Back in September, Jane Sasseen at Business Week made a wise observation about the fight for financial reform, “It may not capture the nation’s attention, as the battle over health care clearly has. But down in the lobbying trenches, an equally hard fought battle is underway. ”
The battle began in June and final passage was expected to take months, with White House officials hoping to get the regulatory reforms passed by winter. Since then, the Administration has been working with the Senate, House, regulatory agencies and banking industry on a series of reforms that are the most far-reaching since the 1930s.
The proposals announced by the President in June are contained in the Treasury Dept’s Financial Regulatory Reform: A New Foundation.
A new national bank supervisor and a separate financial services oversight council,
The ability of the Fed to regulate any firm that could pose a threat if it failed,
The ability of the Fed to dismantle firms in a manner similar to an FDIC bank takeover,
The registration of hedge fund advisers,
The regulation of derivatives,
The written approval from the Treasury Secretary for extensions of credit by the Federal Reserve,
The creation of a new Consumer Financial Protection Agency.Jaret Seiberg, a policy analyst with Concept Capital’s Washington Research Group, said at the time that the proposals were “worse for the financial sector than was expected.”
This led to a summer of lobbying from the financial services sector along with an aggressive strategy from the US Chamber of Commerce to “kill the Administration’s proposal for an independent agency aimed at protecting consumers.” Larry Summers said “those ads are the financial-regulatory equivalent of the death-panel ads that are being run with respect to health care. Those with an argument make it and those without a good argument try to scare people. And that is what is happening here.”
The President hit back as well with a speech at Federal Hall in New York where the President chastised the banking sector, “Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them. They do so not just at their own peril, but at our nation’s. So I want them to hear my words: We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.”
Throughout the fall the President’s economic team continued to advocate for regulation changes, although not all members were on the same page.
For instance, while Mr. Volcker supported 80 percent of the administration’s detailed plan for financial regulation, he opposed maintaining the investment side of banking, as well as the weakening of the Fed. He said that the government should give the Fed responsibility to survey the whole financial system as well as the ability to intercede in any sector when there is a dangerously large amount of trades in that area. He also believes the government should have the ability to intercede any time a particular institution has become too risky. “Somebody should have raised the question that subprime or credit default swaps raised a threat to the markets,” Volcker said.
Fed Chairman Bernanke, on the other hand, took the opposite approach, saying”plenty of firms got into trouble making regular commercial loans, and plenty of firms got into trouble in market-making activities,” he told the Economic Club of New York on Nov. 16. “The separation of those two things per se would not necessarily lead to stability.”
The Senate released their version of a reform bill that would create a single federal bank regulator (opposed by Volcker) leaving the Fed only in charge of monetary policy. This approach is supported by supported by Arthur Levitt, a Clinton-era Securities and Exchange Commission chairman. The Senate bill also tightens capital and leverage requirements, provides shareholder with no-binding votes on pay and board; closes loopholes on derivatives, securities, hedge funds, payday lenders and more.
In Dec, the House passed a reform bill similar to the Senate bill except it does not create a single regulator, and also creates a federal insurance regulator, directly regulates derivatives and hedge funds, reforms credit ratings agencies, and creates a dissolution authority to dismantle failing institutes.
The President continued his push in December after the House passed their reform legislation, reminding people of the entrenched opposition to reform and expressing increased frustration that “the people on Wall Street still don’t get it”.
The President said, “..as we’ve learned so many times before, common sense doesn’t always prevail in Washington.
Just last week, Republican leaders in the House summoned more than 100 key lobbyists for the financial industry to a “pep rally,” and urged them to redouble their efforts to block meaningful financial reform. Not that they needed the encouragement. These industry lobbyists have already spent more than $300 million on lobbying the debate this year.
The special interests and their agents in Congress claim that reforms like the Consumer Financial Protection Agency will stifle consumer choice and that updated rules and oversight will frustrate innovation in the financial markets. But Americans don’t choose to be victimized by mysterious fees, changing terms, and pages and pages of fine print. And while innovation should be encouraged, risky schemes that threaten our entire economy should not.”
Then, late in December, the President met with community bankers who largely support the financial regulatory package and are important to the recovery as they make up 50% of loans to small business. These small banks are also under pressure from the larger American Bankers Association for not fighting the House regulation bill.
As tensions mounted and the banking industry continued to ignore the Administration’s requests to limit excessive bonuses and spending, the President announced a bank fee would be imposed to guarantee the collection of “every single dime the American people are owed.” Word of the fee leaked out as early as Jan 12, three weeks after the President’s meeting with community bankers.
Less than a week after the Jan 14 banking fee announcement, the President pressed on and announced his intention to implement what has come to be known as “the Volcker Rule”, separating the service and investing side of Wall Street firms. A White House official said both Tim Geithner and Lawrence Summers worked closely with Paul Volcker and that “The plan was submitted to the president with a unanimous recommendation from the economic team.” While Geithner expresses concerns about its necessity and effectiveness, one can’t help but wonder if this is not an expression of the President’s exasperation with these banks and a not so subtle reminder that there is much more the President can do if the banks continue to choose risky ventures and excess over responsibility.
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