Fixing finance
Apr 20th 2010 | NEW YORK AND WASHINGTON,DC | From The Economist online
THE Democrats’ first big domestic reform, of health care, was criticised as unnecessary, distracting and partisan. Not so the latest big piece of reform, the Senate’s bill on financial services. No one, Republican or Democrat, thinks the financial system should be left alone. In an era of general grumpiness with a hyperactive federal government, a Pew poll shows that 61% of Americans nonetheless want stricter restrictions on financial firms. A lawsuit brought against Goldman Sachs by the Securities and Exchange Commission has boosted expectations that a reform bill will pass. A slew of big financial firms have just announced stellar results, including Citigroup (which announced a $4.4 billion first-quarter profit this week) and Goldman (which announced a $3.46 billion profit), turning the heat up further. President Barack Obama will make a speech in New York on Thursday outlining his case for reform.
But as Democrats bring their bill, crafted by Chris Dodd of Connecticut, to the Senate floor, their hopes for bipartisan support are dim. Mr Dodd’s bill passed the banking committee last month without a single Republican vote. Since then, the Republican leadership in the Senate has persuaded all of its 41 members to sign a letter criticising what they regard as the Democrats’ partisan approach to the bill thus far. If they hold fast, the Democrats are one vote shy of breaking a filibuster.
Several aspects of the bill invite debate. Perhaps most notable is the proposal for a $50 billion fund, paid for by the banks, to keep banks in trouble from becoming a systemic risk to the financial system. The Republicans, echoing the anger of conservative populist “Tea Party” activists, have said that this will only encourage future bail-outs. The Democrats respond that it is to assist orderly liquidation of failing banks, not to rescue them. In practice, $50 billion might not be enough to cover the failure of even a single big bank. Both parties keep quiet about having supported past bail-outs for systemically important banks in 2008 and 2009. They would rather compete to show which is the most unwilling to do so in future.
The other big point for debate is a new consumer financial-services authority. Congress has already passed a bill reforming credit-card practices, and now wants a new body that will regulate things like mortgages and payday loans. Republicans worry about the cost of compliance that a new, standalone authority (with an aggressively pro-consumer slant) will impose on banks, especially small ones.
The third sticking-point is over derivatives. Both the banks and Republicans are opposed to the bill's requirement that most derivatives trading be moved from dealer markets to regulated exchanges. Meanwhile a separate bill is moving through the Senate agriculture committee which is significantly tougher on banks than Mr Dodd’s proposal: it would force them to give up their swaps desks. For his part, Mr Obama says he will veto a bill that does not reform derivatives.
There is room for compromise on all these issues. But so far both sides prefer to play chicken: the Republicans to filibuster, the Democrats to paint the Republicans as protecting their fat-cat friends. The conventional wisdom is that the SEC's case against Goldman now makes some kind of reform virtually inevitable; but it is not yet a foregone conclusion. Republicans do not want to be on the wrong side of this issue, but neither do they want to be rolled over as they were over health care: told to support a Democrat-only bill or get out of the way. Nor do American voters want the Democrats to do this alone. On such large, complicated issues they prefer reforms to come with a bipartisan stamp of approval.
The Democrats have the option of trying to peel off just one or a tiny number of Republicans. Susan Collins of Maine, along with Richard Shelby of Alabama and Bob Corker of Tennessee are the names mentioned most often. But the Republican leadership has been extraordinarily successful in keeping usually independent-minded senators on side. One Republican defector will not be enough to brand a bill bipartisan, and so any potential 60th vote from the Republican side will face enormous pressure from the leadership not to hand the Democrats a victory they will claim as theirs alone.
So the Democrats face a risk too. By not compromising with Republicans, they may be held in as much scorn as Republicans if a bill falls just short. Americans are still frustrated about the way health care was handled. Financial reform may be much more popular, but Democratic strategists will nonetheless have to remember that the way they have used their big majorities in both houses of Congress has made them extraordinarily unpopular, with just seven months to go before mid-term elections.
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