Commentary—

Legislation Is Just The Start

By Lee H. Hamilton

You might imagine, now that President Obama has signed the massive financial reform package into law, that the issue is behind us. Hardly. In a way, the President’s signature was just the starter’s pistol.

This is because, despite its length — more than 2,000 pages — and the many months of negotiations that went into crafting it, the financial overhaul measure leaves countless issues to be resolved later by federal regulators and the lobbyists who will try to influence their decisions. It is a textbook example of the limits inherent in a legislative product, and of the manner in which Congress relies on a mix of concrete action and ambiguous ball-punting to cobble together a majority.

The law undoubtedly changes the nation’s financial landscape. It creates a new Bureau of Financial Consumer Protection; strengthens regulation of financial holding companies; regulates derivatives; places new limits — the so-called “Volcker Rule” — on the amount of money a bank can invest in hedge funds and private equity funds; buttresses the Securities and Exchange Commission; and tries to discourage excessive risk-taking.

It is also filled with the sorts of compromises the legislative process demands. The “Volcker Rule” was written off, watered down, and then somewhat restrengthened on its way to passage. The consumer protection agency was initially to be a standalone regulator, but then was placed within the Federal Reserve in order to calm some concerns. The language on derivatives went through a complex series of balance-seeking negotiations between those who wanted highly restrictive regulation and those who opposed it.

The result is a grand and sweeping law that nonetheless leaves many issues unresolved and much room for interpretation in the future. When you have such ambiguities in new statutes — as is frequently the case — it amounts to an invitation to further struggle on the part of the bureaucrats who must give shape and form to the ideas contained in the measure, and the lobbyists whose clients have much at stake in the results.

According to an analysis by the US Chamber of Commerce, the measure calls for 350 rules to be formulated, 47 studies to be conducted — which is Congress’s way of signaling action on an issue without actually making any decisions — and 74 reports. The creation of new entities — the consumer protection agency, a board of regulators to assess risk in the financial system — also will engender much executive-branch maneuvering and back-and-forth with Congress as they are set up and staffed.

Moreover, lobbyists don’t stop work when a law is passed; in some ways, that’s when their work truly begins, as they strive to build relationships with the regulators who will oversee their industry and try to influence the regulations that will soon enough begin to flow from various executive-branch agencies.

The difference, of course, is that for all its faults, Congress is a relatively transparent and accountable institution. What takes place in regulators’ offices is far less visible. As the activity surrounding financial reform now passes beyond public view, political considerations will become less important but the stakes will grow higher. Out of the public’s eye, the special interests’ influence will grow, and arguments about how to interpret the language contained in the law will blossom — and, inevitably, spill over into the courts. For years to come, there will be enormous demand for lawyers capable either of making sense out of ambiguous legislative language, or of making the strongest possible arguments in favor of interpretations that just happen to favor their clients.

Yet in the end, it is the executive branch that benefits most from what Congress has done. The entire measure is a significant gift of power to federal agencies and financial regulators, who now have to make decisions about how they intend to wield their power. You can already see how significant their role will be in the early maneuvering over who might head the new Bureau of Consumer Financial Protection: each possible appointee, who must be approved by the Senate, would approach the job differently, and in the weeks following the bill’s passage the nuances of their approaches were probably the hottest single topic of debate over breakfast, lunch, and dinner tables in Washington.

It is important to remember, in the end, that the authority to act is not the same as acting. That is why, while Congress made some important decisions in the process of crafting its bill, the true import of the financial reform package will only reveal itself gradually. There is an old saying in Washington that nothing is ever decided for good there. For legislation, that is certainly true.

(Lee Hamilton is director of the Center on Congress at Indiana University. He was a member of the US House of Representatives for 34 years.)