Taking Apart The CFPB, Bit by Bit

graphic by Matt Shirk

Mick Mulvaney’s Message in the CFPB’s latest Semi-Annual Report is crystal clear regarding his plans for the Bureau:

As has been evident since the enactment of the Dodd-Frank Act, the Bureau is far too powerful, and with precious little oversight of its activities. Per the statute, in the normal course the Bureau’s Director simultaneously serves in three roles: as a one-man legislature empowered to write rules to bind parties in new ways; as an executive officer subject to limited control by the President; and as an appellate judge presiding over the Bureau’s in-house court-like adjudications. In Federalist No. 47, James Madison famously wrote that “[t]he accumulation of all powers, legislative, executive, and judiciary, in the same hands … may justly be pronounced the very definition of tyranny.” Constitutional separation of powers and related checks and balances protect us from government overreach. And while Congress may not have transgressed any constraints established by the Supreme Court, the structure and powers of this agency are not something the Founders and Framers would recognize. By structuring the Bureau the way it has, Congress established an agency primed to ignore due process and abandon the rule of law in favor of bureaucratic fiat and administrative absolutism.

The best that any Bureau Director can do on his own is to fulfill his responsibilities with humility and prudence, and to temper his decisions with the knowledge that the power he wields could all too easily be used to harm consumers, destroy businesses, or arbitrarily remake American financial markets. But all human beings are imperfect, and history shows that the temptation of power is strong. Our laws should be written to restrain that human weakness, not empower it.

I have no doubt that many Members of Congress disagree with my actions as the Acting Director of the Bureau, just as many Members disagreed with the actions of my predecessor. Such continued frustration with the Bureau’s lack of accountability to any representative branch of government should be a warning sign that a lapse in democratic structure and republican principles has occurred. This cycle will repeat ad infinitum unless Congress acts to make it accountable to the American people.

Accordingly, I request that Congress make four changes to the law to establish meaningful accountability for the Bureau :

1. Fund the Bureau through Congressional appropriations;

2. Require legislative approval of major Bureau rules;

3. Ensure that the Director answers to the President in the exercise of executive authority; and

4. Create an independent Inspector General for the Bureau. (2-3)

Mulvaney gets points for speaking clearly, but a lot of what he says is wrong and at odds with how the federal government has operated for nearly one hundred years. He is wrong in stating that the CFPB Director acts without judicial oversight. The Director’s decisions are appealable and his predecessor’s have, in fact, been overturned. And his call to a return to the federal government of the type recognizable to the Framers has a hollow ring since at least 1935 when the Supreme Court decided Humphrey’s Executor v. United States.

I would think that it should go without saying that the federal government has grown exponentially since its founding in the 18th century. The Supreme Court has acknowledged as much in Humphrey’s Executor which held that Congress could create independent agencies.  Independent agencies are now fundamental to the operation of the federal government.

Mulvaney and others are seeking to chip away at the legitimacy of the modern administrative state. That is certainly their prerogative. But they should not ignore the history of the last hundred years and skip all the way back to 18th century if they want their arguments to sound like anything more than a bit of sophistry.

Rigged Justice

photo by Toby Hudson

The Office of Senator Elizabeth Warren has released Rigged Justice: 2016 How Weak Enforcement Lets Corporate Offenders Off Easy. The Executive Summary states,

When government regulators and prosecutors fail to pursue big corporations or their executives who violate the law, or when the government lets them off with a slap on the wrist, corporate criminals have free rein to operate outside the law. They can game the system, cheat families, rip off taxpayers, and even take actions that result in the death of innocent victims—all with no serious consequences.

The failure to punish big corporations or their executives when they break the law undermines the foundations of this great country: If justice means a prison sentence for a teenager who steals a car, but it means nothing more than a sideways glance at a CEO who quietly engineers the theft of billions of dollars, then the promise of equal justice under the law has turned into a lie. The failure to prosecute big, visible crimes has a corrosive effect on the fabric of democracy and our shared belief that we are all equal in the eyes of the law.

Under the current approach to enforcement, corporate criminals routinely escape meaningful prosecution for their misconduct. This is so despite the fact that the law is unambiguous: if a corporation has violated the law, individuals within the corporation must also have violated the law. If the corporation is subject to charges of wrongdoing, so are those in the corporation who planned, authorized or took the actions. But even in cases of flagrant corporate law breaking, federal law enforcement agencies – and particularly the Department of Justice (DOJ) – rarely seek prosecution of individuals. In fact, federal agencies rarely pursue convictions of either large corporations or their executives in a court of law. Instead, they agree to criminal and civil settlements with corporations that rarely require any admission of wrongdoing and they let the executives go free without any individual accountability. (1)

I think the report’s central point is that the “contrast between the treatment of highly paid executives and everyone else couldn’t be sharper.” (1)

The report does not address some of the key issues that stand in the way of achieving substantive justice for financial wrongdoing. First, many of those accused of wrongdoing were well-represented by counsel who ensured that they did not violate any criminal laws, even if they engaged in rampant bad behavior. Second, contemporary jurisprudence of corporate criminal liability presents serious roadblocks to prosecutors who seek to pursue such wrongdoing. Third, many of these cases are incredibly resource heavy, even for federal prosecutors. This can incentivize them to go after other types of financial wrongdoing instead, such as insider trading.

It seems like it is too late to address much of the wrongdoing that arose from our most recent financial crisis. But if this report achieves one thing, I would hope that it gets Congress to focus on how corporations and their high-level executives could be held criminally accountable the next time around.

TARP’s Smallish Rogues Gallery

The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) issued its Quarterly Report to Congress on July 30, 2014. There is a lot to digest in this 500+ page document, but I thought that readers of this blog might be interested in the rogues gallery found at Figure 1.3 on pages 54-56 (note that this is the pagination found in the document, which is different from the pdf’s pagination of the document). Figure 1.3 lists the 85 people sentenced to prison as a result of a SIGTARP investigation, the sentences they received, and their affiliations:

Many of the criminal schemes uncovered by SIGTARP had been ongoing for years, and involved millions of dollars and complicated conspiracies with multiple co-conspirators. On average, as a result of SIGTARP investigations, criminals convicted of crimes related to TARP’s banking programs have been sentenced to serve 77 months in prison. Criminals convicted for mortgage modification fraud schemes or other mortgage fraud related investigations by SIGTARP were sentenced to serve an average of 39 months in prison. Criminals investigated by SIGTARP and convicted of investment schemes such as Ponzi schemes and sales of fake TARP-backed securities were sentenced to serve an average of 88 months in prison. (53-54)

Hard to tell if that is many or only a few people being held accountable. But it is interesting to note that restitution and forfeiture from crimes related to TARP have so far “resulted in more than $5.11 billion in court orders for the return of money to victims or the Government.” (59) That comes out to roughly $60 million for each of the 85 prisoners and about $800,000 for each of the 77 months each of them was sentenced (on average) to prison. While these metrics are merely impressionistic, they certainly make me wonder if this report is right to being touting SIGTARP as an agent of accountability so much.