bachus told The Birmingham News (emphasis mine):
“In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks,” he said.
That’s a classic Kinsley gaffe (Bachus tried to backpedal a bit later in the interview), and about as smooth a summation of the Bush era of financial regulation as you’ll find. The amazing thing is: We’ve seen this show before, and we know how it ended.
Naturally, regulators aren’t just there to serve the banks—Congress is, too! (rim shot), as is apparent from this paragraph:
In the 2009-10 election cycle, the finance/ insurance/real estate sector gave Bachus’ campaign account $752,200, most of it from political action committees, according to an analysis by the Center for Responsive Politics.
Democrat Barney Frank, as the guy with the real power at that point, got even more.
Meantime, The Wall Street Journal reports that the SEC, hardly a fearsome regulator in the first place, “is slowing the pace of some investigations and routine inspections as part of a belt-tightening caused by the budget impasse in Congress.”
Republican gains in both houses of Congress have increased speculation that the 12% budget increase proposed for the SEC by President Barack Obama won’t be approved.
This quote takes some stones:
“Why are we rewarding the agency that failed so miserably on so many fronts?” complained Rep. Scott Garrett (R., N.J.).
How to even begin unpacking something like that?
Here’s a story from the New York Times from almost exactly sixteen years ago, a month before Newt Gingrich’s GOP took the House for the first time in forty years. Its headline: “Republicans May Hold Down The S.E.C. and Investor Suits.”
Joel Seligman, a securities law specialist and author of a history of the S.E.C., said he was concerned about the impact that budget cuts could have. “At the moment, certain aspects of the market — such as investment advisers — appear to be near crisis because of a lack of meaningful oversight or inspection being conducted,” Mr. Seligman said. “Unless the S.E.C. receives adequate support for that, you run the risk of a significant number of cases such as those in Orange County.”
The messy bankruptcy of that Southern California county last week provided a mesmerizing backdrop for discussions about Congressional priorities for revising securities litigation rules. Some Democrats wondered whether the new leadership would become more cautious about putting limits on such lawsuits in the wake of the unfolding scandal, which has already prompted investors and the county itself to sue several Wall Street firms over $1.5 billion in losses incurred by an aggressively managed county investment fund.
Read Clinton SEC Chairman Arthur Levitt on how a Republican Congress interfered with the supposedly independent SEC despite having a Democratic President.
Here’s Thomas Frank in August on the Bush II era SEC:
Now, if you’re looking for reasons why the SEC failed in the past they aren’t hard to come by. Start with political leaders who clearly didn’t believe in the mission; proceed to the agency’s grotesquely underfunded workplace where lawyers had to do their own filing, mail-sorting and photocopying; and arrive, finally, at the revolving door, which sometimes transformed SEC jobs into stations on the Wall Street career path and worked fairly predictable effects on enforcement.
This was an agency whose mandate, essentially, was to crawl out on an ice floe and die.
And my friend Moe Tkacik wrote this last year about the beaten-down SEC culture.
Back in 2002 when the Journal still did this kind of thing, it wrote this leder explaining why the markets collapsed in the tech bust (the story went on to win a Pulitzer as part of a package; there was no parallel effort at the paper after the far bigger Crash of 2008).
Here’s the nut:
From the 1930s to the 1970s, Washington embraced an ever-greater role for the federal government. But the economic stagnation of the 1970s convinced politicians in both parties that the pendulum had swung too far. By the decade’s end, Democrat Jimmy Carter launched the modern deregulation movement by freeing up the airline and trucking industries. His successor, Ronald Reagan, even more enthusiastically embraced the wisdom of markets over bureaucrats.
The reforms, the officials believed, would unleash innovation and raise living standards. Those good things did happen. Deregulation and low interest rates spurred a burst of technological investment that accelerated the growth of the economy and slashed the unemployment rate. But the savviest policy makers knew they were making a choice “between economic growth with associated potential instability, and a more civil … way of life with a lower standard of living,” as current Fed Chairman Alan Greenspan recently put it…
In short, it’s clear in hindsight that the marketplace’s own “checks,” touted by Mr. Theobald 15 years ago, weren’t enough to prevent the upheaval roiling the business world today.
One of the five deregulatory points the Journal zoomed in on was “Starving the SEC”:
In May 1994, SEC Chairman Arthur Levitt told a congressional panel that he “would walk on hot coals” for a larger, more stable source of funds for his agency. Since the early 1980s, he told legislators, the value of public offerings had jumped nearly 1,800%, while the SEC staff had grown just 31%.
But Mr. Levitt’s budget campaign faltered, thanks to a clash between two fiery lawmakers with very different ideas about the role of market regulators.
Phil Gramm, of course, was one of those fiery lawmakers:
A conservative economist with a deep skepticism of government, Mr. Gramm had spent the 1980s on the front lines of the war against federal spending. “Unless the waters are crimson with the blood of investors, I don’t want you embarking on any regulatory flights of fancy,” Mr. Gramm once told Mr. Levitt, according to a new book by Mr. Levitt.
Mr. Gramm thought self-funding would make the SEC too powerful.
And the result:
From fiscal 1995 to 1998, the SEC’s work force and budget stayed about constant, adjusted only for inflation. In 1997, Mr. Levitt sarcastically noted to a House panel that SEC funding was below that of the Sportfish Restoration program, but lawmakers didn’t nibble.
During those years, the number of corporate SEC filings grew 28%. Investor complaints rose 20%. The value of initial public offerings rose by a factor of 12. The agency cut back on reviewing financial filings, examining just 11.9% of the statements filed in 1998, down from 18.5% in 1995. It conducted its last thorough review of Enron’s books in 1997.
Point is, the anti-regulation forces again have a foothold in Congress, and the press’s regulatory coverage responsibilities just got that much more complicated—and important. It’s just about impossible to report, say, Phil Gramm’s threatening phone calls and letters to the SEC chair unless one of them tells you about it.
Let’s hope it can rise to the occasion better than it has in the recent past.Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at email@example.com. Follow him on Twitter at @ryanchittum. Tags: Deregulation, Regulation, SEC, The Birmingham News, The Wall Street Journal