Where financial regulatory reform is heading
The future of U.S. financial reform seems destined to track closely the path of that other major effort winding its way through Congress, healthcare. As a result, what came out of the House of Representatives with a narrow majority on Friday may be far more ambitious than what the Senate could possibly pass.
So the harshest critics of Wall Street â€“ or the â€śfat cat bankersâ€ť, to use President Barack Obamaâ€™s label in a Sunday television interview â€“ will be disappointed by the final result that will probably become law sometime in 2010.
As it stands, the House bill is hardly radical. It doesn’t embrace, for example, the preemptive dismantling of large, interconnected firms. It doesnâ€™t reduce the Federal Reserveâ€™s regulatory reach. It doesnâ€™t restore the law separating commercial and investment banking. It doesnâ€™t even give bankruptcy judges the power to alter mortgages.
But even bits that reformers favor face diminution or elimination. Senate Banking Committee Chairman Christopher Doddâ€™s more radical proposal to strip the Fed of regulatory oversight and create a single super-regulator has been a total non-starter. Dodd quickly reversed field and instructed committee members to pair off into bipartisan working groups to focus on key issues.
A Consumer Financial Protection Agency for gadfly Elizabeth Warren to lead looks possible, but it will be severely weakened from the House version. A proposed $150 billion bailout fund financed by banks could easily disappear. So, too, could language that would force secured creditors to accept a 10 percent haircut if a financial firm needs a government rescue. As for the Fed, one possible compromise would be for the central bank to monitor systemic risk but leave it to existing agencies to take action.
Prioritizing financial over healthcare reform might have led to a tougher final bill worthy of Obama’s harsh rhetoric. By multi-tasking, however, the White Houseâ€™s need to get something done before midterm elections will undoubtedly lead to compromise or downright dilution. This is just the sort of unfortunate scheduling Wall Street would understandably celebrate.