ANALYSIS – Change in Senate sharpens U.S. regulatory reform fight

By Reuters Staff
January 20, 2010

By Kevin Drawbaugh

WASHINGTON, Jan 20 (Reuters) – The financial regulation debate is set to get more divisive after Massachusetts voters elected a Republican senator, with Democrats and Republicans both trying to tap Americans’ deep anger over the economy.

Ahead of November’s congressional elections, look for Democrats to double-down on their attacks against banks and Wall Street bonuses, with Republicans standing firm on a strategy of opposition and delay, supported by banks.

In the long run, the arithmetic of the Senate will push the Democrats toward compromise, while voter resentment over the power and privilege of Wall Street will force Republicans and business interests to yield to reforms, some significant.

The upshot, probably coming this summer, will be a financial regulation package that is less than the wholesale revolution Democrats hoped for a year ago but still meaningful.

U.S. President Barack Obama and the Democrats want to overhaul financial regulations to prevent a repeat of the 2008 capital market crisis and the recession and bank bailouts that followed.

“We believe Senate Democrats ultimately will decide it is better to compromise and get a bill than to hold fast and goad the GOP into killing it,” said Jaret Seiberg, policy analyst at investment advisory firm Concept Capital.

“The Senate often experiences instances of extreme partisanship. Despite this, legislation still manages to get done. There is no reason to believe this will be different.”

Republican Scott Brown’s victory in the special Senate election in Massachusetts on Tuesday deprived Democrats of the 60 votes they need in the Senate to block Republicans from bottling up legislation.

But financial reform was never going to pass the Senate on a strict party-line vote. It was always going to need to attract at least a handful of moderate Republicans.

Now, with one vote less vote for the Democrats, the bill will need to be just that much more moderate.

HOUSE VOTE WAS CLOSE

The House of Representatives on Dec. 11 approved a financial reform bill, but only by a close vote. All of the chamber’s Republicans and 27 Democrats voted against bill.

House Democratic Leader Steny Hoyer on Wednesday said the Massachusetts election result was “very much consistent with the anger and concern that the American people had with reference to what they believe the financial community did. I think they believe that we need greater regulation.”

The election result doesn’t alter Senate Banking Committee Chairman Christopher Dodd’s desire to complete a bill that will be a big part of his legacy. Before he retires at the end of 2010, Dodd will want to preside over passage of legislation.

That points to compromise, as well, although Dodd, by nature a consensus builder, will be under pressure from other Democrats and the White House not to give too much ground.

He met on Tuesday with Obama on financial regulation after days of reports that Dodd’s commitment might be wavering on Obama’s proposal to create a new federal agency to protect consumers from financial industry rip-offs.

The Massachusetts result raises new doubts about the outlook for Obama’s most high-profile initiative — healthcare overhaul — and in doing so likely means further delays for other issues, including the financial regulation reform.

Dodd has been deeply involved in healthcare legislation. Now he will likely have to devote even more of his time to it.

THREE LOSSES UNDER OBAMA

Since Obama’s election, Democrats have lost gubernatorial races in two states as well as the special election in Massachusetts for the late Senator Edward Kennedy’s seat.

Public anger is likely to gather momentum through 2010 as a congressional panel investigates the financial crisis while bailed-out Wall Street banks pay huge bonuses to executives and as economic growth bumps along slowly.

All this means that time is probably not on the side of financial reform opponents, as many expected last year when the debate began. Rather, public support for change in financial oversight is likely to continue and perhaps build.

“What Massachusetts is reflecting is that there are a lot of people out there, nationwide, that are hurting,” said Jeffrey Berry, professor of political science at Tufts University outside Boston. “The electorate is frustrated, and they want something different.” (Additional reporting by Andy Sullivan, Thomas Ferraro, Scott Malone and Karey Wutkowski; Editing by Kenneth Barry) ((kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax)))

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