Working with Regulatory Agencies
For a practitioner, the most creative part of the regulatory process is in discussions with the agency that has been delegated authority to implement a statute. The discretion and flexibility, the ability to solve problems and accommodate conflicting interests, is greatest at this stage of the process. In planning presentations to the agency, you can draw on your entire education to develop policy arguments, based on any discipline you have studied, or drawing analogies from other areas in which you have experience.
In every matter, in whatever forum, the two basic questions a regulatory practitioner must be able to answer are: What policy should the country adopt to govern itself most effectively and fairly? And how can I present my ideas about the proper policy to command popular support?
Until you have worked in the regulatory process, it is impossible to understand the extent to which policy-making is idea-driven. The media tend to cover the political aspects of the policy process but downplay the battle of ideas. But good ideas ultimately drive policy, and an important aspect of the work of a regulatory expert is to develop strong arguments and then figure out how to sell them in the various forums and to the many different constituencies that are involved in an issue. The ideas must be able to survive stress testing by hostile experts and attacks by self-interested entities that will do anything to produce a favorable result. To maximize the chances of success, the regulatory practitioner must identify the moral high ground on an issue and develop effective policy arguments that occupy that ground before her opponents try to do so.
of the great intellectual challenges for the regulatory practitioner is to develop ideas that will show the senior agency and White House officials how best to accommodate conflicting interests. It is difficult to overestimate how intertwined economic and social issues are and how complex regulatory issues can become. All actions have consequences, many of which are unanticipated. Like a law of regulatory thermodynamics, actions generate reactions. The consequences often are unintended and have to be solved on the fly by trial and error.
The best current example of the complexities that can face a regulator, and the constant mutation of the problem to be solved, arises from bank regulation in 2008, after federal regulators decided they could not rescue the financial institution Lehman Brothers. One family of money market funds was overly concentrated in Lehman commercial paper, and “broke the buck,” or traded for less than $1 per share. No regulator had the information to foresee this offshoot of the Lehman bankruptcy, which prompted massive withdrawals from other money market funds. The loss of liquidity threatened to disrupt the entire world financial system. In response, the Department of the Treasury and the Federal Reserve quickly improvised a program that essentially nationalized the money market industry and guaranteed depositors that their shares could be redeemed for $1 per share.
Simultaneously, other parts of the capital markets seized up due to the large capital losses being experienced as the bubble collapsed and the inability of market participants to determine if their counterparties were still solvent. A full-fledged liquidity crisis developed.
Months previously, the Federal Reserve Board had anticipated this problem and had directed its economists to develop contingency plans that considered what assets the most important financial institutions held, which assets it lawfully could accept as collateral against central bank loans, whether the institutions would be willing to pledge those assets, and whether other institutions would regard such pledges as a sign of weakness that would cause a run on a bank that took such a loan. The Federal Reserve staff developed a series of programs that met legal requirements for lending against different types of collateral. When financial pressures started to spread from institution to institution, the Federal Reserve was ready to roll out these programs.
At the same time, other federal financial regulatory agencies worked together to force the country’s largest financial institutions to accept a direct government cash infusion and agree to extensive regulation by the Federal Reserve as bank holding companies. The government accomplished this mission at the same time it was called upon unexpectedly to nationalize Fannie Mae and Freddie Mac, to prevent disruption of the entire mortgage market, and to rescue the insurance firm AIG to preserve the derivative market.
The loan programs and regulatory programs worked. The Federal Reserve had correctly determined what assets the major banks had that would still have market value in a crisis and how a discounted loan against those assets could generate the funds necessary to keep the institutions afloat.
The Federal Reserve regulatory staff was the real hero of the crisis.
John F. Cooney is a partner at Venable, a Washington, D.C.-based law firm. He previously served as an Assistant to the Solicitor General in the Department of Justice, Deputy General Counsel for Litigation and Regulatory Affairs in the Office of Management and Budget (OMB), and counsel for OMB’s Office of Information and Regulatory Affairs.