Kasey S. Pipes
The problem with civil servants, Winston Churchill joked, is that they are neither civil nor servants. One of the little-known facts about American government is how much power and discretion unelected bureaucrats have over everyday life. Nancy Pelosi accidentally made this point when she admitted that she hadn’t read the Obamacare law; she was implying that officials at the relevant federal agencies would sort through the law’s details. But who are these officials? American government runs on a two-lane highway: In one lane, elected representatives pass laws that deal with national issues; in the other lane, the relevant federal agency takes the law and issues rules and regulations to implement it. This makes civil servants at federal bureaucracies the most powerful people that most Americans have never heard about. Not surprisingly, these unelected and largely unaccountable civil servants often interpret laws in ways not intended by lawmakers and not good for the country. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed when Congress decided to increase oversight of the financial industry after the 2008 financial meltdown, presents a case in point. The law was intended to protect consumers through stricter regulation of financial institutions. But after it was signed into law three years ago, Dodd-Frank traveled to the U.S. Treasury Department, where the rule-making and regulating process began. According to some estimates, only about a third of the law has been translated into specific rules and regulations. But that has produced more than 8,000 pages of rules – nearly four times more pages than the law itself. And with so much of the law left to implement, the regulatory fun is just beginning for banks and other financial institutions. One of the highlights of the regulatory process so far has been implementation of the Dodd-Frank law’s provision for “orderly liquidation” of financial institutions. This liquidation process could be triggered by the default, or even the “danger of default,” of an institution whose failure “would have a serious adverse effect on the financial stability of the United States.” And what happens once the process begins? In essence, the Federal Deposit Insurance Corp. executes a hostile takeover of the company, replacing the company’s board of directors and, if the regulators see fit, shutting the institution down. Worse, the takeover process allows the FDIC to ignore bankruptcy rules that often help struggling institutions get things in order. Perhaps even more remarkable, Dodd-Frank fails to lay out firm and clear criteria that might place some restraints on regulators; instead, regulators are given the benefit of the doubt and, in effect, a free hand. This regulatory policy could spell disaster for financial institutions that experience difficulty. What can financial institutions do in light of this new regulatory era? Banks that want to avoid the threat of “orderly liquidation” need to familiarize themselves with the rules and be prepared for the possibility of federal intervention. Once the feds knock on the door, it will be too late.
Kasey S. Pipes is co-founder and partner of Corley Pipes, a government relations firm based in Fort Worth with offices in Washington, D.C. He previously served as an adviser to President George W. Bush, California Gov. Arnold Schwarzenegger and U.S. Rep. Kay Granger. He can be reached at firstname.lastname@example.org.