Does financial reform need reforming? How would we even know? What mode of analysis might yield insight into this question?
Two possibilities come readily to mind. One, which I will call the “sausage approach,” analyzes output by examining the merits of particular financial reform provisions. If the sausage -- the financial reform -- appears unwise on the merits, then one might be able to infer procedural problems of financial reform from this conclusion. For example, a provision that appears overly favorable to the big banks might lend itself to an inference that the legislative outcome is the result of special interest influence. In contrast, one that appears to impose costs in excess of its benefits might be attributed to pandering by elected officials.
The other method, which I will call the “sausage-making approach,” examines inputs by observing the process of financial reform more directly. Do industry groups appear to be attempting to influence outcomes? At what stage of the lawmaking process? Do lawmakers appear receptive to those overtures? Is there a meaningful counterbalance to influential industry voices? What is the public salience of the reform? Does the public appear interested? Involved? Are relevant public interest groups (PIGs) engaged in the issue?
Most Dodd-Frank analyses have so far been of the sausage variety. Numerous books and articles substantively critique Dodd-Frank against alternative statutory schemes, debating which course is wiser. Though these analyses are essential contributions to the literature, the substantive method has a serious drawback: there is little agreement on what the ideal response to the financial crisis should have been. Moreover, the Dodd-Frank sausage is not yet finished and will not be for many years to come. Given that so much of the substantive effect of Dodd-Frank depends on still-pending regulatory rulemaking, the sausage method is especially unsatisfying at this stage of Dodd-Frank’s existence.
In a new working paper, Don’t “Screw Joe the Plummer”: The Sausage Making of Financial Reform, which I just barely managed to get up on SSRN before our forum launched, I direct the sausage-making approach at section 619 of the Dodd-Frank Act, popularly known as the Volcker rule and frequently touted as one of the most important pieces of modern financial reform. Although the sausage-making approach has some limits, which I’ll come back to later, it has the advantage of neutrality on the Volcker rule’s merits. In other words, the Volcker rule makes for an interesting financial reform case study, not because it is wise – that may or may not be the case. Rather, the congressional maneuvering that accompanied the Volcker rule’s passage and the importance of proprietary and fund activities to banks’ bottom line signaled that the provision had the potential to illuminate questions of whose voice gets heard on a major issue of financial reform as the sausage is really getting made.
As part of this examination of Dodd-Frank sausage making, I analyze the roughly 8000 public comment letters received by FSOC on the Volcker rule and the meeting logs of the Federal Reserve, the CFTC, the SEC, and the FDIC. This analysis reveals a surprising level of public activity, but also a stark difference in investment by financial institutions versus all other actors in influencing Volcker rule implementation. As I will come back to in later posts, the normative implications to be drawn from that analysis are in the eye of the beholder, and I expect that other forum participants, particularly Brett and Cristie, will be addressing this normative question in a more robust way than my sausage-making method allows.
But, nonetheless, there is much understanding to be gained from a sausage-making examination of the Volcker rule. For example, the public comment letter analysis reveals that a consortium of PIGs managed to generate a surprising level of Volcker rule interest among private citizens, who sent in letters by the thousands. But, 7316 (or 91%) of those comments are a virtually identical form letter.
The comment letters from private citizens that were not a form letter reveal a great deal – people are angry about the economy, about the plight of working Americans, and about the politicians who allowed the financial crisis to develop. The banks are “fools,” hogs,” and “criminals” out to “screw joe the plummer [sic]” and should be “put in jail,” receiving no more “bailouts with citizens’ money.” Political officials fare little better.
Presumably these comments reveal something to FSOC, both about public attitudes and about the power of the relevant PIGs on this issue. But at the same time, as I will discuss in more detail in my next post, the contrast with the meticulously drafted, argued, and researched – though far less numerous -- letters from the financial industry and its representatives is stark. In comparison, the citizen letters are short and provide little evidence that citizen commenters even understand, or care, what proprietary or fund investment is, much less the ways in which FSOC interpretation of the Volcker rule’s complex and ambiguous provisions might govern such activities.