Tort Lawyers' Dream, Economy's Scourge: Richard Cordray and the CFPB

In late July, flanked by two teleprompters, Treasury Secretary Geithner, and Harvard Law professor (now U.S. Senate candidate) Elizabeth Warren, President Obama announced the nomination of former Ohio attorney general Richard Cordray as first head of the Consumer Financial Protection Bureau (CFPB).  This new agency puts "one consumer watchdog in charge, with just one job: looking out for regular people in the financial system," the president asserted.  Sounds like something right up Occupy Wall Street's alley, right? 

Well, not so quick.  The new board might not be constitutional and is almost certainly inappropriately structured.  And its proposed chair, whose nomination was confirmed by the Senate Banking Committee on a party-line vote this week, has a cloudy past and a very cozy relationship with security litigation firms that wreak havoc on markets. 

The CFPB was created by the Dodd-Franks financial reform plan, the same bill that created the "Durbin Fee" on debit cards through its price controls on contracts between banks and merchants.  Professor Warren, a self-described "rock-thrower" who President Obama concluded was too radical to be confirmable as CFPB head, has given way to Mr. Cordray.   As Ohio AG, Cordray infamously chose to use his office to defend three officials who had snooped through confidential databases in search of information about Joe Wurzelbacher (aka "Joe the Plumber").  [Cordray conceded that he could have declined to use state taxpayer funds to defend these miscreants:  his pithy justification for coming to their aid was, "We have followed the process provided ... and had a judgment to make, and that's the judgment we made."] 

But Cordray's main sin is not the defense of the oppressors of Joe the Plumber -- rather, it's his cozy relations with the plaintiffs' bar, which stands to profit tremendously from the gigantic social costs that could be generated by the CFPB. 

As has been pointed out by my George Mason colleague J.W. Verret, Congress has historically subjected federal agencies to common-sense checks and balances that ensure some accountability.   For instance, statutory bipartisan membership requirements typically allow for three commissioners from one party and two from the other -- this guarantees that far-right or far-left abuses will be tempered by dissenting commissioners' publicity.  The need for these or other checks and balances is particularly acute in the context of the CFPB, which has quasi-legislative powers that have led many  (for instance, here) to doubt that the agency passes constitutional muster under the doctrine of separation of powers.   You see, Dodd-Frank allows the CFPB to repress any and all "unfair," "deceptive," "abusive," and "discriminatory" practices, but the law fails to define those terms at all -- so the CFPB's actions will suspiciously resemble legislation.   Indeed, CFPB is vested with the sole discretion to decide what those terms mean and how they are applied to consumer financial products and services.   

Yet this powerful CFPB, under the leadership of its Chair, is insulated from all the traditional checks and balances of government agencies.  Its budget, for example, is not dependent on appropriations -- it determines how much it needs, and it gets the money directly from the Federal Reserve.  The CFPB has no dedicated Inspector General.  It has no Commission or Board, and its Chairman is not subject to dismissal at will by the President.   I could go on, but you get the picture.

Under this dangerous structure, the identity of the Chair is of paramount importance.  And this Chairman gives us every reason to suspect that he would be the plaintiff's bar's dream.   Forbes Magazine has detailed the numerous campaign contributions he received, when running for the position of Ohio attorney general, from out-of-state law firms with no seeming interest in Ohio.   The Wall Street Journal separately observed that,

"Out-of-state plaintiffs' law firms gave little cash directly to Mr. Cordray's campaign, but in 2007 and 2008 they contributed $830,000 to the Ohio Democratic Party candidates' fund, which passed about $2 million to support Mr. Cordray.  Mr. Cordray then launched what he called an "aggressive" litigation strategy.  Six law firms so far have been retained to represent Ohio pension funds in new lawsuits; five of the firms donated a total of $300,000 to the state Democratic party candidates' fund in 2008." [Wall Street Journal, 2/3/2010, "Trial Lawyers Contribute, Shareholder Suits Follow" By Mark Maremont, Tom McGinty and Nathan Koppel]

In brief, here's one of the problems that make it worthwhile for these law firms to make out-of-state campaign contributions.  Every time a corporation is investigated for "abusive" practices, its stock price will drop.  Each significant stock price drop is then followed by a lawsuit on behalf of disgruntled shareholders, who allege that they have been cheated because the corporation's "abusive" practices caused its share price to drop.  Every such lawsuit of course truly does benefit the law firms that "represent" the shareholders, though of course the suit cannot confer a net benefit on the shareholders (no suit can cause the corporation's price to rise back up again).  And these law firms, who troll for shareholders to "represent", "pay to play" -- they funnel campaign contributions precisely to those politicians who will instigate the investigations that will cause share prices to drop.   Richard Cordray was an intrinsic part of this cycle until he was defeated at the polls in 2010.  Law firms have paid a lot to "play" with him, and now he is in line to become the chairman of the most massive, lawsuit-instigating agency this country has ever seen.

Cordray's nomination would not currently gain a filibuster-proof majority, so it has not yet been brought to the Senate floor.   But I have heard that the administration is hoping to cut a side deal with a GOP Senator or two, vaguely promising something in return for their breaking ranks.   Here's hoping that every single one of the opponents of Cordray's nomination will hold firm, at least until legislation is passed that makes basic structural changes to the CFPB.   We don't need a massive federal lawsuit instigator, headed by the lawsuit filers' BFF.

Michael I. Krauss is Professor of Law, George Mason University

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