Why Obama's Recess Appointment of Cordray Is a Mistake

WASHINGTON — Sometimes where you are giving a speech is just as important as what you plan to say.

For political observers this week, the fact that President Obama was planning to give a speech in Shaker Heights, Ohio, on Wednesday on the economy was the first clue that he will make a recess appointment for Richard Cordray, the state's former attorney general, to the Consumer Financial Protection Bureau.

Sure enough, Obama spent the majority of the address, which was billed as a speech about the economy, touting his decision to recess appoint Cordray. Whether he has the legal powers to do so is unclear, but what is certain is this: The appointment of Cordray is going to hurt the financial system and cripple the CFPB before it even gets off the ground. Here's how.

Republicans will retaliate. Senate Minority Leader Mitch McConnell is holding up the nominations of two agency heads and the vice chairman of the Federal Deposit Insurance Corp. because he is waiting to see if Obama will make a recess appointment. Republicans aren't saying yet, but now that the recess appointment has happened, it's very likely McConnell will refuse to let those nominations proceed.

That means no permanent chairman for the FDIC or new comptroller of the currency. Marty Gruenberg and Tom Curry, respectively, would be left out in the cold, along with Tom Hoenig, the Republican pick for the No. 2 spot at the FDIC. Moreover, President Obama's just-announced nominees for two open spots on the Federal Reserve Board are also unlikely to proceed.

In short, the GOP will view this appointment as a nuclear option and what little cooperation there is between the two political parties will melt away like snow. Far worse, it will leave the FDIC and Office of Comptroller of the Currency without Senate-confirmed leadership at a fragile time for the economy and the banking system.

The CFPB will get sued. The new consumer agency already has a lot of enemies, and not all of them are politicians. The U.S. Chamber of Commerce has dropped obvious hints that it is perfectly willing and able to sue the CFPB for nearly any reason. A recess appointment hands the Chamber a powerful legal argument to use against the bureau.

By Senate tradition, the chamber has to be in recess for three days and House Republicans have blocked that from happening (each chamber needs the other's permission to go on recess).

To be sure, there is precedent for a president skirting those rules; President Theodore Roosevelt did during his term. But the recess appointment of Cordray will almost certainly wind up in court. That means anything he does as acting director can be reversed or undermined by a future court decision. Far from emboldening the agency, such a cloud hanging over its head is likely to weaken it.

It won't actually help. The entire point of giving Cordray a recess appointment is so the CFPB can use its full authority to regulate nonbanks as well as banks. But it's not legally clear whether that can happen.

Forget whether President Obama has the right to make a recess appointment. What matters is the Dodd-Frank law, which gave the CFPB power over banks immediately but said it needed a Senate-confirmed director to exercise any new authorities over nonbanks. Notice I said "Senate-confirmed."

Does a recess appointment count as "Senate-confirmed"? Republicans don't think so, and privately, a lot of Democrats don't either.

This is a double whammy for Cordray. Not only will the legality of his appointment be under fire but — even if it is perfectly legal — it's not clear he can actually exercise the full powers of his office.

And if he can't, what's the point?

Even if Cordray and the White House think there's no problem here, the agency is going to spend the first years of its existence mired in lawsuits that it may ultimately lose.