Era of hands-off business regulation may end with Obama

McClatchy NewspapersJanuary 8, 2009 

WASHINGTON — With the 111th Congress newly seated this week and a new president who promises change coming into office soon, the era of hands-off regulation for a wide number of industries appears to be over.

During much of the past decade, the federal government took the word of everyone from investment bankers to oil traders, toy importers to produce growers, that they were taking steps to protect little guys, consumers and ordinary investors. Republicans, especially, believed Ronald Reagan when he said, "Government isn't the solution to our problem, government is the problem."

The hands-off approach led to the importation of cheap Chinese toys made with dangerous lead paint, grocery store purchases of tomatoes and spinach tainted by bacteria that sickened hundreds of Americans and the proliferation of insurance-like products called credit-default swaps being traded in the trillions of dollars without regulation or disclosure on balance sheets.

"I think it's been proven over the last eight years that I can say absolutely flatly that self-regulation doesn't work," said Ann Brown, a longtime consumer advocate and the head of the Consumer Product Safety Commission from 1994 to 2001. "It would be insanity to keep this laissez-faire, hands-off, consumer-beware and 'protect thyself' approach. We're going to see greater government intervention."

Democrats now have large majorities in both chambers of Congress, and they're promising a new era of regulation on behalf of consumers. That worries some advocates of less regulation.

"I think there is a certain danger of overregulation, and there will almost certainly be an increase in regulation and some of it unjustified," said James Gattuso, a senior fellow on regulatory policy for the Heritage Foundation, a conservative policy-research organization. "But it's not going to be a slam-dunk for people who prefer regulation over markets."

In some areas, such as financial markets, he said, there's widespread bipartisan support for tough new regulation of the complex financial products that grew faster than kudzu and left regulators flatfooted. In other areas, such as new rules governing food safety and farming, there's likely to be less bipartisan agreement.

Business groups such as the U.S. Chamber of Commerce are bracing for a fight.

"There's going to be another 3,500 appointments, and a hell of a lot of them are going to be folks that we're going to have to work really hard to keep them from turning over the apple cart," Thomas Donohue, the president of the chamber, told McClatchy.

Virtually all of Obama's picks to date for top-level government appointees are viewed as centrists, many of them former Clinton administration officials. That's led some advocates to fear that his choices are too close to the industries they'll regulate to police them effectively.

Take Mary Schapiro, Obama's pick to head the Securities and Exchange Commission. A former SEC commissioner, Schapiro in recent years has headed an industry-funded organization that's charged with self-regulation of Wall Street. She's hardly an outsider bent on change.

It's a similar story with Gary Gensler, Obama's choice to head the Commodity Futures Trading Commission. A former partner with investment banking giant Goldman Sachs, Gensler was a high-ranking official in the Clinton Treasury Department when the agency pushed for a revamp of laws that deregulated the trading of contracts for oil and other commodities. So was Timothy Geithner, Obama's pick for treasury secretary.

The Clinton-era change allowed Goldman Sachs and other big investment banks to make vast profits in commodities over the past five years.

There's no evidence that Schapiro and Gensler won't push for strong new regulation, but they're perceived as being cut from the same cloth as those they'll regulate.

"No one knows how they'll act once they get into office, but if one looks at their background, it is easy to make an assumption," said Michael Masters, the president of Masters Capital Management, a hedge fund for the ultra-wealthy, whose industry also is likely to come under regulation.

Masters testified numerous times before Congress last year, alleging that big investment banks were driving up the prices of oil and other commodities by hedging their bets in regulated markets with offsetting bets in unregulated exchanges. Obama, he said, should push for limits on how much of the market that large commodity investors can control and close loopholes that allow them to operate in unregulated markets.

An important gauge of Obama's seriousness about regulatory restructuring will come when he appoints the heads of the Food & Drug Administration and the Consumer Product Safety Commission. Both are under-funded, and that's demoralized the staffs at the important agencies.

"The morale is rock bottom. I don't know how it could get much lower," said one former high-level official at the commission, speaking only on the condition of anonymity because he has business before the agency.

The commission regulates the safety of about 15,000 product categories, but its staffing dipped below 400 last year. That's fewer than half the employees the agency had when it was created in 1973.

The agency has come to be viewed as more sympathetic to business interests than to consumers. One commissioner appointed by the Bush administration, Hal Stratton, left the agency to join a law firm that fights class-action consumer groups. Another appointee, Michael Baroody, withdrew his nomination when the extent of his ties to the National Association of Manufacturers became known.

By appointing someone with a consumer advocacy background, Obama could bring about a change in philosophy.

"One person is able to do a lot," said Rachel Weintraub, the director of product safety for the Consumer Federation of America, a consumer advocacy group.

Weintraub is among those mentioned as candidates to head the commission, along with Pamela Gilbert, who was the executive director of the agency during the Clinton era and is the head of Obama's transition team for the agency.

After repeated scandals involving lead paint in toys sold by big-name companies such as Mattel Corp. and others, Congress passed legislation last year to create 100 new enforcement and inspection positions over five years. The measure also allows Obama, after August, to expand the number of commissioners from three to five if he wishes.

Obama also can make a mark with whom he appoints to head the FDA, another agency plagued by scandal and low morale. The Institute of Medicine, part of the National Academy of Sciences, issued a report in 2007 saying that the FDA had ignored drug-safety concerns voiced by scientists.

The FDA and self-regulation exploded onto the scene in 2006, when a national outbreak of E. coli bacteria in fresh spinach products resulted in three deaths and 205 confirmed illnesses. That unsolved outbreak was followed last year by a salmonella outbreak, thought to be linked to fresh tomatoes or jalapenos, that sickened at least 1,200 people nationwide.

The FDA mulled new regulations to minimize the chance that animal waste and wastewater could contaminate food products, but critics of the agency said that the issue largely faded from public view without any permanent changes.

"The FDA developed those proposals, and it didn't get any further in the agency. When it went to the secretary level, the administration said, 'No, we're not going to move on this at all,' " said Craig Waldrop, the director of the Food Policy Institute, part of the Consumer Federation of America. "I think this was partially a nod to industry and partly a philosophy of nonregulation that the Bush administration has had."

Democrats in Congress are expected to try to make the FDA the chief regulator of the tobacco industry. That's likely to add pressure on an already politicized agency, and some advocates fear that it could distract the FDA from the mission of food safety.

"If tobacco is coming to the FDA, that just really overwhelms the FDA and pushes food safety even further down the chain," Waldrop said. "We're encouraging the administration to consider moving the food part out of FDA and create a food safety — or food and nutrition — administration. "They haven't signaled one way or the other . . . but it would be one way to show food safety is important."

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