House Democrats Frank and Bean, Senate Republicans Shelby and McCain Illustration by Sean McCabe
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In September Obama scolded Wall Street for "reckless behavior" Larry Downing/Reuters
"I have nothing to say except I know how Britney Spears feels," said Representative Barney Frank on Sept. 27, 2008, after yet another day in which a pack of journalists followed his every move. In the frenzied early reckoning of the financial crisis, Frank, the 15-term Massachusetts Democrat known for being the second openly gay member of Congress—and the first member for reporters to hit up for a great quote—made the rare Washington leap from colorful supporting player to full-fledged protagonist: As the chairman of the House Financial Services Committee, the banking industry was a sick patient at his feet. Main Street demanded change. Wall Street feared it was coming. And Frank promised to deliver. "You need a new tool kit for new phenomena, and our job next year is to develop that toolkit," he said in an interview with Bloomberg News.
Frank's legislative agenda was ambitious. He pushed for the creation of a council of regulators to oversee systemic risk; the establishment of a national consumer protection agency; stricter standards for hedge funds, private equity firms, and credit-rating agencies.
The federal government certainly went to extraordinary lengths to forestall a depression and to save the banking system. Congress passed the $700 billion Troubled Asset Relief Program in 2008. Fannie Mae and Freddie Mac, the giant government-sponsored enterprises that are the backbone of America's housing industry, were essentially nationalized. The U.S. Federal Reserve and the Treasury presided over the restructuring of Wall Street, including the bankruptcy of Lehman Brothers, the sale of Bear Stearns, and the conversion of Morgan Stanley and Goldman Sachs into bank holding companies. Meanwhile the government, during the worst of the panic, seemed to roll out a new relief program every week, including a rescue package of American International Group. (Subsequently it has forced the brief bankruptcies of General Motors and Chrysler.) Some of these measures carried short-term stipulations such as compensation limits that the financial institutions, and the well-paid executives who run them, don't like.
But rescuing the system is hardly the same thing as reforming it, and a diverse chorus of voices worries that, with the stock market's recovery and the last of the big banks poised to leave TARP, the moment for real change has been squandered. It's not only a concern in the U.S.: In Europe regulators and policymakers so far haven't enacted a single proposal that would overhaul the financial system. "Meaningful regulatory change is urgent now because this is the window of opportunity," warns Simon Johnson, a professor of entrepreneurship at Massachusetts Institute of Technology and a former International Monetary Fund economist. "If that window closes, we're asking for trouble." Paul Volcker, chairman of President Barack Obama's Economic Recovery Advisory Board and former chairman of the Federal Reserve, recently visited nine cities in five countries delivering speeches warning that bankers and regulators around the world "have not come anywhere close to responding with necessary vigor." Volcker wants lawmakers to bust up the big banks. Since the crisis began, the institutions deemed "too big to fail" have only gotten bigger; at the end of 2008 the world's 10 largest banks had 26% of the assets of the top 1,500 banks, up from 18% in 1999.
So what happened to Frank's initial fervor? The stock market recovery-the Standard & Poor's 500-stock index is up 67% since the March 2009 low-drained some anger from the debate, and after months of haggling over health care, legislators heard from their constituents that regulation was no longer a word with magic healing powers.
More important, Frank, House Speaker Nancy Pelosi, and other left-leaning Democrats have had to deal with the New Democrat Coalition, a moderate group inside the party that shares many of the values associated with Bill Clinton and the Democratic Leadership Council, which was founded 25 years ago in the belief that Democrats couldn't win elections without a strong moderate platform.
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