Academic

Delaware Senate Appointment to Replace Biden: Quote Me, "I Told You So"

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

J.W. Verret, Professor, George Mason Law & Senior Scholar, Mercatus Center Financial Markets Working Group

In the likely event that the Obama/Biden ticket is victorious, Governor Minner will appoint Senator Biden's replacement.  Governors are regularly faced with this type of decision.  But never before has a Governor faced a Senate appointment with such portentous consequence for the long term health of her state.

Any resident of Delaware is aware that the first state's status as America's incorporation Mecca generates nearly a third of the state's budget.  This allows for Delaware's reasonable income tax and rare lack of sales tax.  And yet, the recent financial crisis, and the resulting push for financial regulatory/corporate governance legislation from the next administration and Congress to generate the empty appearance of reform, puts our status in the corporate pantheon in jeopardy like never before.

The credit card industry, the incorporation franchise, and Delaware's prominence among bank holding companies are at stake.  A parade of horribles already threaten to water down any benefits to incorporation in Delaware with federal pre-emption: The Treasury Department can require corporate governance standards for companies that participate in the bailout, Barney Frank is eagerly waiting to pass extensive executive compensation and proxy regulation authority for the SEC, and a federal insurance regulator waits to be born.  The Bailout Bill also required Congress to return next year with a (as yet unknown) wish list of new financial regulations, and who knows what consequences this will have to our beloved state.

This is not to say that the Delaware delegation will be called upon to single-handedly stop this avalanche, that is neither pragmatic nor warranted.  De-regulation is a dead issue, the question for debate is between smart regulation and over-regulation. But merely channeling this regulatory tidal wave in a way that will benefit, or at least limit the damage to, the first state will require a singular courage in the present environment.

Competition between the federal government and Delaware is not a foregone conclusion.  Our recent amendment to the Constitution to permit the SEC to certify questions of law to the Delaware Supreme Court is a case in point.  And the SEC took us up on that offer in the recent AFSCME v. CA case.  What remains to be seen is whether the tidal wave of new financial regulation includes state law references that would facilitate the SEC or other federal financial regulators in drafting our refined specialty into the service of our nation's response to the financial market crisis via direct references to
Delaware corporate law in federal law or administrative rule-making.  And that will require a keen ally for Senator Carper and Representative Castle over the next two years.

Delaware's specialty in corporate law and its financial services industry have been threatened before, and our delegation, most recently Senators Biden and Carper and Representative Castle, have done a wonderful job of protecting the brand.  Senator Biden managed to secure a Delaware carve-out into the recent Bankruptcy legislation two years ago, and a similar compromise was reached over an amendment affecting private securities litigation in 1995.  Both were hard fought battles for our delegation that we nearly lost, and our noble legislative delegation emerged victorious, but also bloodied in terms of their standing within their party.  Imagine having to face dozens of such battles over the next two years.

To get a window into the mind of the candidate for President currently leading in the polls, consider these comments from Senator Obama in the debates:  "Everybody goes to Delaware, because they've got very ? pretty loose laws when it comes to things like credit cards. And in that situation, what happens is, is that the protections you have, the consumer protections that you need, you're not going to have available to you."  And, I will remind, these comments represent Senator Obama's view of Delaware at his most diplomatic...as he had already selected Senator Biden as his running mate.  In addition, Senator Obama endorsed the "Federal Incorporation Transparency Act", which presents a variety of problems for Delaware's incorporation franchise under the misguided ruse of aiding law enforcement.

Let me anticipate one counter, that a Vice-President Biden will be able to look out for Delaware.  How I wish that were true.  Presidents from Nixon to Clinton are notorious for ignoring their Vice-Presidents' most heartfelt needs once the VP's usefulness on the ticket is complete post-victory.  Recall the slap-in-the-face when President Reagan failed to endorse Vice-President Bush's son, George W. Bush, in his run for a seat in Congress because Reagan felt that George's Republican primary challenger would make a better candidate in the general election (even though a continued Democratic majority in Congress was all but certain!)

As a short-term replacement for Senator Biden, Delaware needs a pinch hitter who can swing for the fences without having to worry about their own long-term political health.  The Senate's rules of procedure offer considerable power to a member willing to risk aggravating their majority leader to slow the wheels of legislation.  That was how the founders envisioned the Senate's role.  For example, under Senate rules, even a member of the minority party may object to a bill, threaten a filibuster, and delay a bill's enactment for a week and a half.  With the Senate's busy calendar (including a 2 trillion dollar annual budget that needs to be considered over nearly 3 months) a weeks' delay can be a lifetime for a bill, even assuming that the cloture required to end filibuster can be accomplished.  Imagine the power a member of the majority Democratic Party could wield, if they had little long term political ambitions within their party, and particularly where the Senate majority is a few seats shy of a cloture vote (as is likely).

When Rome was beset by invaders, the Roman General Cincinnatus was granted dictatorial power by the Roman Senate to meet the crisis.  When the battle was won, Cincinnatus famously set aside his authority and retired to his farm.  Delaware needs a modern day Cincinnatus, one who can stand up to the majority party and who will also step aside at the close of the 111th Congress when the danger has abated.  Governor Minner should choose a consummate statesman and a specialist of the Delaware Corporate Code.  Delaware needs a trusted custodian with a rare combination: demonstrated devotion to the service of Delaware, and yet bereft of selfish political ambition.

Full post as published by Conglomerate on May 28, 2009 (boomark / email).