How to Budget for the SEC

Summary

Statecraft Podcast Summary: "How to Budget for the SEC"

Host: Santi Ruiz
Guest: Diego Ruiz
Release Date: January 23, 2025
Episode: How to Budget for the SEC

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1. Introduction

In the second installment of a two-part series, Santi Ruiz welcomes his father, Diego Ruiz, to discuss his tenure as the Executive Director of the Securities and Exchange Commission (SEC). Building on their previous conversation about Diego's experiences in political campaigns and his time with California Representative Chris Cox, this episode delves into the intricacies of budgeting within the SEC.

2. Diego Ruiz's Background and Role at the SEC

Diego Ruiz revisits his career trajectory, highlighting his return to the federal executive branch in 2006 when Chris Cox was nominated as the SEC Chairman under President George W. Bush. At that time, Diego was employed by Univision, where he had amassed nearly a decade of experience managing various media properties.

Notable Quote:

"I end up joining forces again with Chris Cox when he gets nominated by President Bush 43 to be the Chairman of the securities and Exchange Commission."
– Diego Ruiz [00:50]

As Executive Director, Diego functioned as the SEC's Chief Operating Officer, overseeing essential back-office functions such as human resources, finance, budgeting, and maintaining relationships with congressional appropriators and the Office of Management and Budget (OMB).

3. Understanding the SEC's Financial Operations

Diego explains the unique financial structure of the SEC, an independent agency that, despite generating significant revenue through penalties, disgorgements, and fees from various financial entities, does not self-fund its operations. Unlike the Federal Reserve, which is self-sustaining through its open market operations, the SEC relies on annual appropriations from Congress to fund its activities.

Key Points:

• Revenue Streams: Fees from public companies, broker dealers, investment advisors, and penalties from enforcement actions.
• Disgorgement vs. Penalties: Disgorgement ensures violators return ill-gotten gains, while penalties serve as punitive measures for legal breaches.
• Funding Dependency: All revenue generated by the SEC is surrendered to the U.S. Treasury, necessitating congressional funding.

Notable Quote:

"It is not a self-funded agency in the way that, for instance, the Federal Reserve is. The Federal Reserve funds itself."
– Diego Ruiz [03:57]

4. Navigating the Budgeting Process with OMB and Congress

Diego outlines the collaborative budgeting process between the SEC, the OMB, and Congress. The agency's budget request is intrinsically tied to the President's overall budget, requiring negotiation and justification to secure necessary funds.

Key Points:

• Collaborative Negotiation: Utilizing the previous year's budget as a baseline, the SEC collaborates with OMB to determine its funding needs.
• Political Dynamics: Budget requests are influenced by the administration's priorities, with Republican administrations typically advocating for fiscal efficiency and conservative spending.
• Agency vs. President's Budget: By the time the budget reaches Congress, it represents the President's stance, not solely the agency's needs.

Notable Quote:

"The SEC turns that money over to Uncle Sam and then simultaneously has to go hat in hand to the Congress for its annual appropriation."
– Diego Ruiz [04:23]

5. The Challenges of Earmarked Funding

A significant portion of the discussion revolves around earmarked funds, using Senator Schumer's $100 million allocation for SEC enforcement post-2008 financial crisis as a case study. While such allocations can bolster specific divisions within the SEC, they introduce complexities in budget planning and long-term financial stability.

Key Points:

• Allocation Ambiguity: Determining the baseline for earmarked funds—whether they are in addition to the requested budget or a portion thereof.
• Sustainability Concerns: Ensuring that one-time or annual earmarks do not disrupt the agency's ability to maintain consistent operations in subsequent years.
• Operational Strain: Additional funds necessitate strategic allocation, often requiring the hiring of more personnel or investment in new technologies without guaranteed future support.

Notable Quote:

"The buyouts go off without a hitch. We close down the plant, we offer everyone buyouts. I think 85, 90% of the people took them."
– Diego Ruiz [17:03]

6. Diego's Transition to PepsiCo and Managing a Factory Closure

Shifting gears, Diego recounts his decade-long tenure at PepsiCo, where he managed both corporate regulatory issues and Latin America government affairs. A pivotal moment was orchestrating the closure of a major PepsiCo plant in Argentina amidst union resistance.

Key Points:

• Union Challenges: The Buenos Aires plant was plagued by a Trotskyist union faction that sought to seize control of production means, aligning with their ideological beliefs.
• Strategic Planning: Diego and his team meticulously planned the closure, offering generous buyouts and preparing for potential violent resistance.
• Execution and Aftermath: The closure led to a highly publicized eviction of squatters, involving significant police intervention and media coverage. However, the operation was deemed successful from a government affairs perspective, garnering official support and maintaining PepsiCo's reputation.

Notable Quote:

"We actually had multiple government officials up to and including President Macri, the president of the country, going on the air and defending PepsiCo by name."
– Diego Ruiz [31:28]

7. Implications of Supreme Court Decisions on Agency Operations

Returning to his SEC experience, Diego discusses recent Supreme Court rulings that redefine the balance of power between federal agencies and Congress. Decisions like the Loper Bright case and the West Virginia vs. EPA have curtailed agencies' autonomy, emphasizing the need for clear congressional authorization for regulatory actions.

Key Points:

• End of Chevron Deference: Agencies can no longer interpret ambiguous statutes without explicit congressional intent.
• Major Questions Doctrine: Limits agencies from making significant policy decisions without clear legislative backing.
• Future of Regulation: Anticipates a shift towards more restrained and carefully justified rulemaking by agencies to withstand judicial scrutiny.

Notable Quote:

"Gary Gensler did at the securities and Exchange Commission... he interpreted authority where I think most courts would say he didn't have it."
– Diego Ruiz [35:08]

8. Conclusion and Future Outlook

As the episode concludes, Diego speculates on the evolving landscape for independent agencies like the SEC amidst shifting political tides and judicial oversight. He emphasizes the necessity for agencies to adapt their regulatory approaches to align with clearer legislative mandates and anticipates continued political interplay influencing budgetary and operational decisions.

Notable Quote:

"What has happened up till now in a lot of agencies under Democratic administrations is they will adopt the rule they want and invite the lawsuit."
– Diego Ruiz [33:44]

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Transcript

[Santi Ruiz]

Foreign I'm Santi Ruiz and this is Statecraft. We interview top political appointees and civil servants about how they achieved a specific policy goal. You can find the transcript for this conversation and many others at www.statecraft.pub. this is the second in a two part series with my dad, Diego Ruiz. In the first episode we talked about his time helping run a political campaign in Nicaragua and later his time staffing California Representative Chris Cox. Today we jumped ahead to his time as Executive Director of the securities and Exchange Commission, or sec. So you were with Chris Cox for a while. You were in the private sector for a while. I want to come back to your time in the executive branch at the securities and Exchange Commission. So you ended up there in 2006.

[Diego Ruiz]

I end up joining forces again with Chris Cox when he gets nominated by President Bush 43 to be the Chairman of the securities and Exchange Commission. So this was in 2006. I believe he gets a nod to chair the securities and Exchange Commission. I was at the time working for Univision, the Spanish language media conglomerate.

[Santi Ruiz]

Univision to our Spanish speaking listeners.

[Diego Ruiz]

Univision. Exactly. I was there after business school for almost 10 years running different media properties. But I had a hankering. We had a hankering. You were little, but I'm sure you, you would have voted yes as well. We wanted to come back east. We were in Californ at the time.

[Santi Ruiz]

I don't know that I had hankerings one way or another at the time. I think I was 9.

[Diego Ruiz]

You had a great tree house out there. Nonetheless, we missed D.C. which is where I grew up. And we came back, I worked briefly at the Federal Communications Commission, the fcc. And Chris asked me to come back and help at the securities and Exchange Commission. And I come over to the SEC as executive director, which is essentially the chief operating officer position. So in that role I essentially ran all of the back of the house functions, administrative, operational, etc.

[Santi Ruiz]

So I have what's in there?

[Diego Ruiz]

Human resources, finance, all the budget issues, the relationship with congressional appropriators and with the Office of Management and Budget on the administration side for putting together and getting approved our funding every year and then executing it within the four walls of the sec.

[Santi Ruiz]

I want to get to the budget stuff in a second, but just on the finance operational side. What goes into the SEC's finance department? What's happening in the back office?

[Diego Ruiz]

So the SEC is a curious case of an independent agency. Chairman is appointed for a set term, can't be fired, and it's an agency that generates quite a Bit of revenue in the form of penalties and disgorgements and fees. Fees from filers, public companies that file, broker dealers and investment advisors that have to register with the securities and Exchange Commissioners. And then penalties and disgorgements that are ordered as part of an enforcement action against violators of the securities laws defined disgorgement, A penalty is what it sounds like. You break the law, you are penalized, you pay a big fine. And by the way, I should make clear that the securities and Exchange Commission has civil authority, not criminal. So the SEC can't send people to jail, but it can disbar them in an extreme case. It can forbid them from ever holding a position of responsibility in the securities industry, or it can just impose penalties. And then disgorgements are basically the coughing up of ill gotten gains. If you engaged in insider trading, you know you made 10 million bucks, the SEC can and will order you to disgorge that ill gotten profit that you made. And I think there's authority, even in the case of insider trading, up to three times what you made. So there's pretty stiff, stiff penalty.

[Santi Ruiz]

And that's distinct from a penalty in that you may have broken the law in a way that didn't lead to immediate gain, you may have lied or whatever, and you get a penalty for that. Whereas discouragement is you stole.

[Diego Ruiz]

A penalty is punitive. And disgorgement is basically ensuring that you don't get away with the fruits of your crime. You have to cough them up. So the SEC generates a lot of revenues, but they do not fund the operations of the agency. It is not a self funded agency in the way that for instance, the Federal Reserve is. The Federal Reserve funds itself. It is not reliant on an appropriation from Congress.

[Santi Ruiz]

Right.

[Diego Ruiz]

It funds itself from the proceeds of its open market operations. I don't know the ins and outs, but basically when deposit institutions have their funds deposited in a Fed account, the Fed is making money off of that, they're making money off of bond sales, et cetera. Sure, that funds their operations. Not so the sec. The SEC turns that money over to Uncle Sam and then simultaneously has to go hat in hand to the Congress for its annual appropriation.

[Santi Ruiz]

Why isn't it self funded?

[Diego Ruiz]

There's a lot of reasons for that, but this is a long running debate which generally nowadays at least runs on a left right axis. And generally speaking, if there's anyone in favor of self funding, it tends to be Democrats. For agencies whose mission they approve would like to see them have More power to do their mission and funding is power. And if you're not subject to cuts from Congress, then more power to you. A great example, recent example of that would be the Consumer Financial Protection Bureau, Elizabeth Warren's brainchild, which was stood up with a self funding model from the very beginning, which has been challenged and it was very controversial at the time and still is, but it enables them to have some degree of independence and autonomy from the Congress. And generally it's been conservatives or Republicans who have a problem with self funding for agencies because they want to be able to have that lever as part of their oversight. There's also been Democrats who oppose self funding. You know, the appropriators quite often oppose self funding of agencies because appropriators appropriate for a living and they don't want to give up that power and they have good reason for thinking that way. But anyway, all of that to say is that every year my job was to, among others, was first to work with the administration. I actually straddled the Bush and the Obama administration. I worked for two and a half years under the Obama appointee Mary Shapiro. So working with the Office of Management and Budget, the OMB of the current administration, to put together the budget requests and then justify that request to Congress to the Appropriations Committees.

[Santi Ruiz]

So walk me through that process. You start a dialogue. The dialogue starts between OMB and the agency, in this case the sec and jointly, how do you figure out what the budget request is to Congress?

[Diego Ruiz]

Different OMBs might do it differently, but the process that I engaged in was basically a collaborative process that takes last year as a baseline and you just kind of negotiate with OMB and present to them what you need. And again, depending on who's in the White House, the philosophy at OMB might be different. So under a Republican administration, at least the George Bush 43 administration, there is a lot of attention paid to being as efficient as possible, not asking for big increases and keeping any increases down, especially if there's other priorities that the administration wants to prioritize. The interesting thing about that process is your agency's budget request is not your agency's budget request. It is the President's budget request. It is a part of the whole.

[Santi Ruiz]

By the time it gets to Congress.

[Diego Ruiz]

By the time it gets to Congress, and you have this very curious dance that oftentimes develops between the appropriators who will receive the chairman or chairwoman of the agency in their appropriation hearing and that chairman over Mr. Or Madam chairman that you request everything you need. Is there anything else you need from us. That will be the typical question from the appropriators. And the invitation is for the agency head to say, no, actually, I need more.

[Santi Ruiz]

There's this one more thing.

[Diego Ruiz]

There's this one more thing that I need. And actually my President or my OMB didn't give me what I wanted. But now that I have your ear, Congressman, I'm going to ask you for more. That's what they're fishing for. Now, an agency head that actually responds in that way is inviting summary dismissal because the agency head is meant to salute the OMB budget request because that's what the President is asking for. You don't go around your President and you work for the President. Yes, you don't work for Congress. And there is this highly instructive story that makes the rounds in budget circles in Washington about a former head of the Army Corps of Engineers who was asked that question in his appropriations hearing on the Hill. I don't remember if it was House or Senate, but basically this head of the Army Corps of Engineers took the opportunity to say, no, I think we're being underfunded in the President's request. I really don't think we're equipped to carry out our mission and we need more. And he was on the street looking for work practically the next day. It was a complete and total process foul. And he paid the ultimate price for it, which was to get canned.

[Santi Ruiz]

Is there any way to talk about Congress and appropriations so you can't say to Congress directly, no, the President's budget is wrong. Is there any way, implicitly, you can cough, cough and ask for more money without breaking ranks and blowing it?

[Diego Ruiz]

As an agency head, I'm sure that you could hint and you could get a message across. I would say you probably don't want to do that. As an agency head, you probably want to leave that at the staff level. And the danger is that, you know, at the end of the day, appropriators are political animals and they want credit. And they're not necessarily in the business of giving you stuff without you asking for it. Because in the asking comes a transfer of power of sorts. And that is the asking is in part the coin of the realm. For the same reason that if you're a member, a rank and file member of Congress, and you want a project for your district, you're going to have to ask for it and it's going to have to be on the record. And then you're going to have to vote for that appropriations bill even if you hate 99% of it. If your project is in there.

[Santi Ruiz]

That's how the works.

[Diego Ruiz]

That's how it works. You have to vote for it. If you don't vote for it, you'll never get another dime again. And it's not a direct comparison to an agency, but there's a lot of the same political dynamics at work that wink, wink, nudge, nudge from a staffer, even a senior staffer like me, to the senior clerk of the Appropriations Committee. Maybe it works, but most likely it doesn't because that's not how that business gets transacted.

[Santi Ruiz]

I'm sure there's downsides as an appropriator to giving an even agency more than they asked for. Are there political risks to splurging?

[Diego Ruiz]

Not so much. I don't think so. I think if you're an appropriator, you're already by definition, inured to the political risks of overspending because your job is to spend a billion here, a billion there. Pretty soon we're talking real money, right? I don't know there's any real risk. And in fact, there's plenty of examples of agencies or cabinet departments getting more than the President asked for and the President saying, no, no, no, I don't want that much, and the Congress saying, you need that much because we want you to do A, B, C and D. Again, historically, it's been Democratic appropriators who do that. In this day and age, you know, I don't see many deficit hogs in either party.

[Santi Ruiz]

So your main opportunity for any plus ups is with OMB before you ever go to Congress. If you're an agency head, that's your main chance.

[Diego Ruiz]

That is the main chance. And you know, this little dance that I described has different variations to it. So here's another one that I encountered. One year, I believe it was the first, maybe second year that Obama was in office. Senator Schumer decided that he wanted to give the securities and Exchange Commission, I believe it was 100 million extra dollars for enforcement.

[Santi Ruiz]

This is 2009, immediately post financial crisis. Enforcement's on everyone's minds, right?

[Diego Ruiz]

I can't Remember if it was 09 or 2010, but it was absolutely on everyone's minds. There's a feeling that, you know, those greedy bastards on Wall street got away with something. More people need to be in jail, more people need to be brought to justice. And enforcement always grabs a big headline.

[Santi Ruiz]

It's a good headline to generate.

[Diego Ruiz]

It's a good headline to generate. It's a good headline for the SEC as well, not just for the member of Congress who's providing the funding. But in any event, Schumer got included in the appropriations for the sec. An earmarked hundred million enforcement. Now, that's great if you know you're sitting on the agency side and all of a sudden you have 100 more million than you would have otherwise. But it creates a whole bunch of additional questions and challenges for you. One of them is 100 million extra from what baseline? Because internally, the SEC's budget does not break out the different divisions. That's an internal calculation. Is it a plus up from what we asked for? Is it a plus up from what we got last year? Is it a plus up from what we spent last year?

[Santi Ruiz]

Because Congress isn't deciding, here's how much you're spending on HR and here's how much you're spending on yada, yada, yada. They're giving SEC a number, right?

[Diego Ruiz]

The other thing is that in an agency like the SEC where the biggest expenditure is people, how do you spend 100 million extra for enforcement this year without knowing if it's going to be part of your appropriation next year, too? Because if you're hiring people, you're hiring more lawyers, more investigators, more forensic accountants to prosecute these cases in year one. What do you do in year two if you don't get that, if the money dries up, if Senator Schumer forgets about you in year two? So that raises all sorts of issues.

[Santi Ruiz]

And there's no way of saying, look, we're going to hire these people with that money and we're going to hang on to 70% of it and pay their salaries later this decade.

[Diego Ruiz]

You can say it, but next year you're going to have presumably a big bump up in your headcount that you're going to have to show, right? The full effects of that headcount won't be visible yet because you hire people over the course of the year. That hundred million gets spent over time. Let's assume you're spending it all on people. You can't hire 100 million worth of lawyers on day one and they can't.

[Santi Ruiz]

All get results on day 30 or so.

[Diego Ruiz]

You're not paying an annualized salary till the end. Actually, you just remind me of another interesting point. If you want to actually spend 100 million in year one, you actually have to hire probably 200 million. I'm making up these numbers 200 million worth of lawyers say in year one.

[Santi Ruiz]

Because you're hiring over the course of.

[Diego Ruiz]

The year because you're hiring over the course of the year and you won't actually spend all that money on salaries in one year because it takes time to get people on board. And so then at the end of year one, when you're going back for next year's appropriation, you're now presenting headcount, that is twice as much as you got funding for in year one, because.

[Santi Ruiz]

That was the only way to spend the money.

[Diego Ruiz]

That was the only way to spend it. And we were getting precisely in that year, that first year of Obama, Democratic Congress, post financial crisis, and a big head of steam behind financial regulation in the form of Dodd Frank. We're getting so much pressure from Congress to spend, spend, spend.

[Santi Ruiz]

We want to see you out there getting wins, putting bad guys behind bars.

[Diego Ruiz]

I would have appropriation staff, senior appropriation staff calling me to check on our hiring numbers on our hiring pipeline over that year. Yeah, wow. They were getting engaged because they knew we're giving you this money, you got to spend it. How are you doing on the spending? They didn't want to see us slow walking it or taking our time. They wanted us to be able to come back the next year and justify the levels that they gave us. The last thing they wanted was for us to leave all this money unspent, which is yet another of the perverse incentives of Washington. I remember having big arguments with a director of enforcement who logically from his perspective, very bright guy, had a lot of respect for him. From his perspective, he wanted all that money and he wanted to hire, hire, hire. And I had a long list of.

[Santi Ruiz]

Things that he could do with those.

[Diego Ruiz]

People wanted to do. And he kind of understood that in order to spend 100 million, he would need to hire many more than 100 million worth of annual salaries. And I was the one who had to tell him, basically, I'm sorry, I can't release all of this to you because that'll put us in a very bad position next year and we might have to furlough or fire people or make other cuts in other parts of the building, which are just as important from a mission perspective.

[Santi Ruiz]

Were you able to put some of that money into other places in the agency?

[Diego Ruiz]

Yes, we did. So there, it wasn't 100% people. There were some forensic tools that we put it towards. I think that was the year when we embarked on a multi year effort to build out a tips and complaints system, which was, if I'm not mistaken, the SEC's first foray into something approaching artificial intelligence to try to intake the mass of tips that we received in one way or another and put them through some sort of an AI triage process to figure out, okay, where do we. What do we prioritize? This was immediately in the aftermath of the Bernie Madoff scandal.

[Santi Ruiz]

When. When did that drop?

[Diego Ruiz]

So that had been brewing for something like 15 years over multiple administration and administrations and SEC chairman, but it blew up in that interregnum between Obama's election and his inauguration. Dec. Wait around there, where it came out into the public, it became public. And those were dark days at the sec because we were in the middle of the financial crisis, which had been raging all year, but especially in the fall at the height of the presidential election, the Republican candidate John McCain briefly suspended his campaign, tried to call off the second debate to urge everyone to come back to Washington and fix it.

[Santi Ruiz]

Probably the first debate, gone.

[Diego Ruiz]

I think Obama had gotten the better of him. But it wasn't.

[Santi Ruiz]

It wasn't.

[Diego Ruiz]

I don't think it was. But, you know, I think McCain had some big headwinds, not the least of which was the financial crisis itself. And he was just looking to do something to change the narrative and throw a curveball into the mix. And he didn't have any better idea than to say, let's suspend the campaign and fix it. I just remember Obama licking his chops and saying, sure, John, let's suspend the campaign, and I'll go back and put this squarely on the desk of the president and fix didn't go well for McCain. But anyway, I believe this is a carol for another Christmas. But the financial crisis had many fathers. The sec, I think, was by far the least of them. But in any event, we're still in the eye of the storm because we regulated a lot of the entities implicated, and then the Bernie Madoff scandal breaks, and that one was squarely on the lap of the SEC. There's really no two ways about it. Over the course of those 15 years, we had had inspectors in there and examiners in his shop and looking at the books, we'd received tips that we had inadequately followed up on. He had just, oftentimes by a hair's breadth, had gotten away with perpetuating his scam. And the SEC didn't catch it and was in many ways asleep of the switch.

[Santi Ruiz]

I only have the outline of the scam. I mean, I understand the Ponzi scheme nature of it, but why wasn't the SEC able to catch him sometime in the intervening decade and a half?

[Diego Ruiz]

That's a great question. And there's been a lot written on this, but there were tips from people who understood the business that he was in. The investment advisor business could tell that there's no way he could be generating those types of returns from a mathematical perspective. It's just. There's. There's no way. So he had great returns. I forget the number, but. But they were incredibly consistent, too. It wasn't just that they were good year after year, it was that they were consistent.

[Santi Ruiz]

Almost usually you have cycles and peaks and valleys.

[Diego Ruiz]

You have ups and downs. You have sectors that overperform or underperform.

[Santi Ruiz]

Even if you're a dominant investor.

[Diego Ruiz]

And I think in the SEC's defense, there's just a lot of investment advisors out there and broker dealers to examine. The structure of the SEC has changed somewhat since I left the office. What was then the Office of Compliance, Inspections and Examinations has since been upgraded to a division. I believe it's gotten more resources, et cetera. But still, there are many, many, many more investment advisors and advisory firms out there than you have the manpower to truly examine year after year. So it's a fractional reserve system, just like a bank. If everyone wants their money out of the bank at the same time, the entire banking system collapses.

[Santi Ruiz]

Your money isn't in this building. It's in Harry's house.

[Diego Ruiz]

Exactly. It's the old Bedford Falls Savings Building and Loan model. Right. Your money's in Joe's house. And it's similar for. For examinations. You do enough exams that over time you hit maybe every investment advisor, but you're not hitting them every year, you're not digging deep every year, and you're looking for certain things that may raise red flags. And the bottom line is, in the specific case of Madoff, we miss those red flags. Now, some of those red flags, certainly in retrospect, but probably even at the time, should have been very obvious, and they weren't.

[Santi Ruiz]

Because the Ponzi scheme, you could only be generating those returns one way.

[Diego Ruiz]

Yes, and we didn't catch it.

[Santi Ruiz]

After four or five years at the sec, you ended up at Pepsi in a government affairs role. Right. We're running out of time, but there's one story I want you to tell about a factory closure. I think you'll know which one I'm talking about.

[Diego Ruiz]

Yes. So I arrive at PepsiCo with the remit of handling all corporate regulatory issues in the government affairs and public policy shop. And in week two of my being there, my boss calls me into his office and asks me, hey, would you like to also run The Latin America Government affairs shop. Our government affairs person for LATAM just left and I said yes please. I was very excited to get that additional responsibility. So I double headed for all of my time at PepsiCo, which ended up being almost 10 years. But anyways, in the context of my Latin America work, we determined that we had to close our biggest food plant in Argentina in greater Buenos Aires city. Basically one of the larger of the outlying towns in Buenos Aires. It was a chips plant, salty snacks of the, you know, the Frito Ley line, which is part of PepsiCo. And this plant was old. It was encroached increasingly by residential neighborhoods that didn't appreciate the noise and the smells. As delicious as the tiktoki smells the chips are, it's different when they're in your backyard. But most importantly by far was the fact that the union for this plant and anyone who knows anything about Argentina knows that the unions hold outsized power in the balance between employer and employee. This particular union that represented the workers at that plant was Trotskyist and violent and recalcitrant and just basically made operating this plant a money losing game. They sank the operations and the profitability of this plant just by the very nature of the positions they held. To give you an idea, they firmly believed as an article of faith that the company had to turn over the means of production to the workers because that's what aligned with their Trotskyist ideology.

[Santi Ruiz]

You don't mean Trotskyist as a general slur.

[Diego Ruiz]

I don't mean that Trotsky is as an epithet. I mean that they had Trotsky reading groups and they actually believe this. They were affiliated with a splinter Trotskyist party and they literally believed that the means of production had to be in the hands of the worker and that the company that signed their paycheck every other week was their oppressor. So we tried over the years and there were more reasonable factions to the union, but this was the faction that was in power. So at the end of a long process, we determined, okay, we have to close that plant down. We had another plant about five hours away which was modern, it was pretty state of the art. It happened to be right next to the potato growing region of Buenos Aires province. So from a supply chain perspective, it was perfect and it was outside of the control of this particular union bargaining unit. And so we mapped out this process for months. We so carefully thought it through from, from every perspective, from the HR perspective, from the legal perspective, from the production perspective. I remember we had to For a while, we had contingency plans to import product from Brazil to cover any sort of shortages that we might run. I was in charge of the government affairs and the policy communications piece of this, which basically, in a nutshell, involved working very closely with all three layers of government, national, provincial, and the local town government, which thankfully, at the time, were all aligned and were all the same party in control of each of the three. And that party was a pro market, pro Western, very businesslike group of folks. But we had to do something that was pretty risky, which was to bring them into our confidence early on, well before we were ready to hit the button, to actually shut it down and lay out to them our plans, our plans for offering a buyout package to every one of the employees, which was much more generous than required by law, and our contingency plans for what we would do and what we would ask the government to do in the case of some sort of violent action on the part of the union, which we totally foresaw. We predicted it, we knew it would happen, and concretely, we knew that they would take over the plant, that they would barricade themselves in there and hold out and try to generate sympathy, gain a better negotiating position, generate publicity for their cause, et cetera.

[Santi Ruiz]

How did you know?

[Diego Ruiz]

We knew because that's the way they operated in other contexts, in other plants. There were other Western companies, non Argentine companies, that had manufacturing facilities in that general area, that had experience with these unions, and that's the type of thing that they did. And this was in 2017. We had come from a long period of government by the left, the Peronista Party, the Kirchner Matrimony. First Nestor the husband, then Christine Kirschner the wife. We'd been president for 12 years total. And they gave free rein to these types of actions of unions or workers groups or picketers just blocking roads, doing takeovers, squatting and private property, company property, et cetera. So we had all sorts of contingency plans drawn up for what to do in case each of these scenarios played out. And the worst case scenario is the one that actually played out. And so the buyouts go off without a hitch. We close down the plant, we offer everyone buyouts. I think 85, 90% of the people took them. Again, they were very generous buyouts. And this core group holds out, refuses to take the buyout, takes the company to court, and then in the middle of the night, breaks into the plant, rousts the security guards, the private security guards that we had hired to be on Site. We had given them instruction, the security guards. If someone breaks in and tries to take the plant, you just say yes and you leave. No violence, don't fight back. And it's exactly what happened. So they barricaded themselves in there. They held the plan for several weeks. We went through all the legal processes necessary to get them out, which culminated in an eviction order from a judge.

[Santi Ruiz]

Okay.

[Diego Ruiz]

And then working with the Buenos Aires police to effectuate the eviction, which takes place on the morning that I'm landing from the U.S. i took the overnight plane. I land at Isesa Airport. And while I'm in the car heading into town from the airport, every TV station has all of a sudden their satellite trucks and their microwave trucks outside the plant covering live, breaking into their regularly scheduled programming to cover live, the police eviction of the Trotskyist squatters. And it was a scene. It was page one news and live update break into programming, news everywhere. And it was basically a battalion of, I don't know, over a hundred, couple hundred police. Big operation, because it was. The plant was two city blocks.

[Santi Ruiz]

Wow.

[Diego Ruiz]

The big wall around it, they had to contain it. But it's in the middle of a residential neighborhood. It's, you know, Argentina. It's, you know, the perpendicular streets and houses coming right up against the street that the plant is on. And so they had to cut traffic. They had to. To go in. There was a line of people outside that were kind of the. The first line of defense for the people barricading inside. So the sympathizers were outside. They had set up all these barricades. They set tires on fire. They started hitting the cops and throwing things at them. They get dispersed. And then eventually the police start battering down the gate of the factory. Meanwhile, the squatters are up on the rooftop of the factory and they start hurling down onto the police down below. Park bench, cinder blocks, pieces of bricks, pieces of roof tile. There were five wounded over the course of the day. They were all police officers.

[Santi Ruiz]

Wow.

[Diego Ruiz]

I remember this policewoman had her. Her leg broken. She caught a park bench on the side of her leg, broke her leg. And eventually, of course, they got him out. Oh, the other thing that they did was pour the cooking oil for making the chips, the vegetable oil. They poured it all over everything, including on the stairs going up to the roof so that the police would slip and fall.

[Santi Ruiz]

And.

[Diego Ruiz]

And it was just a mess. I went in later that day, and it was just. The damage was pretty extensive. But from my perspective, in spite of, obviously, the black eye of the publicity of that kind of image being what people see. The whole operation worked out perfectly from our perspective and specifically from the government affairs perspective, which is what I was handling, the policy, communications perspective. We actually had multiple government officials up to and including President Macri, the president of the country, going on the air and defending PepsiCo by name.

[Santi Ruiz]

Wow.

[Diego Ruiz]

So we had the governor of the province, the president, the minister of security, the local mayor, everyone going on radio and TV and basically saying what these criminals did in taking over the plant and hurting the police is unconscionable. And they. All they do is cause businesses to fail. PepsiCo had no choice and they did everything exactly as they should have, which is just, you know, you can't buy that kind of coverage and that kind of support from government officials. It's absolutely priceless.

[Santi Ruiz]

And a lot of that came out of the groundwork.

[Diego Ruiz]

Absolutely. Absolutely. And, you know, I think we talked about earlier about people responding to incentives and politicians especially. And in this case, I think the secret to our success is was in ensuring that the incentives were aligned and in the right place for us to get that kind of support from the elected officials that ran those places. They had an incentive, first of all, in PepsiCo remaining in the country, we weren't taking away employment, we were shifting it. We just had to shut down that plant. But we are creating jobs elsewhere for products that were iconic. People love them and they didn't want to see us leave. They had every incentive to work with us to make our staying in Argentina feasible. And they also had an interest in the world seeing, and the country seeing the extreme tactics that these people used and seeing them for what they were, which was saboteurs and wreckers. Wreckers, exactly right. The big risk that we had was once you broaden the circle and you tell more people about it, especially government folks, you run the risk of it leaking. And that was a serious risk rather. But we managed it well and in the end, it worked as well as we could.

[Santi Ruiz]

We're running low on time, but before we close, I do want to go back to the sec. I'm curious how you think a bunch of the recent Supreme Court decisions on the relationship between the executive branch and the legislative branch will change how agencies like the SEC operate or how Congress operates, as you've described it to me. Agencies like the SEC historically have a lot of freedom of action within their congressional mandate. Perhaps you think that will change in a new order.

[Diego Ruiz]

I think we're going to see some big changes in the way independent agencies operate. They might not be as visible for a while because we have Republicans coming back in who have been traditionally the defenders of this notion that agencies mustn't act outside of the scope of their organic authorizing legislation. It would be different, I think, if we had an incoming Democratic administration that would have to now grapple with the reach of the Chevron deference decision. So the Loper Bright case, which overturned the concept of Chevron deference, deference to the opinions of the agency absent clear congressional intent. And then the major questions doctrine which comes out of The West Virginia vs EPA case, which again limits what an agency can do absent clear congressional authorization to do that. I think those are game changing decisions. The Trump administration is likely to come in and overturn a whole lot of what the Biden agencies did. And those, those new actions can take form in different ways. It's not easy to und a regulation that's already been adopted, but they're clearly going to do that. You can see it coming at the sec, which in Joe Biden, Gary Gensler years has been especially active. I think the FTC is another area where you're going to have a lot of undoing.

[Santi Ruiz]

The epa, it's the Federal Trade Commission.

[Diego Ruiz]

The Federal Trade Commission, which looks at matters of competition and antitrust. The EPA and a lot of their environmental rules I think are ripe for undoing doing. It's not easy. As I said, there's a process for adopting rulemakings at agencies that is governed by the Administrative Procedures act, which is an act of Congress from many years ago that basically lays out the process by which agencies can create new rules. And in short, it requires a whole lot of public involvement, public notice, the opportunity for the public to comment, and a very specific process for the agency taking into account and actually addressing each, each and every one of those comments in the process of coming out with a new rule. That's not a short process and it's not necessarily a short process to undo a rule that has been adopted under that process because you in essence have to reverse engineer that very long process. The question for me is what do agencies do going forward with new rulemakings now that you have some pretty clear and and groundbreaking decisions from the supreme court saying you, Mr. Agency Head, cannot go off in any direction you want on matters where Congress has not given you the authority to do that or has not spoken clearly on it? Because what has happened up till now in a lot of agencies under Democratic administrations is they will adopt the rule they want and invite the lawsuit. And more often than not Especially in these last few years, they lose the lawsuit for these reasons. And now you have Supreme Court jurisprudence, not just lower court jurisprudence, to basically stop them before the case gets too far along. So I don't know if that changes the calculus for any future Democratic administration. What Gary Gensler did at the securities and Exchange Commission, which, you know, on rulemakings, like on climate disclosure, on the regulation of investor advisors, other things where there was not clear authority, he interpreted authority where I think most courts would say he didn't have it. The question is, will agencies in the future do that on the hope that they will succeed at court? I just think it's much less likely that they succeed at court now. So what's the end game for them if they don't have that possible positive outcome at the end of the road?

[Santi Ruiz]

So do you think we'll see less agency rulemaking or just more restrained agency rulemaking?

[Diego Ruiz]

I would have to think that it would be more restrained again under a Democratic administration, or at least, least more carefully thought out so that they can justify it under existing congressional authority, as opposed to taking a flyer on a matter that is conceptually emanating from the penumbras of what Congress actually authorized. The other big question for me is what do Republicans do and how do agencies in the Trump 2 administration work? Especially how do they interact with whatever the doge might do? Do? I think in the first year or two, there's some amount of reversal of rules that they can engage in using the Congressional Review act, which allows for the very most recent rules adopted by the outgoing administration within a certain time period to be undone by congressional review process. But then the question is, do they undo, by rulemaking, again using the Administrative Procedures act, some of the Biden era rules rules, does the doge live up to this vague promise to somehow change the way in which rules are adopted or make it easier to clear away bad, old, outdated, inefficient rules? That's a big question mark. I don't know the answer to that, but that conceptually at least holds some promise. Because if you can clear out old rules, bad rules, obviously what is the definition of old and bad is that's politics. That's politics. But if there's an easier way to get rid of some, some of that, then we're in for a whole different kettle of fish. And if not, then I think it's going to be a very similar dynamic than we've seen before whenever a Republican administration takes over for a Democratic one, again with the added new factors that we now have Loper Bright and the Major Questions doctrine to back up a more Republican conservative understanding of the proper role of independent agencies.

[Santi Ruiz]

I think we'll close there. There again, listeners, that was my dad, Diego Ruiz, joining me on Statecraft. We should do this again sometime.

[Diego Ruiz]

We absolutely should. It's been a joy. Thank you for having me.

[Santi Ruiz]

Thank you.