Liberal groups have grown concerned that Senate Minority Leader Chuck Schumer will squander his power to recommend Democratic nominees for financial regulatory commissions by sending up milquetoast, industry-friendly functionaries, instead of stalwarts opposed to loosening rules on big banks.
At issue are two Democratic seats open on the Federal Deposit Insurance Corporation, and one on the Securities and Exchange Commission. Last month, over 30 labor, progressive, and consumer groups urged Schumer to select nominees with a “demonstrated willingness to stand up to Wall Street.”
But Schumer, D-N.Y., has been slow to act on the SEC vacancy. For the FDIC, he’s close to re-appointing former Chair Martin Gruenberg, fresh off his role in shepherding through a major weakening of the so-called Volcker rule, a Dodd-Frank provision barring deposit-taking institutions from risky trading with customer funds. Gruenberg was the only Democratic bank regulator to vote for the deregulation proposal, and Schumer subsequently rewarding him with a re-appointment would be taken as disappointing signal.
Sen. Cory Booker, D-N.J., said that Schumer is taking the pressure from progressive groups seriously when it comes to naming commissioners. “They make critical decisions that affect communities like the one I live in, in the central ward in Newark, and it’s something that I’m really concerned with on a whole raft of issues, from access to capital to fair-lending practices,” he said. “You’re seeing a whole bunch of things really affecting the average working American, and I think Schumer’s conscious of those things, and that’s why he’s spent so much time talking to progressive groups.”
While Democrats on these commissions will surely get out-voted routinely by Donald Trump-appointed Republicans who don’t believe in regulation, there’s still a lot at stake. Minority-party appointments create a record of opposition and carry the banner for the party’s ideas and principles.
They also are critical when the presidency changes, as a new chief executive can designate an existing commissioner as chair. For example, Ajit Pai, a Republican FCC commissioner under Obama, routinely agitated against Democratic-favored positions. He was appointed to the Federal Communications Commission while Obama was president and Democrats controlled the Senate, because the parties often send nominees in pairs.
The battle over appointments reflects how differently the parties operate. When out of power, Republicans use minority-party seats to elevate fire-breathing ideologues who rise to run agencies from the far right. Democrats often nominate weak technocrats from the party’s corporate wing, who side with Republicans and lay down no marker about what the party believes. The result is a rightward drift of the commissions, because one side plays for keeps and the other plays it safe.
By law, federal regulatory commissions with a five-member board and without a single director can contain no more than three members from the president’s party. Traditionally, the opposite-party leader in the Senate — in this case, Schumer — has wide discretion to recommend minority-party commission members, who the president then nominates. It’s one of the few norms in Washington that Trump has actually managed to honor, as several Schumer selections have been confirmed.
The Democratic caucus has begun to put pressure on Schumer as well. Sen. Tammy Baldwin, D-Wis., previously put a hold on SEC nominees Robert Jackson and Hester Peirce, pressuring them to take a stand on rampant shareholder buybacks, activist hedge fund behavior, and runaway executive compensation.
The pressure appears to have paid off. Jackson, who was subsequently confirmed, recently suggested that the SEC needs to probe shareholder buybacks in the wake of the Trump corporate tax cuts. “I believe American workers and consumers need commissioners who recognize the threat that short-termism poses to the economic security of middle-class families,” Baldwin told The Intercept. “I would like to see nominees who are committed to advocating for the public interest and are willing to crack down on Wall Street excess because we can’t afford to repeat the mistakes of the past.”
Schumer had a shaky history on appointments prior to becoming minority leader. In 2005, he managed to get Annette Nazareth, a former Lehman Brothers and Salomon Smith Barney executive, into an SEC commissioner slot. The top Democrat on the Senate Banking Committee, Paul Sarbanes, had another nominee in mind, but Schumer outmaneuvered him and successfully recommended Nazareth to then-Democratic leader Harry Reid.
Nazareth promptly joined her colleagues in neglecting the buildup of toxic assets on bank balance sheets. She was instrumental in establishing a new rule permitting investment banks to take on more debt, ensuring commissioners that it would not lead to riskier behavior. Within a few years, all U.S. investment banks were either bailed out or forced into bankruptcy during the financial crisis. Nazareth then returned to the corporate law firm Davis Polk, where she criticized post-crisis reforms, including the creation of the Consumer Financial Protection Bureau.
The episode epitomizes liberal fears about Schumer’s closeness to Wall Street, a longtime source of funding for his campaign war chest. Critics charge that his tacit approval of the recently passed bipartisan bank deregulation bill, which he made no effort to short circuit, was the main reason that Trump was able to sign it into law. More recently, Schumer hired former Goldman Sachs executive and Tim Geithner chief of staff Mark Patterson as a counselor. Patterson is not involved in the nomination or vetting process.
Early in Schumer’s tenure, the appointment controversy flared up. He wanted to install his former chief of staff, a lobbyist for Airbnb and Yahoo, to a seat on the Federal Trade Commission. Liberals resisted and eventually got Elizabeth Warren protégé Rohit Chopra confirmed to that seat. It showed how party activists were newly attuned to obscure personnel fights. The FDIC and SEC slots represent an escalation.
Kara Stein, one of the more progressive commissioners at the SEC during the Obama years, must vacate her position at the end of the year. The FDIC has an open vice chair seat, and Gruenberg can only serve as a director in a temporary capacity without being re-nominated.
The situation took on new urgency when Republican SEC Commissioner Michael Piwowar announced he would step down by July 7. Confirmation votes for multimember commissions are often paired, so Democrats and Republicans both have an interest in voting to confirm.
Within a few weeks of Piwowar’s announcement, Republicans had ready a replacement: Elad Roisman, chief counsel to Senate Banking Committee Chair Mike Crapo, R-Idaho. This has become a trend for Republicans, setting far-right Senate staffers loose on the regulatory state. Their combination of insider knowledge and ideological zealotry is deadly. SEC Commissioner Hester Peirce worked for former Banking Committee Chair Richard Shelby, R-Ala., and new FDIC Chair Jelena McWilliams was an aide to both Shelby and Crapo.
Chopra aside, reform-minded Democrats like Warren, D-Mass., or Sherrod Brown, D-Ohio, have not had similar success installing their staffers on regulatory boards. In fact, Stein has been a lame duck for months without any action from Schumer. If Roisman gets confirmed first without pairing a replacement for Stein, the agency could be down a Democrat for who knows how long.
“[Senate Majority Leader Mitch] McConnell doesn’t mess around, that’s how a well-oiled machine operates,” said Jeff Hauser of the Revolving Door Project, whose organization helped coordinate the May 24 letter to Schumer. “Democrats are belatedly trying to come up with people. It’s embarrassing, incompetent, and could result in confirming someone disloyal to the values Democrats purport to represent.”
Trump’s regulatory appointees have been gunning for the Volcker rule for some time. But Gruenberg was still in charge of the FDIC when an initial proposal was floated to exempt smaller banks from the restrictions and have larger ones essentially monitor themselves for compliance, removing paperwork requirements. Analysts believe the rule change will bring riskier trading out of the shadows, particularly at veteran trading firms like Goldman Sachs and Morgan Stanley.
Gruenberg worked with other agencies to craft the proposal and voted for it on May 31, saying it would provide “greater clarity and simplicity to facilitate compliance.” The rule will be finalized over the next several months.
“On the heels of the [bank deregulation] bill, here’s yet another example of a Democrat aligning with Republicans to roll back critical post-crisis protections,” said David Segal of Demand Progress, one of the groups pushing Schumer for stronger appointees. “It will increase speculative behavior by banks and with it, systemic risk in the financial sector and danger to the real economy.”
Gruenberg may have assented to the proposed rule to keep his staffers in the room negotiating a final version. In particular, he wants to safeguard a requirement that CEOs attest to Volcker rule compliance under penalty of law. But attestations under Sarbanes-Oxley, meant to put CEOs on the hook for their companies’ risk management procedures, failed to hold them accountable for the worst financial crisis in nearly a century. “People have been signing pieces of paper saying their companies are legitimate for 15 years now, and nobody has gotten in trouble for it,” said Marcus Stanley of Americans for Financial Reform, another pro-regulatory coalition member.
No other Democratic appointee on a bank commission — not Kara Stein and Rob Jackson at the SEC, or Rostin Behnam at the Commodity Futures Trading Commission — voted for the Volcker rule changes. “That vote was very disappointing,” Stanley said. And Schumer is likely to re-nominate Gruenberg to be vice chair, in effect rewarding him for siding with Republicans on a critical deregulatory maneuver.
Liberal groups may be willing to accept Gruenberg in a package with a reform-minded director; they have suggested Graham Steele, a former staffer to Sherrod Brown, D-Ohio, now with the Federal Reserve Bank of San Francisco.
As for the SEC, Stein has proven herself to be among the biggest proponents of tight regulations inside government. Replacing her will be a tall order. Bloomberg reported that Schumer’s team is vetting Warren banking aide Bharat Ramamurti and AFL-CIO Office of Investment Director Heather Slavkin Corzo. Both would be pleasing to liberal groups, but neither is guaranteed, amid the usual assortment of corporate lawyers and Wall Street veterans.
“We need someone who’s demonstrated and shown commitments for protecting ordinary investors and the public,” said Stanley.
Liberal groups have turned to leveraging potential 2020 candidates to pressure Schumer. Rootstrikers, a project of Demand Progress, is asking supporters to call Democratic senators and tell them not to “let Wall Street take over the SEC and FDIC.” Emails sent with the ask highlight senators like Kamala Harris, Cory Booker, and Kirsten Gillibrand, whose potential presidential runs give them more clout within the party.
Some may argue that Schumer is constrained because Trump must formally nominate the appointees, and a Republican-led Senate must confirm them. But Pai was not the only fire-breather nominated under Obama and confirmed by a Democratic Senate. Piwowar was confirmed in 2013, and Christopher Giancarlo, now running the CFTC, in 2014. Obama and Reid were not obstacles in these cases. Nor did Trump and McConnell stop Chopra, the Warren acolyte, from reaching the FTC. Any excuse that Republicans won’t let Democrats get their preferred nominees into minority-party seats belies recent events and would amount to offloading responsibility.
The Democrats’ Better Deal campaign platform, crafted in part by Schumer, vows to “end the revolving door in Washington and rein in the influence of high-powered Washington insiders, lobbyists, and big-money donors.” Schumer has an opportunity to put that into action or prove that the rhetoric was simply empty.