BREAKINGVIEWS-Is Obama losing control of U.S. financial reform?

May 3, 2010

— The authors is a Reuters Breakingviews columnists. The opinions expressed are his own —

By James Pethokoukis

WASHINGTON, May 3 (Reuters Breakingviews) – Is President Barack Obama losing control of financial reform? It is starting to seem that way. With the bill nearing its finale in the U.S Senate, Democratic legislators — and even some Republicans — seem to be scrambling to out-regulate each other while the White House keeps mum. The Obama administration defied its liberal base on nationalizing the banks last year and breaking them up this year. But as controversial amendments, such as those on derivatives, continue to emerge, it may be time to pipe up.

Of course, Team Obama would understandably prefer to lie low. It doesn’t want to backtrack entirely from the populist, get-tough-on-the-banks line. Arguing forcefully on behalf of letting banks keep their derivatives businesses, in particular, would risk message mismatch. That’s especially true after the Securities and Exchange Commission filed a lawsuit against Goldman Sachs over its involvement in a derivatives deal.

Such a hands-off political strategy might have worked if Republicans and Democrats on the Senate Banking Committee had agreed to a bipartisan bill capable of quick passage. But they didn’t, leaving room for the impaired legislation to drift and pick up lots of ill-considered amendments now that it is before the full chamber.

Obama needs to prevent this from happening. Lucky for him, he’s been given some political cover by Sheila Bair, head of the Federal Deposit Insurance Corp. There may be no financial official respected more on both sides of the aisle in Congress, than Bair.

In a three-page letter to Democrats Chris Dodd, chair of the Senate Banking Committee, and Blanche Lincoln, chair of the Senate Agriculture Committee, Bair outlined why it would be wrong-headed to require more derivatives activities to be conducted outside of banks and bank holding companies. Such a move, she argued, would hide the risky activities from federal regulatory oversight. A provision doing just that is currently in the bill and the subject of at least one possible amendment.

Obama should follow Bair’s lead. But he needn’t stop there. Efforts to break up the banks or severely shrink them may be gaining momentum. While Lawrence Summers, a top Obama economic adviser, has dismissed those ideas, nothing beats hearing it clearly from the president himself. The goal of financial reform should be to fashion a safer, sturdier financial system — not foment a free-for-all to punish the banks for past transgressions.



— A top U.S. banking regulator is concerned with a provision in a bill by Senate Democrats that would require banks to spin off their swaps desks, according to a letter obtained by Reuters on Saturday.

— Federal Deposit Insurance Corp Chairwoman Sheila Bair said this could move some of the riskiest parts of banks’ business out of the purview of federal oversight. Bair voiced her concerns in a letter to the two senators in charge of writing rules for the $450 trillion swaps market, Senate Banking Chairman Christopher Dodd and Senate Agriculture Chairman Blanche Lincoln.

— This week, the Senate is expected to start debating and changing the Democrats’ bill, which would impose new rules for Wall Street and try to ensure better protections for consumers and investors.

— Reuters news stories:

(Editing by Rob Cox and David Evans)


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