Pressing the Regulators

Report on economic crisis shows the power of politics in regulatory affairs.

The recently released official report on the nation's financial crisis tells a powerful tale about political manipulation of government regulation-one that should resonate loudly today in light of House members' drive to curb what industry considers regulatory excess.

In January, the National Commission on the Causes of the Financial and Economic Crisis in the United States, created by Congress in May 2009, released a 661-page report recounting the greed in financial firms whose pay structures rewarded excess risk; the flawed judgments of policymakers who wrote laws implicitly encouraging irresponsible lending while depriving federal overseers of the power to curb excesses; and the powerful political influence of industry. Ideology mattered as well: Alan Greenspan, then chairman of the Federal Reserve Board, and other Republicans sought over the years to avoid the heavy hand of government regulation, and Clinton administration officials were sometimes of like mind.

Greenspan, who headed the Fed from 1987 to 2006, believed that markets, in their own interest, would regulate themselves effectively. He asserted in 1997, for example, that "market-stabilizing regulatory forces should gradually displace many cumbersome, increasingly ineffective government structures."

Meantime, presidents of both parties took steps to boost homeownership by encouraging lending to low- and moderate-income borrowers.

Just as proposals to regulate new kinds of financial institutions and practices met tough resistance, so did efforts to rein in the huge government- sponsored housing enterprises, Fannie Mae and Freddie Mac. Taxpayers have put up some $150 billion to nationalize and bail out the two institutions, and the costs continue to mount.

Fannie and Freddie reported $164 million in lobbying expenditures from 1999 to 2008, paying for what former Housing and Urban Development Secretary Mel Martinez described as a "whole army of lobbyists that continually paraded in bipartisan fashion through my office." Worse, their employees and political committees contributed $15 million to federal election campaigns. Their regulator, HUD's Office of Federal Housing Enterprise Oversight, "was constantly subjected to malicious political attacks and efforts of intimidation," testified a former director of the agency.

Fannie and Freddie accounted for just part of lobbying expenditures that totaled $2.7 billion over this 10-year period, during which industry political action committees also made more than $1 billion in campaign contributions.

Attacks on regulators often came from Congress. Former Securities and Exchange Commission Chairman Arthur Levitt testified that once word of a proposed regulation got out, industry lobbyists would rush to sympathetic members of the congressional committee with jurisdiction, who in turn would "harass" SEC with frequent letters demanding answers to complex questions and appearances of officials before Congress. "These requests consumed much of the agency's time and discouraged it from making regulations," the report said. Levitt described it as "kind of a blood sport to make the particular agency look stupid or inept or venal."

In public administration theory, agency rule-making follows orderly procedures. But the commission report paints a very different picture. And the very idea of regulation in the public interest is open to question, as was seen when the incoming chairman of the House Financial Services Committee, Rep. Spencer Bachus, R-Ala., told The Birmingham News that in his view, "the regulators are there to serve the banks." Mary L. Schapiro, chairwoman of SEC, on Feb. 3 complained budget cuts would make it impossible to effectively enforce the new financial regulatory reform law passed last year. And Rep. Darrell Issa, R-Calif., the new chairman of the Oversight and Government Reform Committee, has asked 150 trade associations, companies and think tanks to provide him a list of burdensome regulations-presaging uncomfortable times for many agencies and their executives.