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May 8, 2012

Killing Financial Reform with Cost Benefit Analysis

One of the financial industry’s favorite ways to weaken or kill financial reform is trying to impose an onerous cost benefit test on every rule.  They scored a major victory in July 2011 when the Federal Appeals Court for the District of Columbia threw out an SEC rule in Business Roundtable v. SEC, 647 F. 3d 1144 (D.C. Cir. July 22, 2011), because, the court said, the SEC failed to conduct an appropriate cost benefit analysis. 

This greatly emboldened those who oppose financial reform and the industry began planning similar attacks, as reported by the New York Times in Court Ruling Offers Path to Challenge Dodd-Frank (Aug. 17, 2011).

While the Business Roundtable case was only about one rule, relating to proxy access, the suggestion was every rule adopted by the SEC should be subject to the same cost benefit test, which was so high that it would be difficult if not impossible to meet.  This one case chilled rulemaking at the SEC and other financial regulatory agencies like the CFTC.  Regulators Fear Legal Challenges to Derivatives Rules, NYT, Sept. 13, 2011;  Dodd Frank Rules Slow at SEC After Cost Benefit Challenge (Bloomberg, March 6, 2012); US Regulators ‘Paralyzed’ by Cost Benefits Suits (Bloomberg, March 8, 2012).

Having caused the SEC rulemaking to grind to a halt, the industry turned its attention to doing the same thing to the CFTC when they filed suit against it, including on cost benefit grounds.  Wall St. Groups Sue Regulator to Challenge New Trading Law (NYT December 2, 2011). 

Because the financial industry was arguing for an improper cost benefit test and was using it as a pretext to kill or weaken financial reform, Better Markets filed an amicus (friend of the court) brief that focused solely on the cost benefit issues raised in the case.  That brief is attached below. 

The industry and its allies haven’t limited themselves to using the courts to try to impose an onerous cost benefit test on necessary financial reform rulemaking.  One CFTC Commissioner went so far as to compromise the independence of the CFTC and sought to enlist the aid of OMB to kill his own agency’s rules, which had been adopted by a majority of CFTC commissioners.  Better Markets wrote a letter to the OMB opposing his efforts.

This is just one tactic being used by the industry, but it can be very lethal.  If the industry prevails and imposes an incredibly high cost benefit test on most of financial reform rulemaking, then they will have achieved the de facto nullification of the Dodd Frank Act and cripple financial reform.  The result of doing that will be that the industry is, once again, largely unregulated.  History proves that unregulated banks engage in reckless investments and trading that result in crashes, crises and taxpayer bailouts.  

It was not even four years ago that the unregulated financial industry, with the high crime area of Wall Street leading the way, caused the collapse of our financial system and induced the worst economic crisis since the Great Depression.  The cost of that crisis was trillions of dollars and untold human suffering, much of which continues today with high unemployment, foreclosures and so much more.  Wall Street got the bonuses and everyone else got the bill.

The only way to prevent that from happening again is to enact comprehensive and strong financial reform and that is exactly what the industry is attacking with bogus claims for cost benefit analysis. 



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