WASHINGTON — Even as lawmakers celebrate passing the first bipartisan national budget and appropriations bill in four years, public interest advocates are expressing significant concern over Congress’s decision to fund two key financial regulators at levels well below what had been requested.
The Securities and Exchange Commission and the Commodity Futures Trading Commission are two of the most central regulatory agencies tasked with putting in place strict new regulations on Wall Street. They are also responsible for guarding against the possibility of another major economic meltdown similar to what took place in 2007-08, the ramifications of which continue to be felt today.
Yet the SEC and CFTC are also the only two major financial regulators that are dependent on Congress for their annual funding, a set of reins that analysts say lawmakers are keen to keep. Indeed, while the SEC has backup funds that it can access if necessary, the CFTC has no such contingency monies at all. Nonetheless, appropriations levels for the two agencies approved this week came in well below what President Barack Obama had requested.
Under the new funding agreement, which Obama signed into law on Friday, the SEC will receive around $1.35 billion dollars for the rest of this fiscal year, through September. That’s some $324 million less than the White House budget suggested.
The CFTC, meanwhile, will receive just $215 million for this year. While that constitutes the agency’s first budget increase since 2011, it’s still $100 million less than requested. Critics say this latter funding deficit, a cut of nearly a third, will be particularly problematic.
“The SEC and CFTC are the frontline cops on the Wall Street beat, charged with protecting the American people and preventing another financial crash,” Dennis Kelleher, president of Better Markets, a public interest group pushing financial reform, told MintPress.
“Yet they’re given nowhere near the resources they need to do their job. The CFTC funding level in particular cripples them, and the SEC funding level limits their ability to do their job.”
80 percent fewer cops
A major factor in the concern behind the underfunding of the CFTC’s budget is the fact that the agency’s responsibilities have been significantly increased in recent years, as a direct result of the 2007-08 economic crisis.
Although the causes behind that the financial downturn were multiple and complex, significant blame has been put on risky betting by some of the country’s largest banks on what are known as derivatives, securities whose values are based on multiple other assets. The total size of this market is thought to be valued as high as $700 trillion.
While the derivatives market was largely unregulated in the years leading up to the financial crisis, that changed in 2010 with the passage of a massive financial-services reform bill known as the Dodd-Frank Act. At the time, lawmakers decreed that the CFTC would be given the lead responsibility in overseeing this sprawling and murky market.
Yet while that increased the CFTC’s responsibilities by some 900 percent, the agency’s budget has only grown by 50 percent since the market crash. Further, its staff has reportedly only grown by around seven percent in the past two decades.
“As we’ve increased these responsibilities, we haven’t increased the funding. That’s tantamount to giving them a huge new job and then just paying for half of what it takes to do it,” Lisa Gilbert, director of Public Citizen’s Congress Watch, a public-interest group, told MintPress.
“Derivatives are some of the most complicated securities traded – they’re both complex and often highly secret. The new reforms opened up that market so they can be traded on open exchanges and, as a result, the public can make more informed decisions. But it’s a huge job to regulate that market, and the CFTC has clearly been given inadequate funding, which undermines their responsibilities.”
Both the CFTC and the SEC are behind in implementing a number of Dodd-Frank rules, for which they need to be able to hire economists to undertake the onerous responsibility of actually drafting the regulations. But these agencies are also in charge of enforcement, so they need to be able to hire staff who can watch what’s taking place in the markets – and to be able to react.
Meanwhile, although the underfunding of the SEC isn’t as drastic as what the CFTC has experienced, analysts suggest that the budget cuts there will particularly impact on the agency’s important new attempt to improve its technical capacity.
Indeed, Congress previously mandated that the agency put aside $50 million to strengthen its long-criticized lack of technical prowess, which has become particularly notable as financial markets have become increasingly dependent on lightning-fast computer-driven trades. Yet now lawmakers have pulled back at least half of this money.
“Congress is intentionally setting up these agencies to fail, asking them to perform one of the most vital responsibilities – protecting the American people from criminal and predatory behavior – but also asking them to prevent the next financial crash,” Kelleher said.
“With the SEC cuts, it’s as if you were to take 20 percent of the cops off of the street of a major American city and still expect the police department to do its job. With the CFTC cuts, it’s like taking away 80 percent of the cops.”
It’s unclear which lawmakers were key in deciding on the new funding levels for the CFTC and the SEC. But Kelleher feels confident in placing the ultimate responsibility on financial-sector lobbyists and on what he refers to as “Wall Street’s purchased allies in Congress.”
“The [Dodd-Frank] law was passed to prevent Wall Street from crashing the global economy again, yet here Wall Street has been allowed to influence the budgets of the agencies that are supposed to be providing oversight,” he said.
“That’s absurd. It’s as if Al Capone were allowed to set the police budget for Chicago during the 1920s. What would he do? He’d grossly underfund the police!”
Unsafe compromise
Other regulatory efforts also took a hit in the new appropriations bill. The Environmental Protection Agency, for instance, will see its budget reduced by around $143 million, with some of those cuts impacting on the president’s plans to detour around an intransigent Congress on climate-related issues. The National Labor Relations Board, too, will have its budget cut by $4 million.
In part these reductions reflect the tightened fiscal climate in the U.S., as well as significantly heightened polarization over issues of austerity and debt reduction. Yet these cuts are also a direct result of simmering Republican frustration with what many conservatives increasingly view as Obama’s regulatory overreach, which they say negatively impacts on business hiring and consumer prices.
Thus far, the White House has been publicly tranquil on the regulatory impacts of the new appropriations bill. Administration officials have instead preferred to focus on the successfully bipartisan nature of the new appropriations process and the fact that the budget undoes much of the “sequester”-related cuts enacted in early 2013, the impact of which has been particularly painful for social spending
The passage of the appropriations bill “marks a positive step forward for the nation and our economy,” Sylvia Mathews Burwell, the White House’s lead budget official, said Thursday. “This bipartisan legislation provides funding for investments in areas like education, infrastructure, and innovation … and it brings us closer to returning the budget process to regular order.”
And indeed, part of what makes the new appropriations bill notable – at least in recent years – is the fact that it is the result of bipartisan negotiations, just as the appropriations and broader legislative process is supposed to work. Still, those watching the marketplace believe that this slashing of watchdog budgets is unsafe.
“It’s a big compromise,” Public Citizen’s Gilbert said. “No one’s happy with the entire appropriations bill, but this is one place where we think they shouldn’t have cut the way they did.”
Further confusing the issue is the fact that the penny-pinching with regards to the CFTC and SEC funding doesn’t actually help reduce the overall national deficit. The SEC raises money from fees on Wall Street firms, matching its annual appropriations from Congress and making the agency “deficit neutral.”
Further, these agencies together bring in billions of dollars through punitive actions against wrongdoers and by tracking down illicit monies. Since the 2007-08 financial crisis, for instance, the CFTC and SEC have brought in some $7 billion in fines and $11 billion in recovered funds. All of this has gone either to the federal government or to victims of fraud.
For the moment, the CFTC is circumspect on the new funding levels. On Tuesday, the agency’s acting chair, Mark Wetjen, noted the agency would “continue working with Congress to secure resources that match our new responsibilities to provide oversight for the vast derivatives market.”
On Thursday, SEC Chairman Mary Jo White warned that the appropriations level “will affect the pace and extent of [the SEC’s] continued progress.”