Including corporate-captured, chickenshit and ponderous
This edition of the Revolving Door Project newsletter was originally published on our Substack. View and subscribe here.
Last Friday, The New York Times explored how Trump-era Federal Reserve Vice Chair for Supervision Randy Quarles’ restructuring of Fed banking supervision in 2018 paved the way for the collapse of Silicon Valley Bank (SVB). Prior to those reforms, SVB’s oversight would have been moved to the Fed’s Large and Foreign Bank Organization group when it averaged over $50 billion in assets. After Quarles’ restructuring, the troubled bank did not move to the more rigorous oversight group until it averaged over $100 billion in assets, which happened in late 2021.
The story from the Times is an important one; there is no doubt that scrutiny of Fed banking supervision practices has been lacking (as we’ve pointed out before). And this policy shift looks even more concerning when compared to peer regulatory agencies. The Federal Deposit Insurance Corporation (FDIC), for instance, has its own Large Insured Depository Institution (LIDI) program, which includes quarterly supervision on all banks under their jurisdiction with $10 billion or more in assets. Even before Quarles’s change, the Fed didn’t begin more rigorous supervision until a bank was five times over the threshold at which the FDIC would have strengthened its regulation.
However, Quarles’s fault does not obviate the failures of current Vice Chair for Supervision Michael Barr or current Fed Chair Jerome Powell in facilitating the worst bank run in decades. Quarles may have flipped the switch, but both Powell and Barr had the power to flip it back. While there was congressionally-mandated loosening of some Fed supervision in the Crapo Bill (S.2155), this policy was done entirely at the Fed’s discretion. As the Times put it, Quarles “chose to recalibrate how banks were supervised in line with the new requirements.” It was a matter of trying to match the vibes of new legislation, nothing more.
As our Max Moran has explained, at the Fed, unlike other multimember commissions and agencies, the “chair is the only person in the Fed system who can set its governance policies.” That means two things. One, Powell explicitly or implicitly okayed Quarles’s change. Two, he could have instructed it to be undone any time he wished. That’s why we blamed him in a previous edition of this newsletter. If only more people had taken our case against renominating Powell more seriously.
But Barr could also have pushed for this change. While Powell ultimately has the power, he’s likely inclined to defer to his Vice Chair for Supervision, as he said under oath to Congress during his renomination. Much as we have been vocal on transportation issues about the importance of both Elaine Chao having made a mess and Pete Buttigieg’s failure to clean it up, Barr’s inaction to address the mess he was left in charge of means that he has to shoulder his fair share of culpability.
This is also another reason to heed our Timi Iwayemi’s argument that Barr shouldn’t lead the investigation into the Fed’s regulatory failure to catch SVB before it blew up. It would be one thing if Barr had started to move towards restoring tighter supervision of banks with tens of billions in assets and just hadn’t quite managed to fully roll back his predecessor’s deregulation. But we haven’t seen any indication of that. And it’s quite another thing to do nothing to address a serious issue after having served for eight months as the top regulator at the Fed prior to SVB’s implosion.
Until the Biden administration learns that they need to draw a sharp contrast with their predecessors and, generally, do a full 180, they will keep getting egg on their faces. And when the blame genuinely belongs to both the Trump and Biden administrations, warranted criticism of disastrous Republican deregulation is undermined.
We’re glad Quarles is getting criticized, but Biden and his appointees got caught not doing their jobs too. That’s bad and needs to be reckoned with.
This criticism ties back into our core theory of governance, which is that we need motivated, empowered, and numerically sufficient regulators who are in their dream jobs, and not considering revolving out of government back to industry, in order to prevent disasters. It takes guts to make the kinds of changes that we need to see in the regulatory apparatus, and to swim upstream against the previous administration’s tide. People thinking about revolving back into industry likely won’t have those guts. Hence our concern about Barr’s extensive fintech and crypto industry ties. In Powell’s case, his tenure as Fed Chair under Trump should have been warning enough.
Corporate-Cowed vs Courageous Regulators
Earlier this week, one of us wrote for The American Prospect in “The Chickenshit Club, Climate Edition” about why people should view the Biden administration’s claims that their hands were tied with approving the Willow Project with skepticism. Many mainstream news outlets duly repeated the White House and anonymous administration officials’ claims about the legal constraints they faced, and their fear that they might lose to oil major ConocoPhillips in court.
We don’t see the administration’s aversion to losing in court as a valid justification for taking pro-corporate actions, particularly when the stakes are so massive. You lose every fight you don’t show up for. Indeed, we see it more as a frustrating instance of a longstanding reticence on the part of federal government lawyers to fight the good fight when they’re up against BigLaw lawyers representing major corporations. (Hence, our homage to the title of Jesse Eisinger’s book The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives.)
In contrast to the Interior Department and Justice Department’s apparent cowardice when faced with the prospect of opposing ConocoPhillips in court, the piece highlights the Federal Trade Commission’s unapologetic willingness to take on corporate giants as an available alternative approach. FTC policy director Elizabeth Wilkins made a powerful case for taking on that kind of legal risk to fight for the public interest in a recent speech:
“It has been suggested that taking on legal risk is somehow inappropriate. Certainly, as stewards of the agency, leadership has an obligation to be protective of the institution and its mission,” Wilkins said. “But I would suggest that having a zero tolerance for risk would not be fulfilling the agency’s obligations to apply the creativity, nimbleness and innovation necessary for this small agency to meet its significant task. More than that, some of the agency’s greatest successes would have never been realized if the agency took a zero-risk approach.”
“In a ‘win some, lose some’ game, you do lose some of the time,” Wilkins continued. “But that’s okay, that’s the inevitable back-and-forth between agencies and the courts that our system created. The risk should not chill us from doing our best. If it did, we’d be acceding to the equivalent of ‘lose all, lose all.’”
There are many great ideas packed in there, but one of them worth pondering for a minute is the idea that for this “small agency to meet its significant task,” it needs to approach that work with creativity, and some tolerance for risk. We wholeheartedly agree with this assessment. Pointing out opportunities for creative risk-taking to protect and advance the public interest is a central goal of our executive branch scrutiny. The challenge is often whether regulators are willing to take those creative risks.
Small Agencies, Big Task
We’ve written before about how Republicans leverage the sheer size of the government budget to obscure its contents, and prevent informed conversations about spending priorities and whether immensely popular government initiatives—whether that’s protecting endangered species or tackling financial crime—are actually being properly funded. Sure, it might be hard to believe that a government budget in the trillions could be starving urgent priorities. But the truth is that many important parts of the federal government have been haphazardly shrunk over decades, even as hundreds of billions get funneled each year into the war machine.
Take the National Transportation Safety Board (NTSB), for instance, which investigates all aviation accidents and all other “significant” transportation accidents, and issues recommendations to improve transportation safety. The NTSB is currently conducting the ongoing investigation of the toxic train derailment in East Palestine, Ohio that continues to impact the health and safety of local residents. It also has the authority to recommend additional actions to prevent future derailments. This is the kind of under-the-radar work by federal employees that people should be able to count on; it’s very clearly a public good. But that doesn’t mean it gets the resources it needs.
The National Transportation Safety Board’s budget in 2010 was around $98 million, equivalent to around $135 million in 2023 dollars. Compare this to its actual budget in 2023, which was $129.3 million, and you see that its budget has declined in real value over the past dozen-odd years. Meanwhile, between 2010 and 2020, freight accidents increased by 30.1 percent.
The NTSB’s staffing levels have also stagnated over the last twenty years. It had 419 employees in 2000, 418 employees in 2011, and 412 employees in 2022, with a two-decade high of 433 in 2016, and a two-decade low of 376 in 2007. While freight accidents in 2020 are not as high as they were in 2000, they are higher than in 2010 and 2015, which means that transportation has not been getting safer even as technology has ostensibly been improving. The need for stronger safeguards is starkly apparent.
The NTSB is far from the most egregious case of systemic underfunding. Indeed, it’s useful as an example precisely because it is not a direct target of political attacks, but an indirect casualty of the conservative zeal to hobble agency budgets writ large. The Environmental Protection Agency, which also bears responsibility in helping East Palestine recover from Norfolk Southern’s toxic mess, has in contrast faced direct assaults on its capacity for decades, and the numbers show the impact. Its $10 billion budget in 2023 is not only smaller in real value than its 2010 budget (equivalent to $14 billion in 2022 dollars), but smaller than its 2000 budget ($13.4 billion in 2022 dollars), its 1990 budget (almost $13 billion in 2022 dollars), and its 1980 budget (over $18 billion in 2022 dollars, when the population was 30% smaller than today).
There is a nuanced case to be made about how the EPA has both been hobbled by systemic underfunding, and has also failed in significant cases to take the kind of clear-eyed risks—going up against corporate bad actors—that the public needs to see to build trust in the agency. Its actions in the aftermath of East Palestine have failed to reassure the public that the EPA isn’t downplaying risks out of fear. It is unfair that the EPA has such a massive mandate and such a hostile political environment in which to maneuver; and yet its mandate remains unchanged, and, as the nation’s foremost environmental regulator, its duty is to the health of people and ecosystems, not to political expediency or institutional reputations.
For more on the ongoing crisis in freight rail safety, and regulators’ failure as of yet to respond to it, check out ProPublica’s new investigation into how trains keep getting longer, and the Federal Railroad Administration’s “ponderous response to the mounting warnings about the dangers of long freight trains.”
You can also expect more from us soon looking at Biden’s proposed budget for the government in 2024, in the long view of departments’ and agencies’ funding and staffing over the past few decades. For many important programs and offices, Biden’s proposed increases barely bring the agency beyond Reagan-era funding levels in real value; and we know from the frothing hostility of the Republican House majority that Biden’s budget will not be enacted. Republicans have yet to propose any sort of actual budget, but are seeking steep across-the-board cuts to non-defense budgets. As we know, this blanket hostility to a well-functioning regulatory system has vast reverberating consequences.
Want more? Check out some of the pieces that we have published or contributed research or thoughts to in the last week:
The Blind Spots in Marty Baron’s Case for Objectivity
The Chickenshit Club, Climate Edition
As We Say Good Riddance, Which Corporate-Funded Entity Will Give Christine Wilson A Warm And Lucrative Welcome?
Hack Watch: Steve Rattner, SVB, And Selective Expertise
Fast, Vast, and Built to Last: The 12 Best Arguments for Rent Control
The Majority Report: The Tears Of A Billionaire & The Willow Project Betrayal w/ Hannah Story Brown & Michelle Eisen
“The billionaire bailout”: FDIC chair says the biggest deposit accounts at SVB held $13 billion