My article on the administrative law and practice of the FOMC is available on SSRN, and has come out as part of a great symposium in Law and Contemporary Problems, with articles by Jim Cox, John Coates, Kate Judge, and many other people smarter than me. Do give the paper a download, and let me know what you think. Here's the abstract:
The Federal Open Market Committee (FOMC), which controls the supply of money in the United States, may be the country’s most important agency. But there has been no effort to come to grips with its administrative law; this article seeks to redress that gap. The principal claim is that the FOMC’s legally protected discretion, combined with the imperatives of bureaucratic organization in an institution whose raison d’etre is stability, has turned the agency into one governed by internally developed tradition in lieu of externally imposed constraints. The article evaluates how the agency makes decisions through a content analysis of FOMC meeting transcripts during the period when Alan Greenspan served as its chair, and reviews the minimal legal constraints on its decisionmaking doctrinally.
In addition to being your one stop shop for the legal constraints on the FOMC, the paper was an opportunity to do a fun content analysis on Greenspan era transcripts, and to see whether any simple measures correlated with changes in the federal funds rate. In honor of Jay Wexler's Supreme Court study, I even checked to see if [LAUGHTER] made a difference in interest rates. No! It does not! But more people may show up for meetings where the interest rate is going to change, tiny effect, but maybe something for obsessive hedge fund types. Anyway, give it a look.
The AIG suit is over, and the shareholder who was zeroed out by the government won a judgment without damages. These kinds of moral victories are cropping up against the government: a Georgia judge just ruled that the SEC's ALJ program was unconstitutional, but easily fixed. The Free Enterprise Fund held that PCAOB was illegal, but not in any way that would undo what it had achieved. And now AIG. A right without a remedy isn't supposed to be a right at all, but it is true that this is incremental discipline of the government for business regulation excesses. That won't make any of these plaintiffs happy, however.
While reading this article I was pleased to find quotes from my good friend and colleague, Kent Barnett. I asked him to share with the Glom readers further insights on Judge May's recent ruling that the SEC's use of an ALJ in an insider trading case may be unconstitutional. Here's Kent with more:
The Washington Post has a story on the AIG and Fannie and Freddie cases, which, as you might remember, use the Takings Clause to go after the government for its financial crisis related efforts. In theory, that's not the worst way to hold the government accountable for breaking the china in its crisis response - damages after the fact rectify wrongs without getting courts in the way. And I've written about both cases, here and here.
Anyway, the Post has checked in on the cases, and the view is "you people should be worrying more about the possibility that the government may lose.
Greenberg is asking the court to award him and other AIG shareholders at least $23 billion from the Treasury. He says that’s to compensate them for the 80 percent of AIG stock that the Federal Reserve demanded as a condition for its bailout. Judge Thomas Wheeler has repeatedly signaled his agreement with Greenberg. A decision is expected any day.
In the Fannie and Freddie case, the decision is further off, with the trial set to begin in the fall. The hedge funds are challenging the government’s decision to confiscate all of the firms’ annual profits, even if those profits exceed the 10 percent dividend rate that the Treasury had initially demanded. This “profit sweep” effectively prevents the firms from ever returning the government’s $187 billion in capital and freeing themselves from government control.
Earlier this year, Judge Margaret Sweeney refused to dismiss the case and gave lawyers for the hedge funds the right to sift through the memos and e-mails of government officials involved. Within weeks, Fannie and Freddie shares, which had been trading at about $1.50, started trading as high as $3 based on rumors that the documents revealed inconsistencies in government officials’ statements.
They checked in with me on the article, so there's that, too.
My soon to be colleague Peter Conti-Brown and Brookings author (and future Glom guest) Philip Wallach are debating whether the Fed had the power to bail out Lehman Brothers in the middle of the financial crisis. The Fed's lawyers said, after the fact, that no, they didn't have the legal power to bail out Lehman. Peter says yes they did, Philip says no, and I'm with Peter on this one - the discretion that the Fed had to open up its discount window to anyone was massive. In fact, I'm not even sure that Dodd-Frank, which added some language to the section, really reduced Fed discretion much at all. It's a pretty interesting debate, though, and goes to how much you believe the law constrains financial regulators.
as I discuss at much greater length in my forthcoming book, The Power and Independence of the Federal Reserve, the idea that 13(3) presented any kind of a statutory barrier is pure spin. There’s no obvious hook for judicial review (and no independent mechanism for enforcement), and the authority given is completely broad. Wallach calls this authority “vague” and “ambiguous,” but I don’t see it: broad discretion is not vague for being broad. In relevant part, the statute as of 2008 provided that “in unusual and exigent circumstances,” five members of the Fed’s Board of Governors could lend money through the relevant Federal Reserve Bank to any “individual, partnership, or corporation” so long as the loan is “secured to the satisfaction of the Federal reserve bank.” Before making the loan, though, the relevant Reserve Bank has to “obtain evidence” that the individual, partnership, or corporation in question “is unable to secure adequate credit accommodations from other banking institutions.”
In other words, so long as the Reserve Bank was “satisfied” by the security offered and there is “evidence”—some, any, of undefined quality—the loan could occur.
I (and most observers) read the “satisfaction” requirement as meaning that the Fed can only lend against what it genuinely believes to be sound collateral—i.e., it must act as a (central) bank, and not as a stand-in fiscal authority. The Fed’s assessment of Lehman Brothers as deeply insolvent at the time of the crisis meant that it did not have the legal power to lend. Years later, we have some indication that this assessment may have been flawed, but I don’t take the evidence uncovered as anything like dispositive. As I note in the book, the Fed’s defenders make a strong substantive case that the Fed was right to see Lehman as beyond helping as AIG (rescued days later) was not.
And the debate will be going on over at the Yale J on Reg for the rest of the week. Do give it a look.
Jessica Kennedy at Vanderbilt has done research on what makes corporate officials behave unethically. Here she is, in an interview (disclosure: my department's former post-doc, now at Vanderbilt):
Previous research has often traced ethical misconduct to high-ranking people’s orders. It shows that power leads to bad behavior, in essence. Other studies have shown that the behavior of high-ranking people sets the tone in their groups — that it trickles down.
But I don’t think that presents a complete picture of how unethical practices emerge. In fact, such practices often emerge from groups. For example, prior research has found that people making decisions as a group are more willing to lie than when they are making decisions as individuals. What I found in multiple studies was that high-ranking people are more inclined than low-ranking people to accept what their group recommends to them, even when it represents a breach of ethics. That is, higher-ranking people are less likely to engage in principled dissent and actively oppose such recommendations than are lower-ranking individuals.
I've watched with interest the new vogue among regulators to insist that financial institutions behave more ethically. What does that mean? The language is often one of chastisement. Jessica's research suggests - and this is consistent with what banking supervisors often point to - that the problem really might be one of culture and groups, not that she is making regulatory recommendations. Anyway, it's an interesting compliance problem.
The SEC announced an indictment against a financial advisor that got a bunch of public Georgia pension funds to invest in its own affiliated product. Which I guess sounds kind of dodgy - you're obligated to offer advice in the best interests of your client, and yet you're pushing your own investment vehicle. The strange thing about the case, however, is that it isn't about that sort of breach of fiduciary duty. Instead, the SEC, a federal agency, is going after Gray and its principals because they failed to comply with Georgia law. From the SEC's release:
The SEC’s Enforcement Division alleges the investments violated Georgia law in the following ways:
- A Georgia public pension fund’s investment is limited to no more than 20 percent of the capital in an alternative fund. Two of the pension funds’ investments surpassed that limit.
- The law requires at least four other investors in an alternative fund at the time of a Georgia public pension fund’s investment. There were fewer than four other investors in GrayCo Alternative Partners II L.P. at the time of these investments.
- There must be at least $100 million in assets in an alternative fund at the time a Georgia public pension fund invests. GrayCo Alternative Partners II LP has never reached that amount.
Gray knew this was coming, and knew that the SEC wouldn't be taking them to court, but rather before one of its own judges. It had already filed suit alleging that the ALJ program is unconstitutional - and among the many problems with these types of suits, imagine the timing and ripeness challenges presented by litigation premised on "we think the SEC may be bringing administrative proceedings against us in the future."
Still, I think this case is interesting. Shouldn't Georgia be bringing it instead of the SEC?
Lawsky had a tough reputation, and was probably the most challenging state corporate regulator since Spitzer (the Times: " a polarizing four-year tenure that shook up the sleepy world of financial regulation in New York"). And I can say that I knew him when - we were in the same unit at DOJ. But really, I'm awfully impressed that 1. he is leaving to start his own firm, continuing the craze for boutiques that has animated investment bankers, and now, perhaps their former regulators? And 2. this excellent front page from the Village Voice.
Apparently, the new firm will specialize in digital security. Congratulations, Ben!
One way to enact your regulatory agenda is to pass a rule. But another is to commit yourself to some program of regulatory reform as part of a settlement with an outside party. Some congressional Republicans are increasingly worried that this sort of hands-tying is increasingly being resorted to by environmental regulators, hence the introduction of the Sunshine for Regulatory Decrees and Settlements Act of 2015. Financial regulators blow a lot of statutory deadlines, leaving them vulnerable to litigation by an angry NGO, but so far haven't been accused of sue and settle, as far as I know. But perhaps it is only a matter of time. RegBlog has a nice symposium up on sue and settle, here's a taste:
When agencies acquiesce to plaintiffs’ demands, they may give the litigating organizations a potentially outsized influence over the agency’s policies and allocation of resources. ... Dan Walters ... noted that sue-and-settle rarely occurs, “at least in its worst possible form.” Furthermore, he argued that, perhaps counterintuitively, such “settlements add to the democratic character of what is otherwise a very shadowy forum” called rulemaking.... Jamie Conrad, a highly-regarded practitioner with years of experience in Washington, D.C,  takes issue with Walters’ downplaying of sue-and-settle’s potential threats to the legitimacy of the rulemaking process.
Give it a look.
There's a proposal out there, with support from various surprising corners of the political spectrum, to get rid of the NY Fed's place on the FOMC, on account of it being too close to Wall Street, big banks, and so on. I wrote about it for DealBook - do check it out. A taste:
I have my doubts about any legislation that threatens the central bank’s independence, but would evaluate it by looking to three of my pet axioms of financial regulation.
When I apply these axioms, I conclude that the New York Fed should not lose its vote. The short-term benefits are unclear, making the change look like a symbolic effort to shift the long-term focus of the Fed away from Wall Street. But Wall Street is important, and deserves its focus. There’s no reason to believe that the New York Fed will do a better or different job on Wall Street if it loses its automatic vote.
Do let me know what you think, either in the comments or otherwise.....
The WSJ has a story today that suggests that indeed it does.I'm not so sure, and I've been looking into the situation. Looking at the plain numbers doesn't account for selection effects - one reason the agency might take a case to an ALJ is because they've already settled it, and it's inexpensive to put the settlement on record before an in-house judge. So we should probably strip settled cases out of the analysis. But there's no question that the SEC is ramping up ALJ enforcement, and that it usually wins there.
Hence the recent spate of arguments that ALJs are unconstitutional. I'll have more to say on that, too, but it's worth remembering the "part of the furniture" theory of constitutional law as a first order reason to conclude that a government program is probably okay. If something has been around forever, and is important, it's probably constitutional. The Supreme Court has probably decided hundreds of cases that began with ALJ proceedings. You can expect it, and other Article III judges, to assume that the institution of the SEC ALJ should survive.
Greenberg is suing the government for treating his firm unconstitutionally differently than other firms bailed out during the financial crisis - he argues, correctly, that AIG got killed, and was used as a vehicle to pay AIG's struggling counterparties out at 100 cents on the dollar. Whether that's a taking, given 1) that the government couldn't possibly treat everyone identically during the crisis, and 2) that AIG would have failed without the government's intervention, making the measure of damages difficult, is why many people have found the case to be unlikely.
So now that Greenberg is getting some good rulings, and sympathetic questions from the bench, the received wisdom seems to be that he is doing surprisingly well (though if he wins, an appeal is certain). I haven't read every transcript, but I do wonder whether the "day in court" effect is at work here. In appellate cases, I think that oral argument is an excellent predictor of the outcome. But at trial, with appeal likely, savvy judges often let the side that is going to lose put on plenty of evidence, and do well with motions, so that there can be no allegation of bias, and to minimize things to complain about on appeal. They get, in other words, their day in court. I'm not sure if that's what's going on there, but I know that when I was a litigator, I wouldn't want the court to treat long-shot adversaries with contempt, but rather with tolerance.
The corporate law community often places high hopes in judges as a mechanism for checking government or (in Delaware) defendant excesses. They usually go along, sure, but may in dicta indicate displeasure, or give critical speeches, and sometimes, as in the Newman insider trading case, the refusal to accept the Citigroup settlement, the ethics critiques made during the KPMG prosecutions, that displeasure will sprout into an adverse ruling.
It's a pretty interesting, but pretty gauzy, was of thinking about adjudication, maybe Orin Kerr would find it persuasive in the Fourth Amendment context, but in other areas of public law, administrative law, for example, the small community of bench and bar just don't see their roles that way. It's not, "SEC you've gone too far this time, and so we're cooking up a new reason to reverse you," it's "SEC [or EPA, or whoever], we substantively disagree with this policy, and we're cooking up a procedural reason to reverse it." Different, in that administrative law is not governed by equity, it is governed by process.
Anyway, my theory about the way white collar works in New York - opaque, clubby, but almost chivalrous - gets what I'm taking as a vote of confidence in James Stewart's nice overview of the fight between the judges and the US Attorney's Office in Manhattan over the pushy, PR-savvy nature of the US Attorney. The whole column is well worth reading - for one thing, it sounds like a bunch of judges talked to Stewart, which never happens, and there's the requisite, "greatest judges ever! but" from the prosecutors office and "whatta prosecutor! however" from the judges. But here's an excerpt that illustrates the way that this weird "just do justice" method of handling white collar crime works:
[Former statehouse speaker Sheldon] Silver’s lawyers moved to dismiss his indictment because Mr. Bharara had orchestrated a “media firestorm” that tainted their client’s right to a fair trial. Such motions are considered long shots, but Judge Valerie Caproni of Federal District Court in Manhattan wrote that Mr. Silver had a legitimate argument that the case should be thrown out because Mr. Bharara, “while castigating politicians in Albany for playing fast and loose with the ethical rules that govern their conduct, strayed so close to the edge of the rules governing his own conduct.”
Judge Caproni ultimately sided with the government, so there’s no way of knowing how close she came to tossing the indictment. But the possibility she even seriously considered such a step has set off alarms among some of her fellow judges. Judge Caproni herself acknowledged that dismissing an indictment is a “drastic remedy” that is “rarely used.” She also noted that the motion was not a disciplinary proceeding against Mr. Bharara. That didn’t stop her from spending a good part of the opinion questioning his ethics and chastising him for his public comments about the case.
This is, as they say, developing, and if you think that Bharara may be AG some day, one question is whether he will be able to avoid being blackballed by the bench ... and whether a blackballing would work outside of the white hankie world of white collar crime administration (didn't seem to work out so badly for Rudy Giuliani).
When you join a transnational regulatory network, you have to report to the network that you're acting consistently with its principles, that you have the powers that it expects you to have, and that you're a worthy member of the club. The SEC just made its case to its peers through a 700 page Q&A that is worth a look, though it exemplifies the differences in the way a lawyer or a social scientist might approach the question "what do you do?" The SEC is full of lawyers, and so this report includes not so many numbers, but plenty of discussion of regulatory powers, and representative matters that show how those power are exercised.
However there is some aggregate data. For example, the SEC keeps track and categorizes the sorts of cases that it brings. In 2013, the agency was, for example, mostly likely to initiate a securities offering proceeding, which it did 103 times, followed by 68 reporting and disclosure cases, 50 market manipulation cases, and, bringing up the rear, only 44 insider trading cases (the agency was only asked about these categories, the reporting is on page 184 et seq. Did I know this? More pump and dump proceedings than insider trading cases? Anyway, it's that sort of thing that will surely have you reading the whole 700 pages, just as I did.
I have argued in a paper that the revolving door seems much less problematic than conventional wisdom would have it. And Ed DeHaan, Simi Kedia, and their co-authors have found that SEC lawyers who go through the door usually try to show off when at the agency by bringing and winning bigger cases.
But Congressman Stephen Lynch isn't so sure about that door, and has introduced the SEC Revolving Door Restriction Act of 2015 to put some brakes on it. His press release:
H.R. 1463, the SEC Revolving Door Restriction Act of 2015, amends the Securities Exchange Act of 1934 to prevent former employees of the SEC from seeking employment with companies against which they participated in enforcement actions in the preceding 18 months. H.R. 1463 defines enforcement action as court actions, administrative proceedings, or Commission opinions. Former employees must seek an ethics opinion from the SEC if they are interested in seeking employment within a year of their termination at the SEC with a company that was subject to an SEC enforcement action in which they participated.
I'm actually not too sure what this adds to the typical revolving door restriction. Federal prosecutors can never work on matters on which they worked while in government service. And they are barred from representing clients for at least one year. This lengthens that limitation to 18 months, but at the White House, it's already 2 years for lobbying.
The agency isn't too excited about this, as they have observed over at Jim Hamilton's World of Securities Regulation:
Delaying staffers’ employment in the private sector would affect a significant number of SEC employees, who have a long tradition of leaving government service to join the defense bar. At the 2015 SEC Speaks conference, when current and former agency staff members were asked by Chair Mary Jo White to stand, at least two thirds of the room took to their feet.
But it doesn't seem to add much to the regs already in place. Even POGO, the NGO that seems to be behind the introduction of the bill, acknowledges - indeed, it collects data on - previous ethics restrictions: "SEC regulations require former employees to file [ethics] statements if they intend to represent an employer or client before the agency within two years of their SEC employment." This even gives them the out of a waiver. But you can look over the text of the bill and let me know if you see anything more than a more specific ban of agency officials working on matters post-employment that they handled pre-termination.