ANALYSIS – Democrats bet politics favor US financial reforms

February 18, 2010

By Kevin Drawbaugh

WASHINGTON, Feb 18 (Reuters) – The next round of betting is near in a high-stakes game to tighten U.S. financial regulation and Democrats are wagering heavily on a hunch — that some Republicans cannot afford politically to block reform.

The view is strongly held at the White House, where officials remain confident, despite setbacks, that reforms will be approved by Congress this year, said congressional aides.

President Barack Obama and the Democrats need a boost as they head into November’s midterm congressional elections after disappointing outcomes on healthcare and climate change,

Financial regulation reform — an issue that has been working its way slowly through Congress — could provide that, said some policy analysts, especially with Wall Street’s recent success at making itself more unpopular every day among voters angry over massive bailouts and resurgent bonuses.

By the time a financial regulation bill moves to the Senate floor for a final vote, possibly in April, Democrats will be able to paint Republicans who oppose it as tools of the banks who have been trying for months to squash reforms.

That kind of image risks alienating not only independent voters, but also anti-establishment Tea Party conservatives, a rising and volatile force in the Republican Party.

If even a few Republicans recognize these dangers, then a compromise bill, pared back from one approved in December by the U.S. House of Representative, will win Senate approval.

“The consensus is that the bill will get out of the Senate, and then the House mostly goes along with the Senate language. The final bill is likely on the president’s desk by early June,” said policy analyst Jaret Seiberg at Concept Capital.

Of course, the scenario falls apart if Republicans discount the risks of siding with Wall Street; if Democrats refuse to compromise over their most contentious reform proposals; or if a new issue comes along that changes the subject entirely.

The loss of a Senate seat in Massachusetts to Republicans, and several retirement announcements by Democratic lawmakers have been seen by some as damaging for the reform effort.

But another factor to consider is this — after many months of debate, beginning even before the recent financial crisis, some Republicans genuinely want to fix financial regulation and concur with the core thrust of the Democrats’ proposals.



Last week’s announcement that Senate Banking Committee Chairman Christopher Dodd, a top Democrat, was negotiating a compromise bill with Republican Senator Bob Corker was a “game changer” that “increases the chances of passage,” said analyst Paul Miller at investment firm FBR Capital Markets.

Bipartisan support exists, aides said, for five core proposals: creating a “resolution authority” for unwinding large financial firms in distress; monitoring “systemic risk” to financial stability; raising bank capital standards; regulating derivatives; and streamlining bank supervision.

In a sign of incremental progress, The New York Times reported on Thursday that the administration and senators were near agreement on forming a council, led by the Treasury Secretary, to identify risks to financial system stability.

That approach would resemble one already endorsed by the House, with the exception that the Fed would play a smaller role, as Dodd and others in the Senate have long favored.

But disagreement lingers over protecting consumers and curbing banks’ proprietary trading and growth under a new proposal made in January by the administration and known as the ‘Volcker rule’ after former Fed Chairman Paul Volcker

“We understand the bill will include loose restrictions on non-deposit funding and no restrictions on prop trading — a positive for large financial institutions, including JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley,” Miller said.

Corker in recent weeks has worked closely with Democratic Senator Mark Warner on resolution authority and systemic risk.

After Dodd and top banking committee Republican Senator Richard Shelby reached an impasse earlier this month in talks over consumer protection, Corker defied Senate traditions of seniority by agreeing to negotiate with Dodd.

Asked last week about this unconventional move, Corker told Reuters he would not have done it if he had not seen the chance of bipartisan agreement on a narrowed bill.

“I hope there’s going to be … lots of Republicans involved in this, okay? We’ve had such great bipartisanship except in one area,” he said, referring to the administration’s proposal to create a financial consumer watchdog agency.

“The best way for us to get an end is to ensure this bill doesn’t try to solve every problem there is … just focus on a few fundamentals and get that done,” Corker said.



Republican Senator Judd Gregg, also a banking committee member, last week said the need for financial reform is widely recognized in Congress and he expects a bipartisan agreement.

Key to a deal will be accommodating Obama’s proposed U.S. Consumer Financial Protection Agency (CFPA), which has emerged as the chief stumbling block. Democrats will be keen to prevent it from weighing down financial reform in the way that the so-called ‘public option’ did for healthcare reform.

Still, according to a poll last week, while the public is wary of too much government, it will make an exception when it comes to stricter regulation of major financial companies.

Fifty-nine percent of those surveyed by The Pew Research Center for the People and the Press said stricter government regulation of big financial firms was a good idea, a level of support as high as it was in April 2009, the center said.

Just 25 percent said they had a favorable opinion of major banks and financial firms, while 68 percent had an unfavorable view. Those negative views crossed party lines, with 72 percent of Democrats, 68 percent of independents and 67 percent of Republicans having an unfavorable impression, the center said. (Reporting by Kevin Drawbaugh, editing by Anthony Boadle)

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