The road to reforming financial regulations winds through the cornfields, hog farms and cattle ranches of America's heartland, and that complicates the Obama administration's already arduous effort to revamp oversight of Wall Street.
Lawmakers from Iowa, Minnesota, Oklahoma and other farm-belt states who sit on the congressional agriculture committees have a surprisingly influential role in the administration's proposed overhaul, which Congress resumes debating today after its summer recess.
Those committees oversee a key regulatory agency, the Commodity Futures Trading Commission, and committee members don't want to give up that role for a big reason -- they raise more money from the financial sector than they do from agribusiness.
Many experts have long believed that it makes no sense to have both the CFTC and the Securities and Exchange Commission regulating markets that have become increasingly indistinguishable. They have advocated merging the agencies.
"If you were to merge the CFTC and the SEC, it would be hard to make the argument that the primary [oversight] committees would be the agriculture committees," said Douglas Elliott, an economic studies fellow at the Brookings Institution.
"That would mean the agriculture committees would lose a significant amount of power that they have, and they also would lose a lot of campaign contributions," Elliott said.
The agriculture committees' oversight of the CFTC stems from its origins regulating markets once dominated by corn, soybeans, pork bellies and other farm products. But the fast-changing world of futures and options contracts became increasingly complex and led to holes in oversight between the CFTC and SEC.
Those contracts spun into sophisticated unregulated products, such as derivatives and credit default swaps, and were at the heart of the nation's financial crisis. They helped prompt the Obama administration to propose the biggest revamp of financial regulation since the Great Depression.
But even though President Obama had wanted to combine the agencies to close the gaps, the agriculture committees' power, many believe, was the reason the administration decided against merging them.
"I think they correctly judged the politics . . . that it would be a serious impediment to the passage of the overall reform bill to merge the SEC and CFTC," Elliott said.
Instead, the two agencies last week held their first-ever joint meetings to try to eliminate gaps and policy differences in their oversight of futures and options markets.
Critics said such a move might work for a while but could still lead to the same sort of regulatory gaps that helped cause the financial crisis as new products emerge.
Those meetings follow several hearings this year by the agriculture committees on overhauling financial regulations, adding more layers to the already difficult task of passing comprehensive legislation this year. The tangential role of the agriculture committees complicates the process because some committee members don't understand financial issues well, according to some in the industry.
"Derivatives are very complex, and we had to start from Square One before we could even get to the meat of the issue" in briefing them, said one financial industry executive, who requested anonymity to avoid alienating committee members. "Remember that old song, 'One of these things is not like the other'? Derivatives are just not like the rest of their jurisdiction."
Overall, committee members have raised more money from the finance, insurance and real estate sector the last two election cycles than from agribusiness, according to the Center for Responsive Politics.
Senate agriculture committee members have raked in $41.6 million from that Wall Street-related sector and less than half that -- $17.6 million -- from agribusiness in the 2008 and 2010 election cycles. House committee members have raised $7.9 million from the financial sector and $6.6 million from agricultural interests, according to the center.
Committee leaders make no apologies for supporting a tougher CFTC, and not eliminating it. They said the agency's role in regulating agricultural futures is important to America's farmers. And the committee chairmen -- Sen. Tom Harkin (D-Iowa) and Rep. Collin C. Peterson (D-Minn.) -- each have sponsored legislation tightening oversight of derivatives markets.
"Agricultural future markets are fundamental to the functioning of every aspect of our agriculture economy," Harkin said at a June hearing on regulatory overhaul.
The United States, though, is the only country that splits the oversight of the financial industry, said Roberta Karmel, co-director of the Dennis J. Block Center for the Study of International Business Law at Brooklyn Law School.
"It happened for historical reasons, and these agencies haven't been combined for political reasons," said Karmel, a former SEC commissioner.
She noted that when the SEC and CFTC fought over who should regulate credit derivatives in 2000, Congress had to step in to resolve the dispute -- and prevented either from regulating the products. That wouldn't have happened had there been one regulatory agency, Karmel said.
Acting jointly to eliminate gaps, a process dubbed harmonization, "could work for a while, but ultimately it's going to be a problem," she said.
Former Treasury Secretary Henry M. Paulson proposed merging the two agencies in 2008 as part of his regulatory overhaul plan.
Obama appeared headed in that direction this year when he chose Mary L. Schapiro as chairwoman of the SEC. She had chaired the CFTC in the 1990s, and some analysts said such experience would qualify her to run the merged agencies.
But it soon became clear that such a move would make the already difficult task of passing the overhaul even harder because of opposition from many agriculture committee members.
"In deciding what to do, we certainly took into account the realities of what opposition we would face to different kinds of proposals. And where it wasn't essential to the core of the reform, we took that into account," said Michael Barr, assistant Treasury secretary for financial institutions. "We thought it was much more important to address the core substantive concerns than to focus on the turf issues."
Barr said the administration was focused on adding oversight of derivatives rather than arguing about which agency would do it. The plan calls for the SEC and CFTC to share the oversight, while at the same time harmonizing their regulations.
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Campaign contributions* to House and Senate agriculture committees.
2008 ELECTION CYCLE
* $48.2 million overall
* $6.64 million from the finance, insurance and real estate sector
* $5.32 million from agribusiness
* $120.7 million overall
* $22.76 million from finance, insurance and real estate
* $9.49 million from agribusiness
2010 ELECTION CYCLE
* $9.5 million overall
* $1.3 million from finance, insurance and real estate sector
* $1.3 million from agribusiness
* $106.2 million overall
* $18.8 million from finance, insurance and real estate sector
* $8.1 million from agribusiness
*contributions from individuals and political action committees
Source: Center for Responsive Politics