Wall Street’s biggest trade of the year
Wall Street’s famed army of lobbyists does not seem to have had much success pushing back on the regulatory overhaul bills now being considered by the U.S. Congress.
The Street remains perilously isolated in Washington, deserted even by its normal friends. As a result it has little influence over the course of bills that will have a significant impact reshaping the industry over the next few years and risks being steamrollered.
Isolation is the result of a basic miscalculation about how angry voters are about the financial crisis and its aftermath in terms of lost jobs and income.
Voters may be angry with the government and Congress (as evidenced by the passions stirred in the healthcare debate, sagging ratings for legislators in both parties, and a string of election defeats for Democrats at state and national level). But they are even angrier with banks they blame for sparking the crisis in the first place.
In this environment, the industry’s lobbying strategy has been high-risk. By pushing back on so many fronts (from the proposed consumer protection agency to the Volcker Rule and derivatives clearing) it has sometimes seemed to be arguing in favour of the (discredited) status quo. Industry lobbyists may have overplayed their hand.
DESERTED BY FRIENDS
The extent of the isolation has been on vivid display in Washington in recent days.
No one would expect House Speaker Nancy Pelosi and the liberal wing of the Democratic Party in the House of Representatives to offer much support. But almost the entire Democratic Party in Congress and the administration is united in pressing for the toughest version of the regulatory reforms. Usual friends have disappeared.
Normally, the industry could expect support from the Treasury and to some extent the White House. Last year, Treasury Secretary Timothy Geithner and White House economic chief Lawrence Summers were both criticised by left-wing Democrats for appearing too sympathetic to banking interests. But in recent weeks, the Treasury and White House have seemed irritated by the lobbying effort, and have been pressing lawmakers not to compromise.
In speeches, senior policymakers at the Commodity Futures Trading Commission (CFTC), notably Chairman Gary Gensler, have also adopted an increasingly exasperated tone in response to industry opposition to substantive reform.
Nor has the industry received support from traditional champions on the House Financial Services and the Senate Banking committees. Chairmen of both committees appear ready to ram through changes despite opposition.
Earlier this year, some commentators expressed hope that Senate Banking Chairman Christopher Dodd would promote a “statesmanlike” reform measure, after he announced he would not run for re-election in November. Dodd has been a good friend in the past.
Instead, the outgoing senator has taken an uncompromising line, refusing to make significant changes on a bill the industry likes even less than its House counterpart.
Some industry supporters seem to have tried to circumvent or water down the Dodd bill by encouraging the Senate Agriculture Committee to produce its own version. The Agriculture Committee claims jurisdiction over some aspects of derivatives legislation, especially commodities, as a result of their origin in the farm sector.
Senate Agriculture was seen as more friendly to the banks on derivatives issues. Chairman Blanche Lincoln (D, Arkansas) is a noted moderate in the Democratic Party, from a conservative-leaning state which voted for Senator John McCain by a large margin in the 2008 presidential election.
But any attempt to exploit a jurisdictional dispute seems to have failed. In a letter to colleagues, published by the Wall Street Journal, Lincoln endorsed most of the banking committee’s proposals. In many cases she seemed to promise an even tougher approach than either Dodd or the administration have advocated.
Almost the only friends the industry has mustered in Washington have come from the Republican Party, which is ironic since parts of Wall Street have historically given financial aid to the Democrats, and many supported President Barack Obama’s election campaign in 2008.
But Republican support is at best ambivalent. Party leaders seem keen to secure Wall Street’s friendship (and campaign contributions). But they are nervous about becoming tarred in the public mind by too close an association with banks and bailouts.
Senate Republican Leader Mitch McConnell on Wednesday denounced the Dodd version of financial reform — but because it would, in his view, “lead to endless taxpayer bailouts of Wall Street,” not because it was too tough. With friends like this, Wall Street doesn’t need enemies.
In theory, the Senate Republican caucus could prevent the Dodd bill ever receiving a floor vote, but only if all 41 members stuck together to sustain a filibuster. There seems little chance at present the party could maintain that degree of unity for a cause it fears is unpopular with voters.
Leading Republicans have sent mixed messages, repeatedly changing their stance. Negotiations were originally led by Senator Richard Shelby (R, Alabama), the senior Republican on the banking committee. But when he refused to make further concessions, reportedly under pressure from party leaders, the lead position passed to Senator Bob Corker (R, Tennessee).
When Corker and Senator Judd Gregg (R, New Hampshire) told reporters a month ago there was scope for compromise legislation to pass in 2010, both were criticized from the right and by lobbyists for giving up too much too soon .
Gregg this week wrote an opinion article saying “All of the current proposals, however, go one step too far by mandating trades of [OTC derivatives] be executed through an exchange”.
Corker, by contrast, said today financial reform legislation would hit the floor on April 26 or perhaps a week later, and Republicans could “easily reach a bipartisan consensus” on financial reform .
With the Republican caucus so divided and tentative about opposing the bill, there seems little prospect of mustering 41 votes to block it.
The industry is running out of friends, and out of time. Senior banking leaders and their advisers will have to make a strategic choice in the coming days. Continue opposing the bill in the hope of forcing wholesale revisions, even postponing it altogether, or drop their opposition and start offering compromises in the hope of softening the text at the margins.
It is perhaps the most important trading decision the Street will make this year.