Lobbyists Forge Letters To Pretend There's A 'Grassroots' Interest In Derivatives Reform

This story actually comes from back in November, but I just found out about it due to a recent Planet Money episode all about the regulatory scramble to rewrite our banking rules. The whole podcast is interesting, but there's a bit in the middle about one of the tactics used by lobbyists to influence the rules: they totally forged letters from individuals and small businesses to make it seem like there was "grassroots" support for a particular position on derivatives reform.

We've seen similar things before, where various DC lobbying groups make "deals" with various groups to put their name on letters. A few years ago there was a disturbing quote from someone who did this for a living who explained how it works:

"You go down the Latino people, the deaf people, the farmers, and choose them.... You say, 'I can't use this one--I already used them last time...' We had their letterhead. We'd just write the letter. We'd fax it to them and tell them, 'You're in favor of this.'"

Except, in this latest case, the subcontractor of the subcontractor of the lobbying firm didn't even do that last part. They just forged the letters entirely -- including from a small Burger King franchise and a circuit court judge who was not happy about her name being used this way. It appears the only way this was actually noticed was because a Bloomberg reporter was lazily scanning the letters to the CFTC (the Commodity Futures Trading Commission) and was surprised to see what looked like very out-of-place letters. Everything else was from big banks and big financial institutions. Letters from a Burger King franchise seemed odd. So the reporter called... and the franchise had no idea what the CFTC was, let alone why its name was on a letter pushing the CFTC in a particular direction about derivatives reform.

And yet, these kinds of letters do influence regulatory decisions -- which is a big part of the problem.

The Planet Money podcast discusses how these regulators need lobbyists to actually understand what they're regulating. And, it's absolutely true that the regulators don't really understand the issues at all, while those in the industry do understand what kind of impact regulatory changes will have. But, really, that's an argument for taking a rather light regulatory touch on these issues, since the regulations are going to be driven by lobbyists who understand the issue better than the regulators. Thus, the end result is almost always going to be in the favor of big players in the industry who can afford lobbyists (whether they do underhanded things like forge letters or just do more aboveboard lobbying). This is the concern that many folks have.

Yes, there are problems with a light regulatory touch. But the assumption that we need heavy regulations ignores how bad people are at regulating most industries, and how much regulatory capture there is in the rulemaking. The end results of aggressive regulation, driven by lobbyists, can often be worse than no regulation at all.

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