By Peter Schroeder - 01/03/11 11:00 AM EST
The Dow Jones stock index plummeted nearly 900 points in a matter of minutes last May in a "flash crash" that frayed the nerves of traders on Wall Street.
Five months later, federal agencies fingered computer algorithm-based trading as the primary culprit of the crash and vowed to step up oversight. Officials at the Securities and Exchange Commission (SEC) went through more than 1,000 applications and found five algorithm experts they wanted to bring on board to provide expertise in the technology.
The budgets of the SEC and the Commodities Future Trading Commission (CFTC) remain locked at fiscal 2010 spending levels, thanks to the continuing budget resolution passed by Congress in December, even though the workloads for both agencies have increased exponentially since the "flash crash" occurred.
Most of the new responsibilities come from the Wall Street reform law that Congress passed this summer. The overhaul, often referred to as the Dodd-Frank law for its key sponsors, sets an ambitious timetable for both agencies to write hundreds of new regulations for financial products like derivatives.
SEC spokesman John Nester said current hiring restrictions brought on by budgetary limits have prevented the SEC from hiring the algorithm experts, but the funding crunch looms largest for the implementation and enforcement of Dodd-Frank.
"Operating under the continuing resolution is already forcing the agency to delay or cut back enforcement and market oversight efforts," Nester said. “The longer we operate under significant budgetary restrictions, the greater the impact."
After President Obama signed the reform law in July, both agencies asked for hundreds of millions of dollars in new budget authority to hire employees, purchase technology and rent office space.
But five months later, the agencies are still operating under the 2010 budget levels set before the reform package became law. And with belt-tightening Republicans preparing to exert new influence on Capitol Hill, it is unclear whether the funding agency officials say is needed will ever materialize.
For now, the new responsibilities brought on by Dodd-Frank are being handled by a staff stretched thinly, as agencies pinch pennies by reducing travel and other expenses. At the SEC, the development of six new offices mandated by Dodd-Frank is on hold as the agency waits for congressional appropriators to authorize funds.
At the CFTC, which has been given the task of overseeing the swaps market by Dodd-Frank, Chairman Gary Gensler is already sounding the alarm about the financial shortfall. He told lawmakers in December that current funding is "far less than what is required to properly fulfill our significantly expanded role."
The administration asked Congress for $261 million for the CFTC in its most recent budget request, a 55 percent increase from its current budget of $168.8 million. Those funds would go toward hiring the 400 new employees needed to handle Dodd-Frank obligations.
Similarly, the SEC has asked for more funding, submitting a budget request of $1.258 billion for fiscal 2011, up from the previous year's $1.118 billion budget. SEC Chairman Mary Schapiro in September said the agency would need to hire an additional 800 people to meet its expanded duties.
The GOP, particularly in the House, put up strong opposition to the financial reform law. The bill garnered zero Republican votes in the House and just four in the Senate.
Now that Dodd-Frank is law, Republicans are searching for other ways to delay or minimize its effects. Rep. Spencer Bachus (R-Ala.), the incoming chairman of the House Financial Services Committee, recently told The Washington Post he planned to go over the law "provision by provision" once Republicans take over the House in January.
Similarly, House Financial Services Committee member Rep. Randy Neugebauer (R-Texas) is considering legislation that would push back all regulatory deadlines for Dodd-Frank by one year. And given that Republicans took back the House in the fall elections by promising to cut federal spending, limiting funding for the law could kill two birds with one stone.
Immediately after the election, incoming House Majority Leader Eric Cantor (R-Va.) suggested that paltry funding could be a way to stifle implementation of Dodd-Frank and the healthcare reform law.
"We certainly have the power to go about denying [President Obama’s] agencies the funding they need," he said Nov. 2 on CNBC. "That's what the American people are expecting."
"The government is set up so the way you can control unelected bureaucrats is by cutting off their funding," agreed Alex Pollock, a resident fellow at the American Enterprise Institute.
One of the primary architects of the bill, retiring Sen. Chris Dodd (D-Conn.), has warned that the biggest threat to the legislation will be Republican attempts to "starve" the agencies.
"It’s what Republicans have done, historically, to regulatory bodies," he said in a Dec. 20 interview with The Wall Street Journal. "It’s harder to accuse someone of wanting to deregulate when they just starve the budget of an agency than it is for them when they actually try to get rid of it."
However, some conservatives maintain that the agencies should do more with less.
"The real question is — I don’t think the amount of money, but what are the agencies doing with the money they have," said Paul Atkins, a former SEC commissioner and visiting scholar at AEI. "Even if you doubled the size of the SEC, I’m not sure that would really, necessarily, make it any better."