The Consumer Financial Protection Bureau Leadership Dispute

Today (November 27, 2017 the Consumer Financial Protection Bureau (“CFPB”) has two persons claiming to be the Acting Director. One is a career civil servant, Leandra English. She had been chief of staff to the previous director, Richard Cordray. He promoted her to be Deputy Director on Friday before abruptly resigning. She rests her claim on a provision of the statute creating the CFPB. Following that on Friday, the White House announced that President Trump had appointed Mick Mulvaney, the OMB Director, to be Acting Director of the CFPB (he is not leaving his OMB position). The White House and the Office of Legal Counsel of the Justice Department argue that the Federal Vacancies Reform Act of 1998 provides the President the authority to do this, no matter what the specific statute creating the CFPB says. The General Counsel of the CFPB, Mary McLeod, issued a memo to CFPB staff on Sunday stating she agrees with the Justice Department opinion and that staff should consider Mulvaney the Acting Director. Also, on Sunday, English filed a lawsuit against President Trump and Mulvaney in the U.S. District Court of the District of Columbia claiming that they were attempting to deprive her of her rightful position at the agency. 

Those wanting to read legal arguments and opinions about who is right in this dispute need to go elsewhere. What I want to do in this post is to raise some issues and questions that I do not think have been adequately focused on in news reports about this dispute.

First, there is some mystery about what Cordray and English are thinking.

·       Why did Cordray suddenly move up his resignation date one week and announce his departure and the appointment of English on the day after Thanksgiving (a holiday for many but not for the federal government)?

·       Why did Cordray not prepare the way for English to assume the Acting Director position by assuring himself that she would have the support of the CFPB General Counsel. Mary McLeod was appointed by Cordray; if he had discussed this with her and found he disagreed with her opinion, he could have appointed someone else General Counsel before he left. While his departure was abrupt, it was in the works for some time, and, in any case, he would have had to leave next year when his term expires.

·       What do Cordray and English hope to accomplish by this dispute? After all, Trump can nominate someone to his liking to head the agency, and barring someone clearly unqualified, the Republican-controlled Senate will vote to approve the choice. That person can undo whatever actions a temporary director has taken and much else besides.

·       Prior to Friday, the acting Deputy Director of the CFPB had been David Silberman. Why had Cordray not acted in the past to remove the “acting” from his title? One possible explanation for choosing English over Silberman is that Silberman had no appetite for the inevitable legal dispute. Silberman is still at his job at the CFPB as Associate Director for Research, Markets, and Regulation. No matter how the current legal dispute is resolved, English will almost certainly not be an employee of the CFPB in a few months. Perhaps she was willing to take on this thankless role because she planned to leave or retire from the federal government in any case.

These issues indicate that there is much about this bizarre episode that is not in the public domain. Probably some staffers at the CFPB know what it is, but there are likely few, if any, reporters who have cultivated sources at the agency sufficient to get leads as to what is really going on.

As for the Trump Administration, there is some mystery too.

·       Why did they choose to wage this high-profile fight, since they will in a relatively short time be able to get their own person in as Director of the CFPB? What is it they hope to accomplish by this maneuver?

·       Their legal case is not a slam dunk. They may prevail in court, but, if they lose, they may have established a precedent that could prove troublesome for them and successive Administrations. Why do they think this legal dispute is worth having the courts resolve over this particular agency, since their risk of losing is hardly minimal?

·       Politically, the Democrats will naturally claim that this shows that the Administration sides with banks and not the consumer. The Administration’s action highlights the role of this agency, including going after Wells Fargo and its establishment of accounts for its customers that they did not ask for or want. If the Administration wants to ease up on banks, it would seem politically expedient to do this quietly, not nosily as they are now doing. What does the Administration hope to gain by making all this noise?

Perhaps, the Administration is being politically incompetent, which, given its record so far, is not a surprise. But the questions about Cordray suggest that there is something going on that has not been made public. I am curious what it is we don’t know about this bizarre situation. 

Book Review: “A First-Class Catastrophe: The Road to Black Monday, The Worst Day in Wall Street History” by Diana B. Henriques

On October 19, 1987, the stock market crashed, with the Dow falling by 22.6%. I remember the day well; I was a speaker at a conference on new, proposed government security market regulations in New York at which senior SEC officials also spoke. At each break, the news about how much the market had fallen got progressively worse. Most of the conference attendees remained, since they were for the most part accountants and compliance officials at Wall Street firms, but the SEC officials started disappearing.  When I returned to Treasury the next day, my colleagues joked that I must have given one hell of a speech the previous day.

Diana Henriques has written a book about this stock market crash, which has been eclipsed by more significant, subsequent events. She argues that we failed to learn the lessons from the crash and that the regulatory laxity that led up to it was not corrected. The book has earned some praise, and it is obvious that a great deal of research went into it. While reading it, I was reminded of events I had not thought about for quite some time.

Nevertheless, the book is frustrating to read. The author, perhaps not wanting all her research to go to waste, discusses a lot of financial events and disputes without drawing a clear link to the ostensible subject of the book, the 1987 stock market crash.

An example of this is the aforementioned government securities market regulation, a subject I was very involved with as a Treasury official both while the Government Securities Act (“GSA”) of 1986 was being written and considered by Congress and during the writing of regulations (I wrote the capital rules mandated by the legislation). It is hard to see what the problems in the government securities repo market, which led to the enactment of the GSA and which the book discusses, had to do with the stock market crash. Also, annoyingly she criticizes the GSA as a weak measure. In fact, it has been a success by bringing regulation to firms which had not been previously regulated and likely causing other firms which did not for whatever reason want to face regulatory scrutiny to close up shop. The author is also wrong in saying that “the whole statute would expire in five years unless Congress renewed it.” What expired was Treasury’s rulemaking authority, not the legislation nor the regulations that had been previously issued. Because of the Salomon Brothers Treasury auction bidding scandal, Treasury’s authority did lapse. However, Treasury’s response to the Salomon Brothers episode, including promptly alerting the SEC when we had discovered what had happened, was appropriate. In the end, the Treasury’s authority was renewed and the GSA was strengthened in certain areas.

It would be a real stretch, though, to argue that all this has anything to do with the stock market crash. The author seems to think that this is evidence of regulatory laxity, which it isn’t, and that regulatory laxity led to the crash. 

The book also discusses over-the-counter (“OTC”) derivatives. Whether or not the Commodity Exchange Act (“CEA,” the statute the CFTC administers) applied to OTC derivatives was hotly debated among the futures exchanges, investment and commercial banking firms, the Treasury Department, the banking regulators, the SEC, the CFTC, and Congressional committees. The law was unclear, and the legal debate was motivated by both policy positions and turf interests. What the author misses is that certain OTC derivatives, those that were arguably futures, would not have been subject to CFTC regulation if the CEA applied but would be illegal contracts without the CFTC having any ability to change that. The universe of potentially illegal contracts was narrowed with amendments to the CEA as time went on. But, again, what does any of this have to do with the stock market crash? 

Henriques is more on point when she discusses stock index futures. Clearly, portfolio insurance using stock index futures played a significant role in the stock market crash. Stock index futures were and are subject to regulation by the CFTC; while the stock market itself is of course subject to SEC regulation. I have long thought it would be preferable for the two agencies to be merged, but I am not at all certain that a merged agency would have prevented the crash. What triggered the panic on October 19 is unclear. One can argue that the stock market had been overvalued prior to that date in 1987 and a needed correction was in order (if not such a quick one). It is hard to see how regulators would address an overheated market, and it is even harder to see regulators, whatever agencies are involved, taking regulatory actions to make a market fall. 

Given all the financial market issues the book discusses, the lack of any discussion of the eventual legislative proposal of the Treasury Department in the George H.W. Bush Administration is mystifying. The Treasury advocated that stock index futures regulation be transferred from the CFTC to the SEC. Quite a bit of effort was made to push this proposal in Congress, and the SEC was naturally on board. It failed, because the policy arguments against it were strong as were the opponents to this proposal. The problem with the policy is that all exchange-traded futures contracts, no matter the underlying “commodity,” share basic similarities, are traded on the same exchanges, and are cleared and netted by the same clearinghouses. Having different regulations issued by a different agency would have unnecessarily complicated regulatory compliance and burdens. The futures exchanges were naturally opposed. It would have made more sense to propose merging the two agencies, but that was (and still is) politically impossible. Henriques could have usefully discussed this issue in depth.

Finally, there is a reason that the stock market crash of 1987 has receded from memory. The feared collapse of the economy did not happen. While it is true that it took some time for the market top in 1987 to be reached again, the stock market did recover. In short, while the crash highlighted market vulnerabilities and regulatory shortcomings, the book makes too much of this event. Yes, it was scary, but its significance pales to what later happened in 2008.   

As for regulation, while I do not agree with some of her criticisms of regulation and wish she had studied the facts more closely, I agree that the regulatory structure could be improved. A major failure of Dodd-Frank was the lack of rationalizing the regulatory structure to make it more effective. There are too many banking regulators, and the somewhat arbitrary division of responsibilities between the SEC and the CFTC does not make much sense. 

The author could have usefully discussed various proposals to address the regulatory structure and also could have addressed what I have observed in more than one agency to be a serious problem – regulatory capture. There is no easy solution to regulatory capture, but I submit that it is more of a problem when there are competing regulators who focus on one type of financial institution.

The book is well-written, and the stories told are interesting. However, for those with some knowledge of what the book discusses, it is in the end disappointing both for its hasty judgements on some issues and for the lack of a coherent and convincing argument about what the market crash signifies and what its implications for policy are going forward.

Proposed Fee Increases at 17 National Parks

The National Park Service is proposing increasing fees at seventeen national parks. They are:  Acadia National Park, Arches National Park, Bryce Canyon National Park, Canyonlands National Park, Denali National Park, Glacier National Park, Grand Canyon National Park, Grand Teton National Park, Joshua Tree National Park, Mount Rainier National Park, Rocky Mountain National Park, Olympic National Park, Sequoia and Kings Canyon National Park, Shenandoah National Park, Yellowstone National Park, Yosemite National Park, and Zion National Park.

The proposed fee increases are significant. For example, at Shenandoah National Park, the fee per passenger vehicle is currently $25. This would increase to $70 during the peak season (June-October). An annual pass to the park, which currently costs $50, will increase to $75. (More details about the proposed fees for this and the other parks can be found in a NPS pdf document that can be downloaded here.)

Timothy Egan wrote about a week ago why he opposes these fee increases in a column for The New York Times. People who wish to submit comments to the NPS can do so online or by writing a letter. The address for physical letters is in the document linked above. Online submissions can be submitted here. Note that the comment period ends November 23 at 11:59 PM Mountain Time. (For some reason, the NPS chose Thanksgiving Day for the end of the comment period.)

I am opposed to these fee increases. Below is reproduced my comment to the NPS about this.

I write to urge you not to implement this proposal to raise fees for certain national parks but rather to seek other revenue sources for needed maintenance and upkeep for all of the national parks. One of the great assets of our country is its natural beauty, and the U.S. government has acted to conserve some of the most beautiful areas, beginning in 1872 with the establishment of Yellowstone National Park, as national parks for current and future generations. Charging the high fees which the National Park Service is proposing will limit the ability of all except the affluent to visit the national parks to which they apply. The national parks were not established for the enjoyment of just the richest of our citizens. They are owned by all Americans, and pricing should not be so high as to limit the ability of all but the affluent to enjoy the parks.

With respect to the Washington, DC area where I live, it is not at all clear that hiking the fees for Shenandoah National Park will result in much of a revenue increase. It will lead to enforcement issues, since there are ways to access this park without driving on Skyline Drive. Moreover, many may decide to make more excursions to the mountains in George Washington National Forest on the other side of the Shenandoah Valley rather than paying $70 per vehicle to enter Shenandoah National Park.

To take another example, Rocky Mountain National Park is certainly a beautiful place, but there are other beautiful places in Colorado. The proposed fees will certainly limit the number of visits to Rocky Mountain National Park.

Also, while there may be legal reasons why some national parks do not charge fees, there is no offered public policy reason why vehicles entering Shenandoah National Park should be charged $70 during the peak season while vehicles entering Great Smoky Mountains National Park on the other end of the Blue Ridge Parkway should be charged nothing. Since, according to the proposal, 20 percent of the collected fees at the parks charging a fee will go to other parks, it is not explained why visitors to certain parks should subsidize the financial needs of parks not charging a fee. 

Finally, I note that as a holder of a Senior Pass, I am not directly affected by this proposal. However, I urge you not to implement these proposed fee increases not out of self-interest but because they go against some of the purposes for creating the national parks in the first place. In short, this proposal is bad public policy.

Update (11/21/2017):The NPS has extended the deadline for comments on the fee increase to December 22, 2017 (23:59 Mountain Time). If you care about this, please comment. As the reversal on elephant trophies demonstrates, the Trump Administration is not impervious to criticism of its proposed actions.