Financial Reform: Far from a Done Deal in Congress

It’s funny how fast the Beltway consensus can change. A few months ago, health care reform was dead. Then it got undead. Financial regulatory reform was supposedly dead, too, but now that Republicans have supposedly learned that pure obstructionism is a losing play, it’s being treated as a done deal. Democrats like Obama’s economic adviser Larry Summers and Senate Banking Committee chairman Christopher Dodd are saying it’s going to pass, perhaps as early as next month. So are key Republicans like Senator Judd Gregg of New Hampshire, who recently put the odds of passage at “100%.”

Let’s just say that seems high.

It is conceivable that a new wave of bipartisan cooperation will sweep financial reform into law — even though the House version passed last year with zero Republican votes; even though Dodd’s version passed through committee last month with, yes, zero Republican votes; even though Big Finance is blasting boatloads of money around Washington to block reform. It’s at least plausible, as I’ve written, that if President Obama succeeds at framing reform as a stark banks-vs.-people choice, and enough Republicans get nervous about the political price they might pay for siding with Wall Street, a deal could be cut to get the issue out of the news before November. And the most recent behavior of Republicans — their hopeful rhetoric about reform, their sudden openness to concessions on the consumer financial-protection agency they’ve been bashing for months — is consistent with a desire to cave rather than fight.

Yet their behavior is also consistent with a desire to appear reasonable, maintain the illusion of good-faith negotiations and insulate themselves from charges of carrying the industry’s water when the negotiations fall apart. We saw this movie during health care. And if you focus on the fundamentals — political and substantive — instead of the latest Washington kabuki, the path to passage is a lot harder to envision than the path to oh-well-maybe-next-year.

Start with the calendar. Financial reform still needs to get through the full Senate. Then the House and the Senate would have to work out a compromise bill, which would have to get through the House and the Senate again, which would mean ample opportunities for filibusters and other delays. And the window for bipartisan cooperation — never a particularly large window — gets smaller every day. “Time is not the friend of reform,” an Administration official told me in January. “This won’t get done after everyone goes home to campaign in August.”

Of course, a deal could happen before August if everyone really wanted one. But that is not the case.

Obama clearly wants reform; he’s been outspoken about the need for a dramatic regulatory overhaul to prevent another financial meltdown. But he’s been so outspoken — especially about the consumer agency — that it would be tough for him to accept anything less dramatic than his tough proposals. And many Democrats see an uncompromising stance against Wall Street as a political winner; if it doesn’t produce a bill, they’re happy to have an issue they can use against Republicans in the fall.

On the other hand, watering down reform to cut a deal with the GOP could alienate a liberal base that already felt neglected after the public option was stripped out of health reform. And the health care experience showed Democrats that the horse-trading necessary to corral 60 Senators can end up producing cornhusker kickbacks that make reform unpopular.

Meanwhile, the default position for the GOP in the Obama era is no, and while its united recalcitrance failed (barely!) to stop health care, that’s likely to make its leaders even less eager to hand the President another big victory. For reasons of anti-regulatory ideology as well as intense pressure from banks and other business lobbies, many Republicans — and some conservative Democrats — are deeply uncomfortable with a financial crackdown in the first place. Senator Bob Corker has been the GOP’s leading voice for compromise, even criticizing his own party’s intransigence, but he also told me many provisions in the House bill were “crazy left,” and said Obama’s proposal for a modest tax on big banks reminded him of Venezuela. Really, it’s hard to imagine many Republicans saying yes unless they thought they’d get hammered for saying no.

That leads to the most important reason for skepticism: financial reform is so complex and confusing, with so many moving parts, that excuses to say no will be exceedingly easy to find. Even a group of staunch like-minded reformers would have a hard time finding common ground; in fact, that’s exactly what happened inside the Obama Administration, which is why the President recently proposed new add-on provisions limiting bank size and speculation. So how hard is it going to be for the less staunch to find something in the bill to reject? It’s worth noting that the 100%-confident Gregg and Democratic Senator Jack Reed were assigned to hash out compromise rules for derivatives — and failed. Even if they had succeeded, the House might not have gone along. And there are dozens of similar issues that need to be resolved for reform to pass.

Most of the spotlight on reform has focused on the up-or-down question of an independent consumer agency, a fairly simple issue even for nonexperts. But reasonable reformers can and do disagree about how much power to give the Federal Reserve, how to wind down failing banks without bailouts, how to regulate “systemic risk,” whether to cap the size of banks, whether to allow banks to own hedge funds or play the markets with their own cash, whether to preempt stricter state banking regulations, and countless other disputes over leverage and liquidity restrictions, payday lenders, securitization, industrial loan corporations, derivatives end users, mortgage underwriting and other arcane issues that probably won’t translate into 30-second attack ads.

The point is that reform won’t pass unless every one of those issues gets resolved in the Senate, and then re-resolved to get through the House and the Senate again. It could happen. But don’t be surprised if in a few months you see Gregg shaking his head sadly: If only the Democrats weren’t so intransigent about proprietary trading, or 15-1 leverage restrictions or something else you’ve never thought about, we could’ve had a deal. And don’t be surprised if the Beltway consensus then concludes that failure was inevitable.