The financial regulations package recently passed by the House of Representatives would create a new diversity overseer at each of the major federal financial regulatory agencies, including the new ones created by the legislation itself.
This new office, called the Office of Minority and Women Inclusion, would take over from any existing diversity or civil rights office already working at the agencies in question.
It would also be responsible for making sure that each of the major federal financial regulators is hiring enough minorities and women, and contracting with enough minority-owned and women-owned businesses.
However, each individual diversity czar is responsible for defining exactly how many minorities, women, and minority- and women-owned businesses are satisfactory.
“[E]ach agency shall establish an Office of Minority and Women Inclusion that shall be responsible for all matters of the agency relating to diversity in management, employment, and business activities,” the legislation says. (The bill passed in the House on June 30; a Senate vote could occur as early as next week.)
In fact, each new diversity chief will be responsible for developing quota-like guidelines proscribing the ethnic and gender makeup of each regulator’s workforce, including upper management.
“Each Director shall develop standards for- (A) equal employment opportunity and the racial, ethnic, and gender diversity of the work-force and senior management of the agency,” it states.
These diversity offices will also be responsible for “assessing the diversity policies and practices of entities regulated by the agency.”
This means that in addition to monitoring every bank in the country, checking every financial institution in America to make sure they are not doing anything systemically risky, and trying to prevent another financial collapse, every federal financial regulator will also be counting the number of minority and female employees at banks and investment firms, big and small.
The proposed law would also mandate that federal financial regulators hire from certain types of minority- or women-only colleges and universities, advertise in minority- and women-focused publications, and partner with inner-city schools and other minority-focused organizations to hire or mentor more minorities and women.
The diversity offices will also be charged with enforcing the newly written diversity guidelines for each private sector company the regulator contracts with, meaning that they will be checking to ensure that each of the agency’s private contractors is following the agency’s diversity guidelines.
“The Director of each Office shall develop and implement standards and procedures to ensure, to the maximum extent possible, the fair inclusion and utilization of minorities, women, and minority-owned and women-owned businesses in all business and activities of the agency at all levels, including in procurement, insurance, and all types of contracts,” the bill states.
This provision is significant because some of the same federal regulators who must establish these diversity offices – Treasury and Federal Reserve – make heavy use of the private sector on a regular basis. They have also relied heavily on the private financial sector in their responses to the financial crisis.
For example, the Fed’s Term Asset-Backed Lending Facility (TALF) program, which backstopped the securitization market during the height of the financial crisis, was actually run with the help of Bank of New York Mellon, an institution regulated by the New York Fed.
The TALF program, along with other Fed lending programs, had to maintain a strict level of secrecy to protect the banks using the program from irrational runs on their businesses. Because the securitization market had essentially collapsed, TALF’s customers had to remain anonymous if the government was to avoid setting an arbitrary – rather than market – price for securitized debt.
Had the markets learned which financial institutions were using Fed lending programs like TALF, they would have known which securities the Fed was taking as collateral for a particular loan amount. With such information in the public domain, the government would have essentially been fixing the price of asset-backed securities, rather than letting supply and demand set the price in the normal way.
The new diversity office at the Fed – and other financial regulators – apparently would be empowered to dig into such sensitive relationships under the guise of diversity enforcement, possibly endangering the programs and hamstringing their effectiveness.
If one of the new diversity czars thinks a financial firm is not being diverse enough, he potentially could recommend that the regulator terminate the contract(s) the regulator has with that firm.