Why the Dems Need to Hang Tough on Financial Reform

Original Link: http://www.time.com/time/politics/article/0,8599,1971726,00.html

By Michael Grunwald

Senate Banking Committee Chairman Christopher Dodd announced Thursday that he can't keep negotiating a financial reform compromise with Republican senator Robert Corker, because the process needs to go faster. Corker then declared that he was "very disappointed" the talks had broken down, and that the process needs to go slower.

Are we really supposed to be surprised the compromise didn't happen? (See a one-year evaluation of the White House stimulus.)

Financial reform is an extremely complex issue, substantively and politically, but a few simple things can be said about it. Republicans have vowed to block any independent consumer protection agency with enforcement authority, while President Obama and many Democrats have insisted on one. Republicans don't want to hand Obama a victory; even before they lost their supermajority, Democrats didn't want to repeat the ugly get-to-60 process that squeezed health care reform through the Senate. Democrats are ideologically inclined to support strict regulations; Republicans, not so much — one reason none of them voted for the reform bill that passed the House last year.

The stars, in other words, were not exactly aligned for a backroom bipartisan deal. Dodd tried anyway — first with Richard Shelby, the ranking Republican on his committee, and after that crashed and burned, with Corker, a junior member of the committee who seemed more open to a compromise. Over the last several weeks, they did manage to reach agreement on some less controversial elements of reform, such as systemic risk regulation and rating agency liability, but it was never clear how they would bridge fundamental differences like the consumer agency, derivatives regulations and shareholder protections. When I spoke to Corker last month, he suggested that Obama's relatively modest proposal to recoup the costs of the financial bailouts by taxing the risk-taking of large banks made him wonder if he was living in Venezuela. And he's considered one of the softer-edged Republicans. (See the Top 10 Embarrassing Things Voters Have Overlooked.)

Even if Dodd had agreed to water down reform enough to cut a deal with Corker, that wouldn't have guaranteed success; it was not clear if any other Republicans would have supported it, if Democrats on his committee would have agreed to pass it, if it could have survived the full Senate, if the Senate would have been able to work out its differences with the House in a conference, if the Senate and House would have been able to pass the resulting conference bill, or if Obama — whose aides have suggested they'd much prefer no bill (and a potentially powerful issue they could use to bash Republicans in the run-up to the midterm elections) to a weak bill — would have signed the compromise. And time was a serious factor; Congress probably needs to complete its legislative business before campaign season kicks into high gear in August.

Dodd is not naï ve; he knew that ostensibly softer-edged Republicans like Senator Charles Grassley had drawn out health care negotiations for months before scuttling the talks with tea-party rhetoric about grannycide. But Dodd is retiring after 36 years in the Senate, and he was eager to cut a deal for the sake of his legacy. He knew he needed GOP votes, and he figured that after a catastrophic meltdown, financial reform would be less polarizing than health care. And Corker did seem to be negotiating in good faith, even if GOP leaders were clearly eager to pull the football away before Charlie Brown could kick. (See 25 people to blame for the financial crisis.)

In fact, Dodd said Thursday that he's still optimistic about a consensus bill. He hinted that when he unveils his draft on Monday, it will reflect the compromises he's already made with Corker. But common sense, as well as leaks from their talks, suggest that those compromises — stripping the consumer agency of enforcement power, exempting payday lenders from new regulations, blocking any state regulations that are stricter than federal ones — would remove teeth from the bill. And perversely, that would make consensus — which is pretty unlikely anyway — just about impossible.

Dodd is right that he can't try to shimmy past a filibuster in an election year by cobbling together 59 Democrats and a Republican; it's probably hopeless, and certainly hopeless without cutting unsavory deals like the toxic Cornhusker Kickback on health care. But weakening the bill won't get him to 60 either; it will just alienate Democrats committed to reform in the House as well as the Senate, while most Republicans will still find some reason to oppose it.

The only hope for consensus is a bill that takes an unmistakably tough line on Wall Street, which could end up striking a political chord and persuading recalcitrant Republicans and unenthusiastic Democrats that they have to support it if they don't want to look like Wall Street apologists. Again, this is not a likely scenario; the health care experience suggests that even preposterous attacks on complex legislation can provide cover for opponents, and Republicans are already starting to portray tougher financial rules as a new Wall Street bailout. But this is at least a plausible scenario; a Harris poll released yesterday found that 82% of Americans support reforms. (See "Republican Surprise: 10 More Scott Browns.")

The most credible scenario for an irresistible groundswell of public support would have to include a tough consumer agency that would regulate financial products the way the FDA regulates food and drugs, along the lines proposed by bailout watchdog Elizabeth Warren. It wouldn't have to be a stand-alone agency; the FDA isn't, and nobody thinks of the Office of the Comptroller of the Currency as a Treasury agency just because its employee emails end with treas.gov. But it would have to be truly independent, with its own budget, its own presidentially-appointed director, and preferably its own address; it can't be subservient to the larger mission of the Treasury or the Federal Reserve, and it shouldn't be tucked in their basements. It would have to enforce rules as well as write them; otherwise, we'd remain dependent on the same regulators who failed us last time. And those rules would have to apply to all bank and non-bank institutions, including the payday lenders who contributed so generously to Corker's campaigns; otherwise, the loan business would simply move to the unregulated corners of the market.

An independent consumer agency isn't the most vital provision for preventing another meltdown, but it's the most vital provision for persuading ordinary families that reform is about them. And along with significantly less vital provisions that would help shareholders rein in executive pay, it's the starkest way to make the case that opposing reform means doing the bidding of Wall Street. Sure, disputes over systemic risk, clearinghouses for derivatives, resolution authority for failing firms and proprietary trading are all important, but they're not going to move the masses. (See the top 10 financial-crisis buzzwords.)

In the end, of course, a tough bill would face long odds. The money and power of the financial industry would be arrayed against it. There would be so many arcane moving parts — How much authority for the Fed? Should end users be exempt from derivatives regulation? Should something be done about naked credit default swaps? — that reaching consensus by August would be challenging even if everyone wanted it. And it's not clear that anyone is desperate to have it; there probably won't be another meltdown this year, and Democratic leaders may be content to let Republicans block reform so they can blast them as Wall Street shills in November. But it's at least possible that Republicans will decide that they want to keep the focus on health care, that giving Democrats a populist issue could transform the landscape before the midterms, that letting financial reform pass would defuse accusations of obstructionism.

In any case, a weak bill would face insurmountable odds. So hanging tough is not just better politics for Democrats; it's the only chance for Dodd to burnish his legacy. And after the worst regulatory breakdown in 80 years, it also happens to be the right thing to do.