Judicial Oversight of the Bureaucracy: Probably Good
Two years ago, Judge Ned Rakoff rejected a settlement between the SEC and Citigroup. The SEC had been prosecuting Citigroup over fraud in some securities offerings it put together, similar to many cases in the bubble-era financial world. As was standard in this situation, finally Citigroup had enough and agreed to settle the case in the standard manner – a fine of $285 million and not having to admit it did anything wrong. Sick of seeing Wall Street getting simple slaps on the wrist, Rakoff put his foot down:
Judge Rakoff said it was impossible for him to say whether it was “fair and reasonable,” let alone in the public interest, after the bank “neither admitted nor denied” the S.E.C.’s accusations nor otherwise revealed any of the facts in a complex mortgage fraud case.
Rakoff’s ruling was a feel-good moment for people tired of Wall Street’s excesses, and two years later it is being reined in by the powers-that-be. The New York Court of Appeals for the Second Circuit found that Rakoff had exceeded the bounds of his discretion. Regardless of the merits of this specific decision, the logic is troubling. One of the perennial issues facing regulators and the bureaucracy in general is the question of “regulatory capture”, when bureaucracies turn from impartial regulators of an industry to its defenders or advocate. The SEC as a whole is certainly not captured, or else it never would have brought such a case in the first place. However, there were no doubt certain elements within the SEC which were very happy to see the case disappear with the minimum of fuss and muss lest it impede the revolving door to Wall Street. The decision by the appeals court threatens to set general precedent for judicial review of settlement, sharply decreasing the power of the courts in overseeing regulatory disputes.
The courts are not perfect, but the political economy of the situation suggests there are benefits to a supervisory role for the courts in this area. The professional incentives for judges are much better than for the SEC, since judges aren’t gunning for Wall Street jobs. Most are aiming to advance in their judicial career, generally doing so by making good law. Courts can be capricious and produce poor policy, and there are structural incentives encouraging that – little accountability and a partisan nomination process. However, these structural factors might lead to systematically poor policy. but there are no reasons to believe they systematically create biased policy, unlike the structural incentives facing the regulatory bureaucracy. It actually does make sense to hand off a fair amount of regulatory oversight to the courts, if we’re interested in a more even playing field for public interests. The Court of Appeals’ decision is troubling in that regard.