How Wall Street Killed Financial Reform

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Sue their asses! For all the right's supposed hatred of "activist judges," conservatives immediately flocked to the courts in search of magistrates willing to casually overturn the work of elected officials. In the case of the proxy access rule, Wall Street convinced its two favorite lobbying arms, the Business Roundtable and the Chamber of Commerce, to sue the Securities Exchange Commission over a technicality, claiming that the agency had not done a proper cost-benefit analysis before it instituted the new rule. In an appropriately loathsome touch, the Chamber's legal team was led by one Eugene Scalia, son of Supreme Court Justice Antonin Scalia. The younger Scalia, who looks like the product of a twisted test-tube experiment that crossed his father with Ari Fleischer, pitched a federal appeals court on the idea that the proxy access rule was "arbitrary and capricious," and that the SEC hadn't spent enough time studying the rule's effects on "efficiency, competition and capital formation."

In fact, the agency had produced 60 pages of cost-benefit analysis and had spent, according to SEC chief Mary Schapiro, some 21,000 man-hours working on the bill and studying its effects. Still, the court wasn't impressed. In his opinion, presiding judge and Reagan appointee Douglas Ginsburg peed all over Dodd-Frank, vacating the rule, which he dismissed as "unutterably mindless." With striking chutzpah, considering that he was ruling in a case brought by the mother of all special­interest lobbies, Ginsburg also denounced the shareholder rule as a gift to special interests, particularly "unions and government pension funds."

Almost immediately after the win, the gloating Scalia issued a thinly veiled threat to regulators, letting them know that any attempt to implement more limits on Wall Street would likely result in the same kind of lawsuit. "I would hope the agencies are taking to heart the potential consequences for Dodd-Frank rules," he chirped.

The success of the lawsuit cemented Wall Street's strategy for doing away with Dodd-Frank. Rather than challenge the constitutionality of the bill in one broad suit, the finance industry would take the bill apart by pulling out one fingernail at a time. "Dodd-Frank is not one thing but many," Margaret Tahyar, a partner at the white-shoe corporate defense firm Davis Polk, told reporters last year. "There is no reasonable constitutional or statutory challenge on the whole – only on the bits and pieces."

Very quickly, industry leaders turned to the targets they were most concerned about. This time, two bank-friendly industry groups sued the Commodity Futures Trading Commission (CFTC) to stop it from implementing "position limits" in the derivatives market. Unlike the proxy access rule, which was essentially a procedural issue, position limits got right to the heart of a monstrous international problem – the perversion of fuel and food prices by financial speculators. The oil bubble of 2008, in which a barrel of oil rose to a preposterous $146 before falling to an equally preposterous $35, was one result of such wanton speculation; the surge in global food prices that led to the Middle East revolutions last year was another.

The position limits set by Dodd-Frank were designed to prevent any one speculator from controlling more than 25 percent of a commodities market at any given moment. To say that this is an issue that shouldn't be litigated over a technicality is an understatement; it's not a stretch to say that the viability of capitalism itself is at least partially at stake here. The rule, after all, would help ensure that prices are pegged to the real supply and demand of real producers and consumers, not to fantasy bets placed by market-monopolizing speculators. But the industry sued the CFTC over the exact same issue – the supposed lack of sufficient cost-benefit analysis – that the Chamber of Commerce used to derail the proxy access rule. And once again, the industry hired the ass-kicking Scalia, who argued that the CFTC had failed to provide "sufficient evidence" for its decision to establish position limits.

In an even more awesome demonstration of sheer balls, Scalia & Co. also argued that the CFTC's vote to establish position limits was invalid because one of the agency's commissioners, Michael Dunn, did not really believe in the law. Dunn had quit the CFTC to take a cushy job at a Wall Street-friendly law firm, and on the way out the door, he whined that he had only voted for position limits because Dodd-Frank forced him to, calling the rule a "cure for a disease that does not exist." So under the novel test offered by Scalia, rules like position limits – approved by Congress after months of debate – could be invalidated simply because a federal commissioner who signed off on the details wasn't emotionally on board at the moment of the rule's conception.

The lawsuit by Scalia & Co. succeeded in gumming up the works. The industry has tried to get the court to issue an immediate stay on the implementation of position limits, and the case is likely to drag on for months. Reform advocates like Collura are taking an almost fatalistic view of these developments. "Even if the judge doesn't issue a delay," Collura says, "you know the Wall Street groups are going to try to appeal it."


You might think otherwise, but it doesn't naturally follow that because a law has been passed by Congress and signed by the president, said law actually has to be implemented. With Dodd-Frank, the SEC took a brilliant approach to submarining one of its own regulations. The agency was supposed to begin enforcing the new proxy access rule by late 2010. Instead, in October 2010, it granted speculators a last-minute stay – essentially giving the Chamber of Commerce time to prepare its lawsuit to permanently kill the rule.

Position limits are another example. Dodd-Frank ordered the CFTC to begin enforcing the new rule no later than January 17th, 2011. But January 17th came and went, and – no position limits! Gary Gensler, the head of the CFTC and a former executive of Goldman Sachs, then announced that he hoped to implement the rule by September 2011. But September came and went, and soon it was 2012, and before you knew it, the CFTC, like the SEC, was in court, facing a lawsuit that would permanently kill the rule.

Even the president got into the stalling game. During the year of nonaction on position limits, the "disease that did not exist" – energy speculation – returned to ravage the American gasoline market. In the winter of 2011, oil soared above $100 a barrel, despite fundamentals of supply and demand that would have suggested a price drop. Obama blasted fuel speculators for the price hike and announced that he was creating the Oil and Gas Price Fraud Working Group to "root out any cases of fraud or manipulation in the oil markets." He added, in stern and stirring tones, "We're going to make sure that nobody is taking advantage of American consumers for their own short-term gain."

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Matt Taibbi

Matt Taibbi is a contributing editor for Rolling Stone. He’s the author of five books and a winner of the National Magazine Award for commentary. Please direct all media requests to taibbimedia@yahoo.com.