Will Obama Join the New Democrat Coalition on Financial Regulation?

A series of interesting journalistic takes on financial regulation have suggested that, after the hyperpartisan brawl over health care reform, financial reform may be a more bipartisan affair. For example, according to Alison Vekshin and Dawn Kopecki, it appears that House Democratic leaders have put a large contingent of moderates on the House Financial Services Committee:

In the House of Representatives, where the debate on regulatory reform started, the New Democrat Coalition has 68 fiscally conservative, pro-business members who fill 15 of the party’s 42 seats on the House Financial Services Committee. And with just a 38-member voting majority over Republicans (who often vote as a block in the House), Frank and Pelosi can’t push legislation through without the New Democrats’ support. . . .

While the House Financial Services Committee was tweaking the reform bill proposed by the Obama Administration this summer, the New Democrats pushed back on key regulatory issues. One of the biggest: derivatives, the complex financial instruments that helped spark the global financial crisis. Most derivatives are traded in murky over-the-counter deals. The Administration wanted to push some of them onto regulated trading platforms. But that would have crimped one of Wall Street’s most lucrative businesses: The top five U.S. commercial banks, including JPMorgan Chase, Goldman Sachs, and Bank of America, were on track through the second quarter to earn more than $35 billion in 2009 trading unregulated derivative contracts, according to a review of company filings with the Federal Reserve and people familiar with the banks’ income sources. So JPMorgan, along with Goldman Sachs and Credit Suisse (CS), lobbied . . . New Democrats to temper the proposed rules. . . .

The pro-regulation forces backed down. Under the House bill that passed in December, banks won’t have to trade standardized derivatives on regulated trading platforms, although they will have to report the deals to regulators.

The New Democrats’ fingerprints are all over the final House bill. Lawmakers rejected a mortgage “cram-down” amendment, which would have given federal judges the power to extend loan terms, lower interest rates, and cut principal for bankrupt homeowners. Although lawmakers ultimately voted to create a consumer protection agency, the New Democrats succeeded in stripping the proposal of some components. Under the bill, real estate agents, auto dealers, and other nonfinancial companies won’t fall under the purview of the agency. And the largest banks won’t have to offer plain-vanilla credit-card and mortgage products.

Vekshin & Kopecki portray tensions between the White House and the “New Democrats.” But other sources portray an Administration trying to be all things to all people. Sen. Maria Cantwell has tirelessly fought for more aggressive federal oversight of the financial sector. (Among other things, she (along with John McCain) proposed reinstating the 1933 Glass-Steagall Act last month.) Cantwell objected to the White House’s nomination of former Goldman trader Gary Gensler to chair the CFTC, and thought she had extracted some concessions from Geithner & co. But, as Robert Kuttner reports, the administration has apparently failed to keep its word to her:

[In Jan., 2009, Cantwell] put a hold on Gensler’s nomination. After a lengthy meeting with Gensler on Jan. 15, Cantwell sent him a letter soliciting commitments on several regulatory issues involving derivatives. His reply, dated Feb. 11, was detailed, but it deftly fudged key questions. . . .Little by little, however, Gensler came around to Cantwell’s demands. He went on a charm offensive, meeting with consumer groups, speaking with the press, and promising a total change of heart. . . .

But Cantwell was taking no chances. She pressed Treasury Secretary Timothy Geithner to put these commitments in writing. . . .After marathon negotiation sessions, [Larry] Summers agreed to a letter committing in detail to fundamental reform. . . .

She waived her hold on Gensler, but her suspicions were not entirely allayed. She still voted against confirming him. As Cantwell dryly said to me in an interview not long afterward, “It’s not unheard of in D.C. to feign a commitment and then not fight hard to have the legislation pass.”

That skepticism understated what was coming. Though Gensler fought inside the administration to keep his word to Cantwell, the Treasury Department released a white paper on June 17 that was weaker than the commitments in Geithner’s May 13 letter. And the financial-reform legislation that Geithner sent to Congress in August was even weaker than the white paper. The loopholes were widened further by the House Financial Services Committee after an industry lobbying offensive that was supported by the 15 members of the New Democrat Coalition on the committee — and these loopholes were not resisted by the administration.

“The Treasury Department should be ashamed of themselves,” Cantwell told MSNBC in mid-October. She added, “What is moving through on the House side is a bill that supposedly has a new rule but it has so many loopholes that the loophole actually eats the rule. … Current law with its loopholes would actually be better than these loopholes.”

As some of Vekshin & Kopecki’s sources concluded, a “moment for real change has been squandered.” But, as Frank Partnoy points out, legislators weren’t exactly quick out of the gate in 1929, either. It will be interesting to see if the McCain/Cantwell (and Paul/Grayson) forces will continue to press for more fundamental financial reform. They’ve got their work cut out for them, as this profile of the House Financial Services Committee suggests:

[The House Financial Services Committee] is known as a “money committee” because joining it makes fundraising, especially from donors with financial interests litigated [sic] by the panel, significantly easier. The Democratic leadership chose to embrace this concept, setting up the committee as an ATM for vulnerable rookies. Eleven freshman representatives from conservative-leaning districts, designated as “frontline” members, have been given precious spots on the committee. They have individually raised an average of $1.09 million for their 2010 campaigns, according to the Center for Responsive Politics; by contrast, the average House member has raised less than half of that amount. . . .

[B]y setting up the committee as a place for shaky Democrats from red districts to pad their campaign coffers, leadership made a choice to prioritize fundraising over the passage of strong legislation. . . .

And just as the lure of money leads inexperienced new members to join the committee, it prompts experienced staffers to bolt for larger paydays in the private sector. “You have this phenomenon where if you have a staffer who’s very experienced on a certain issue and is dealing with the financial sector for any number of months or years, all of a sudden they become a real acquisition target for Wall Street,” says . . . Rep. Stephen Lynch (D-Mass.), a subcommittee chairman, of the unwieldy panel.

Similar “acquisition targets” have paid off handsomely.

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