Prompted by an excellent conference at Chicago organized by William Birdthistle and Todd Henderson, I've been thinking about how the FSOC, exactly, is going to persuade agencies to do its bidding. The result is up at the Times/DealBook, do give it a look:
The Financial Stability Oversight Council has the power, under Section 120 of Dodd-Frank, to review and make recommendations related to a member agency’s regulation of a systemically significant sector of the financial system. Ms. Schapiro and Mr. Geithner successfully persuaded it to urge the S.E.C. to adopt a floating net asset value rule or to require money market funds to hold extra capital to deal with shocks.
But the problem with the council’s Section 120 powers is that they are not paired with the ability to force a member agency to act. If the S.E.C. does not want to regulate money market funds in the way the the council suggests, it need not do so. Under Section 120, it only has to provide an explanation to the council as to why it is not adhering to the council’s recommendation.
One of the growth areas in DC firm practice has been representation before CFIUS, a committee of agencies with the power to undo every purchase anyone with an arguably foreign interest could make of an American asset.
Only that's not really what CFIUS does. I've argued that what it actually does is to require companies to enter into ministerial, cut-and-paste consent decrees, and to serve as a notification service for Congress, so that the legislature can have one of its periodic freakouts when the wrong sort of foreign company buys an American one. So although some Washington lawyers would like to sell their CFIUS expertise as a target corporation's last takeover defence, I'm unconvinced that national security review poses quite such a threat; what you really want is someone who can get Chuck Schumer's attention. Which is precisely what the jilted party in the bidding for Sprint has done.
However, just as antitrust review can require expensive divestment, national security reviews can make acquisitions more costly:
To address the matter of Chinese equipment, SoftBank and Sprint, as part of earlier concessions, pledged to remove Huawei equipment from Clearwire’s network. the task will cost about $1 billion, according to a person briefed on the matter. They also agreed to give the government a say over non-American vendors used by Sprint.
$1 billion isn't nothing, but China is, increasingly, everything to CFIUS, the country that prods action even when it is a Japanese company that is doing the buying of the American one.
This is not the place to go for careful consideration of tax policy, but we do know something here about business regulation more generally, so an observation and a reference with regard to the IRS investigation of tea party groups and their 501(c)(4) status:
- I assume that the decision to investigate the tea party applicants by the agency was an exercise of enforcement discretion; as such, it should be unreviewable by the courts under the principle that agencies cannot be reviewed for their decision to bring enforcement actions on one set of guys as opposed to another set of guys (the idea is that reviewing those sorts of decisions would enmesh the courts too much in the work of the agency). The denial of an application for 501(c)(4) status, oddly enough, would be plainly reviewable as a matter of administrative law. But doesn't appear to be what happened here. Of course, the mere fact that you can't go to court doesn't make it right, and what is happening here is supervision (pretty angry supervision, too) by the other branches of government, rather than by the judiciary. Moreover, this is tax, and tax is different; there may be special review provisions at stake in the tax code I'm not aware of.
- Kristin Hickman is your source for the administrative procedures adopted by the IRS, and one of the themes of her work, fwiw, is that the IRS rarely complies with some of the basic principles of administrative law. See, e.g., here and here and here.
JPMorgan is far too big to fail - but, then, so is Wells Fargo, Bank of America, and Citigroup. And JPMorgan is generally thought to be the safest and best run of the four of them (or at least better run than BofA and Citi). But this spring, it is JPMorgan that is getting buffeted by the press, regulators, and others. ISS is urging a vote against some directors as a result of the London Whale fiasco. Congress ripped the firm over the same thing on March 15. Mark Roe has been critical. And now the Times is discussing the "full court press of federal investigations."
It is a season of woe for JPMorgan, as it finds itself in a very uncomfortable spotlight. The Times has run 31 headlined stories on JPMorgan between today and March 1 (source). It has run none on Wells Fargo (source), 9 on BofA (source), and 10 on Citi (source) during that time period. And the London Whale trade, and subsequent defenestration of a number of JP executives, happened long ago.
Moreover, while the London Whale trade was terrible, it is by no means clear that JPMorgan has failed to manage the situation. The firm is, admittedly, too big. But it is not alone in that. This is beginning to look to me like the start of something corporations fear most, a singling out scandal, whereby one firm becomes the poster child for the shortcomings of an industry sector - it is a way that Washington works, and one that corporations find difficult to understand. Usually, those firms pay a disporportionate penalty for their celebrity; I can't help but be a little sympathetic for the bankers in this case, if it turns out that that is in their future.
a whistle-blower program is a privatization approach, not unlike hiring a private company to run a prison. But for the S.E.C., it is law enforcement that is being privatized. Rather than being able to take aim at particularly worrisome corners of the securities markets, the program leaves the S.E.C. beholden to tippees. Moreover, if Congress believes whistle-blowers, rather than the agency, are doing the work, it will have yet another justification for placing tight limits on the agency’s budget.
Do check it out, and let me know your thoughts, either down below or thataway.
The SEC just announced that it would split the post of enforcement chief between two lawyers, both alumni of the US Attorney's Office at the SDNY. I've never heard of such an arrangement outside of the Roman Empire; why do it?
Conflict of interest. One of the enforcement directors worked closely with Mary Jo White at her New York firm; the other one can handle Debevoise cases until they age out of the problem. Which means that this does not need to be a permanent arrangment, and perhaps fittingly, the conflict enforcement chief plans on leaving reasonably soon.
But it is also a statement about how such problems come up more the closer you get to the top of an agency. Mary Jo White is hardly the first appointee to bring her favorite person at her law firm along for the ride. But special assistants and assistant deputies are easy to wall off; it used to be that there was only one enforcement director.
Promontory, the consultancy firm for banks in distress, is the place you go if you are a senior regulator and you want to cash out. Eugene Ludwig, its founder and the former OCC head, makes $30 million per annum, way more than CEOs of banks with actual branches and loans and so on. His subordinates include a raft of Obama first termers confirmed by the Senate.
Felix Salmon thinks that this means that Promontory needs to be regulated. But I think that the firm's services are bought for two reasons. One - the bad old Washington lobbyist one - is to try to get the regulators to lay off. But the other - the government alumni promotes law observance one - is to concede that the regulators might lay off if you implement some reforms, and hire some people who can tell you what those reforms need to be, and how to sell them to the government.
That means that the strange thing about Promontory - and it is strange - is that it is so, so profitable. Washington lobbyists look at seven figure salaries with awe. Eight figures? Hard to even parse. The gap between SEC deputy director and Promontory executive is stunning when the competition amounts to law firms and Ernst & Young. In the next set of Promontory stories, I'd like to see more about how all of the money is made.
- If you haven't seen Steven Davidoff's discussion of the amusingly active trading in dead people walking stocks Fannie Mae and Freddie Mac, you'll want to give it a look.
- Continuing the international law theme around here, Kent Greenfield, along with Judge Nancy Gertner, have filed a brief in the shareholder suit against Hershey accusing it of tolerating child labor, and seeking inspection. They argue that
- The reality of chocolate production in western Africa, linked with the dominant role of defendant Hershey corporation in the world chocolate market, gives rise to a more-than-reasonable presumption that Hershey is toward the top end of the continuum of accountability for illegal acts, providing a more than “credible basis” for the shareholder plaintiff’s claim for inspection.
- Here's a nice wrap of the DC Circuit's resolution of the dispute between the CFTC and FERC over whether FERC could impose fines for manipulation of the energy futures market. The answer is, despite FERC's increasing efforts as a financial regulator, no.
I'm at the American Society of International Law's annual meeting, where I attended one panel in which an oil services company’s in-house counsel outlined a way that the private sector is launching its own efforts to reduce the number of bribes paid to foreign officials - the thing that has launched a huge new Washington FCPA bar.
These efforts largely amounted to recommendations as to how to engineer the regulatory process to reduce the opportunities for government officials to seek bribes from his industry. Oil service firms and importers have, for example, tried to automate as much of the customs process in Indonesia as possible, limiting the number of personal interactions between firms and officials. They have lobbied the Indonesian government to clarify whether companies must pay government inspectors per diems. They have pursued similar sorts of initiatives in India, Vietnam and other countries, with varying degrees of success.The private sector initiatives were creative, and suggest that there may be an organized private role for compliance as well as a public one. One might expect that businesses would find the anti-corruption rules to be burdensome and unrelated to their bottom lines. They might be presumed to wish to avoid engagement with the law. But the increasing corporate effort to pursue its own anti-corruption interests appeared more than a public relations effort, or an attempt to build safe harbors in light of the potential for future prosecutions. Rather, it appeared to be an effort to look to transparency to make enforcement of the anti-corruption rules simple – and therefore compliance all the easier.
I'm less exercised about the revolving door than most. But this American Banker story on Promontory Financial, the lucrative place where retired regulators go to read the riot act to banks in crisis, in an effort to get them out of the jail that is CAMELS 5, is pretty interesting. It has made Eugene Ludwig, the former Comptroller of the Currency. something like dynastic wealth, and it seems to afford other career bureaucrats, incuding Princeton economist (and Fed vice-chair) Alan Blinder, seven figure sums for post-retirement work.
I don't have problems with either of those things, and Promontory really does seem to salt the private sector with consultants who expect compliance with regualtory edicts. What does surprise me is that I can't think of a similar example of this particular sort of revolving door elsewhere, though one presumably exists for defense contractors. Does EPA have a Promontory? OSHA? It might be that the money for "tell me how I can make this right with the FDIC" sort of advice exists in finance alone. HT: Counterparties
- Here's Bainbridge on the SEC's suit against Illinois: "Why do I call this a stunt? No fine. No relief for the affected bondholders. No benefits for Illinois pensioners, although I grant that that's largely beyond the SEC's jurisdiction. And no additional changes beyond what Illinois has already done."
- Ben Walsh is right, this dodgy hedge fund manager is "hilariously ostentatious." And no master criminal, either - he got really rich doing things that were really obviously fraudulent. At the very least the SEC can catch those guys.
- The NY soda ban injunction isn't really business law, but it is a good illustration of the arbitrary and capricious standard's downside, which can undo compromised, but potentially promising regulation, which in turn might be a byword for your average SEC rulemaking. As the New York judge observed:
- The simple reading of the Rule leads to ... uneven enforcement even within a particular City block, much less the City as a whole...The loopholes in this Rule effective defeat the stated purpose of the Rule. It is arbitrary and capricious because it applies to some but not all food establishments in the city, it excludes other beverages that have significantly higher concentrations of sugar sweeteners and/or calories on suspect grounds, and the loopholes inherent in the Rule, including but not limited to no limitations on refills, defeat and/or serve to gut the purpose of the Rule.