Even a big job like being governor of New York must seem like a bit of a let-down after leaving the glamorous job of being New York attorney general. Andrew Cuomo and Eliot Spitzer both ascended to the state’s highest office on strength of the popular support that they generated for themselves while bringing law suits against Wall Street’s major financial institutions, especially its banks.
Governor Cuomo’s cure for the separation anxiety he is suffering in the wake of his departure as attorney general is to usurp for himself much of the power exercised by the attorney general’s office. To this end, Mr. Cuomo’s new budget contemplates forcing the current attorney general, Eric Schneiderman, to share power with a huge new bureaucracy that would be under Mr. Cuomo’s control in the executive branch.
The proposed new bureaucracy is called the Department of Financial Regulation. It would combine the functions of the New York Consumer Protection Board with the Department of Insurance as well as the Department of Banking and would fund itself by imposing fees on regulated financial firms and by cannibalizing the budget of the attorney general’s office.
[The Senate will hold a budget hearing on Mr. Cuomo's consolidation plans today in Albany.]
Mr. Cuomo envisions empowering the new Department of Financial Regulation to issue subpoenas, compel testimony and seek damages and penalties from anyone found to have committed “financial fraud,” which includes fraud related to the investment products sold by Wall Street firms and banks as well as other financial services including annuities and life insurance.
One critical difference between the Department of Financial Regulation and the attorney general’s office is that the attorney general has to work through the courts. It cannot impose fines and penalties unilaterally. In contrast, the operatives in Mr. Cuomo’s proposed new office will be able to exert their powers unilaterally via administrative hearings.
The new legislation is a naked and highly suspicious power grab. Unlike, say, the SEC, it is not as though the New York attorney general can be faulted for lying down on the job of fighting financial fraud. But the new legislation would shift power and resources away from the attorney general. While the governor’s budget fully funds his new agency, it cuts the budget of the Office of the Attorney General by about 10 percent.
What is perhaps most perplexing is that the governor is well acquainted with the important differences between the law-bound Office of the Attorney General and the far more politicized regulatory agency that he seeks to create. As attorney general, both Mr. Cuomo and his predecessor Mr. Spitzer fought to regulate the world of finance and especially to impose New York’s tough consumer laws on national banks doing business in the state.
When Eliot Spitzer was attorney general he launched a highly publicized investigation alleging that banks were engaged in discriminatory lending practices by charging higher fees and rates on mortgages to African-American and Hispanic customers. When the federal regulators in the comptroller of the currency’s office rebuffed the attorney general’s efforts to obtain information from banks about their lending practices, the new attorney general, Andrew Cuomo, ultimately won a partial victory in the U.S. Supreme Court.
In the opinion in that case, Cuomo v. Clearinghouse Association LLC, the Court emphasized the distinction between inappropriate (and illegal) state bureaucratic supervision of national banks, which is done by asserting what are quaintly known as “visitorial powers,” and the legitimate exercise of old-fashioned law enforcement authority over banks.
The Court held that the National Bank Act permitted state attorneys general to enforce the law against both national as well as state chartered banks. But the Court ruled that only federal regulators can exercise supervisory or visitorial authority over the nationally chartered banks that were the target of the attorney general’s probe.
The Supreme Court made it clear that New York fair lending laws and other state consumer laws applied to national banks as well as to state banks. But state officials were barred from imposing any “form of administrative oversight” over national banks. The Supreme Court specifically found that the proper approach to state law enforcement in banking was to have attorneys general work through courts in enforcement actions.
Last summer, the Dodd-Frank Wall Street Reform and Consumer Protection Act not only formally endorsed the holding in Cuomo v. Clearinghouse, it also singled out the states’ attorneys general as the proper officers for enforcing state consumer protection laws against national banks.
Section 1047 of Dodd-Frank specifically identifies the attorneys general as authorized “to bring an action against a national bank in a court of appropriate jurisdiction to enforce an applicable law and to seek relief as authorized by such law.” In other words, the Supreme Court and Congress specifically have endorsed the role of attorneys general in enforcing state laws against national banks.
Mr. Cuomo seeks to dodge this legitimate, judicially monitored enforcement program and replace it with a highly suspect regime of intrusive, ineffective and largely unfettered state bureaucracy.
Jonathan Macey is a professor of law at Yale Law School and a member of the Hoover Institution Task Force on Property Rights.