In Search Of Excellence: The President’s Current Choices To Oversee Wall Street
With 16 months left in his term, President Barack Obama has the opportunity to fill a number of senior positions in agencies that oversee Wall Street. At both the Commodity Futures Trading Commission and the Securities and Exchange Commission, there is one open Republican slot, and one open Democrat slot – a total of four open seats. Each of these agencies have five commissioners. At the Federal Reserve Board, there are two open positions to serve among the seven governors. The regulatory agencies prohibit all commissioners coming from the same party.
The President can go one of two directions. First, he could find confirmable nominees. That’s inside-the-Beltway jargon for individuals who can win a Senate majority vote. In this Republican-controlled chamber, that means avowed conservative Republicans paired with low profile, moderate Democrats.
Or second, the president could name excellent nominees.
If the president names excellent nominees, they are unlikely to win a confirmation hearing, let alone a vote.
Yet if he takes the other path, naming confirmable nominees may not actually lead to Senate action either. For example, Sen. Richard Shelby (R-Ala), chairman of the Senate Banking Committee, has chosen to sit on the two nominations for the Federal Reserve. That’s not because the committee is distracted or otherwise engaged, or that these nominees are excellently not confirmable. Chair Shelby is moving lesser nominations, such as for the Under Secretary for Terrorism and Financial Crimes as the Treasury. It’s the chair’s political choice.
Here’s the case for naming excellent nominees.
First, filling the seats isn’t necessary. The practical fact is, these regulatory bodies can operate without a full complement of governors or commissioners. They already do. The CFTC now runs with only three of five commissioners — two Democrats, including the chair, and one Republican. At the SEC, Republican Commissioner Daniel Gallagher announced he will leave in October, bringing the five-seat commission down to four sitting officials. The term of Democratic SEC Commissioner Luis Aguilar expired in June. The statute provides that he can remain in office until the end of President Obama’s term in 2016 if he is not replaced. That means the SEC will run with four of its five commissioners.
Second, naming confirmable nominees can disserve America. Consider SEC Commissioner Gallagher. The president nominated him to a Republican slot in 2011. The president might have known he’d be resistant to Wall Street reform because Gallagher previously served as an assistant to SEC Chair Christopher Cox. Under Cox’s watch, investment banks Bear Stearns and Lehman Brothers failed. As we all know, their mischief proved ground zero for the financial crash of 2008. Sen. John McCain (R-Az) called on President Bush to fire Cox.
Sure enough, as SEC commissioner, Gallagher has belittled Obama’s Wall Street Reform Act as misguided. He flaunts the commission’s congressional mandate to implement rules, voting against proposed and final rules, openly declaring that the SEC should be focused elsewhere. Of the mandated rule to implement the Wall Street Reform statute on CEO pay, Gallagher said, “I lament the time wasted on it.” (Chilling rumors that Gallagher will replace Richard Ketchum as the chief executive of the Financial Industry Regulatory Authority are unfounded, say FINRA representatives.)
Obama need not name a Gallagher clone Republican to replace him. Sensible Republicans and independents have proven themselves skillful financial supervisors. Cases in point: former Federal Deposit Insurance Corporation Chair Sheila Bair is a Bob Dole Republican and current FDIC Vice Chair Thomas Hoenig is an Independent. Both served the nation well. For that matter, Republican presidents have named deregulation Democrats to commissions. President Ronald Reagan named Joseph Grundfest, then a young scholar and now a Stanford Law School professor to SEC. He proved himself well to the right of Republican commissioners at the time. Of note, Grundfest recently joined with Gallagher in an article that questions whether a Harvard project overseen by esteemed Harvard lawyers violated federal securities law.
As for the Democratic slots Obama can fill, he must pick strong candidates, as recent picks have proven less than stellar. For example, SEC Chair Mary Jo White. Sen. Elizabeth Warren recently called White’s tenure “extremely disappointing.” Obama promised that White would reform Wall Street. “You don’t want to mess with Mary Jo,” he claimed. Instead, White sides often with the Republican commissioners and against the two Democrats. White’s “waivering” SEC consistently grants waivers to criminal firms from otherwise mandatory SEC penalties. These waivers come through commission votes, where White joins with the Republicans, while Democrats Luis Aguilar and Kara Stein generally oppose the waivers.
White halted a rule initiative begun by her predecessor that would require corporations to disclose fully how they spend shareholder funds on politics. (Though we hope to see a reversal on this choice.) Commissioners Aguilar and Stein support the proposal. More than 1.2 million shareholders have petitioned White to move the rule. Last month, 44 United States Senators asked her to advance the proposal. White, however, has not yet proceeded.
White presumably wants the President to replace Aguilar with a commissioner who will side with her, not against her on these waiver contests and rulemakings.
Instead, the president should name an excellent Democrat to replace Aguilar.
The political dynamic at the CFTC seems to be working in its reduced state of three commissioners, though we hope excellent new appointees find their way to that agency soon The CFTC now benefits from the reform-minded Democrat Sharon Bowen who joined the commission in June 2014. She’s challenged Chairman Timothy Massad on compromises with Wall Street. Before, Massad could count on Democratic cover from Democrat Mark Wetjen for votes to soften safeguards. Wetjen left the CFTC in August. The other commissioner is conservative Christopher Giancarlo who came from a Wall Street firm that promoted the market for credit default swaps and other derivatives and who maintains ties with the Koch brothers. Unregulated derivatives figured at the core of the financial crisis. Democratic Chair Massad should not wish to vote 2-1 with Giancarlo against Bowen. Ideally, Chair Massad will move toward Commissioner Bowen to advance policy.
Where should the president find excellent nominees? Certainly, he should not look to the revolving door between Wall Street, its law firms and trade associations and Washington. Public Citizen recently joined with Sen. Tammy Baldwin (D-Wisc.) and Rep. Elijah Cummings (D-Md.) to introduce a revolving door reform. Naming investor advocates to the SEC would be a refreshing, welcome change, especially since protecting investors is the SEC’s primary mission. The president could also name individuals with relevant experience, ideally straddling Main Street and Wall Street. Of the nation’s 6,000 public companies, 100 percent have chief financial officers who know about both widget-making and how to fund it. The academies are replete with experts, many of whom served as staffers at Washington regulatory agencies.
The financial crash of 2008, which began seven years ago this month, demonstrated that bad regulators can wreak enormous economic calamity. The president should not and need not respond to the regulatory agency vacancies with anything less than excellent choices that America deserves.