Why It’s Not So Easy To Drain a Swamp
By Norbert Michel, Heritage Foundation Financial Regulations Expert
As everyone from south Louisiana knows, draining a swamp is tricky business. Just when you think you have all the water out, maybe even after it’s been dry for years, something goes wrong and it starts seeping in again.
And draining is dangerous. Alligators and other deadly creatures can disrupt your efforts. Even worse are the mosquitos—flying alone, nearly invisible, they extract what they need and move on. They’re not just a nuisance. Mosquitos carry diseases that can pop up much later, when you least expect it.
If you want to drain a swamp, you simply must deal with the mosquitos. The problem is they seriously outnumber you, they’re everywhere, and they’re relentless. It’s enough to make you think you’d be better off abandoning the project and just let the swamp be a swamp.
The mosquitos make a great analogy to all the special interest groups in Washington, DC.
Any reform-minded, incoming President trying to make major changes faces an enormous uphill battle. For any chance of success, his administration will need to block all the special interest predators that inhabit the swamp. These groups don’t like wholesale reforms, or even simplifying the rules very much. They especially don’t like deregulation. Regulation is actually good for the largest (and best-funded) companies because they have the easiest time complying with regulations. It hits the smaller firms – the upstart competitors – the hardest.
Extensive regulation keeps the small competitors at bay, and that lets the entrenched firms charge higher prices. It also empowers an army of lobbyists and lawyers, since they’re the ones who get paid to secure the best possible deals for their clients. So any administration that aims to, for example, dismantle Dodd-Frank, will have to deal with lots of mosquitos.
Some may find all of this rather odd, but there is ample proof that the largest financial firms have little interest in deregulating their markets. In 2013, JP Morgan Chase CEO Jamie Dimon pointed out that all the new regulation enacted by Dodd-Frank could eventually increase JP Morgan’s market share because it put a “bigger moat” around the company that helped keep competitors out.
All the new capital rules, the Volcker rule, the new derivatives regulations? Dimon doesn’t mind so much because those kinds of things make it more expensive for smaller players to compete, effectively widening the moat.
And it’s not only commercial bankers who like their regulatory moats. Just prior to the 2010 enactment of Dodd-Frank, Lloyd Blankfein, the CEO of investment banking giant Goldman Sachs, said: “We will be among the biggest beneficiaries of reform.”
Here’s another – more informative – supportive statement from Blankfein just prior to Dodd-Frank’s enactment: “The biggest beneficiary of reform is Wall Street itself. The biggest risk is risk financial institutions have with each other.”
Like any good CEO, he knows that the regulatory framework is built on the premise of keeping things going in the event of a crisis. And that means someone else – U.S. taxpayers – helps reduce the risk that “financial institutions have with each other.” And, of course, there are all the industry lobbyists.
The conventional wisdom is that financial companies lobby for deregulation, but that’s not quite right. They tend to lobby for regulatory relief via special rules that benefit their bottom line. That’s a far cry from broad deregulation and free market competition.
Here’s one example that might surprise some people: the Independent Community Bankers of America (ICBA) helped get the Dodd-Frank bill passed. That’s right, one of best known trade associations that represents community banks – the ever oppressed mom and pop lender that, supposedly, is getting crushed by Dodd-Frank regulation – went along with the 2010 law.
In 2013, the Washington Post ran a detailed story of how Cam Fine, president of the ICBA, cut a deal with Rep. Barney Frank (D-Mass.). Here’s a key passage describing their deal over the CFPA, the agency that ended up being called the Consumer Financial Protection Bureau (CFPB):
They jockeyed back and forth, settling on a standard: The CFPA’s supervision would extend only to banks whose assets exceed $10 billion, the Federal Reserve’s suggested dividing line between small and large banks. (The assets of the biggest banks are measured in trillions of dollars.)
Fine knew — but did not volunteer — that just four of the ICBA’s 5,300 member institutions had assets exceeding $10 billion. Frank knew — but did not say — that his compromise would not exempt small banks from any new rules written by the CFPA. Instead, Frank was offering to allow the traditional regulatory agencies to handle enforcement at the smaller banks most of the time, rather than sending a separate examiner from the CFPA.
Fine asked for – and got – a change to the formula used to calculate the fee banks contribute to the FDIC for deposit coverage. The deal saved community banks more than $1 billion per year, at the expense of larger banks. I’m not sure how many small-town community bankers are still big Dodd-Frank fans, but at least they know who to thank for it.
This “go along to get along” approach between lobbyists and Congress is not unique to the banking sector. Take, for example, Tim Ryan, the CEO of the Securities Industry and Financial Markets Association (SIFMA). In 2011, he said:
“Today, the industry’s view as expressed by SIFMA is Dodd-Frank is the law. We are all about providing substantive input so that the government produces final regulations that make sense.”
And it’s not just the large trade associations. After Dodd-Frank required the SEC to issue countless new rules, a group of more than 40 securities lawyers lobbied Congress to increase the SEC’s budget. The group was led by a former SEC employee turned lobbyist.
That’s right. Wall Street lawyers actually lobby on behalf of their federal regulators. Shocking, but true.
No surprise, then, that the ICBA, the American Bankers Association, the Financial Services Roundtable, and all sorts of financial trade groups, are now eager to help with President-elect Trump’s transition process.
It’s not in their best interest to drain the swamp. But they sure would like to get as many like-minded individuals as possible into top financial regulatory posts.
*Originally published at Forbes, click here.