America’s most powerful politicians met at the White House
yesterday for the start of a six-week battle in which both main parties
will fight for the right to claim that they are taming Wall Street’s
wildest excesses and safeguarding a resurgent US economy.
Emboldened by continuing popular disgust over the big banks’ role
in the worst US recession since the 1930s, President Obama invited
Republican leaders to what was billed as a cordial bipartisan
discussion of financial regulatory reform.
It was anything but. In an hour-long meeting that appears to have
deepened party divisions over the future of the economy, Mr Obama
attacked his Republican guests for their closeness to Wall Street
lobbyists, demanded a complete overhaul of the risky derivatives
markets that led to the brink of a financial meltdown two years ago and
accused Republicans of a “campaign of misinformation” about his
In open defiance of Mr Obama’s call for cross-party backing for the
Senate finance Bill, Mitch McConnell, the Republican Senate minority
leader, denounced the Bill minutes after the White House meeting as a
recipe for institutionalising the bank bailouts of 2008. The $85
billion (£50 billion) rescue of the AIG insurance giant in particular
has become a reviled symbol of taxpayer-funded indulgence of Wall
The stakes in the unfolding debate on the future of the US financial industry could hardly be higher.
Outside Congress, experts from across the political spectrum agree
that tough new rules on derivatives trading and banks’ capital reserves
are essential to prevent a repeat of the 2008 meltdown that cost
America 11 million jobs and wiped out the savings of millions of
Mr Obama has set Congress a deadline of May 31 to approve a Bill
that would give the Federal Reserve direct oversight of financial
institutions with assets of more than $50 billion.
It would also create a “resolution authority” that would let the US
Treasury guide failing firms into bankruptcy — and oblivion — at
minimal or no cost to the taxpayer.
“I am confident that we can work out an effective bipartisan
package that assures that we never have ‘too-big-to-fail again’,” he
said before yesterday’s meeting, referring to the AIG bailout.
Senator McConnell had already launched a pre-emptive strike against
the Democratic Bill on Tuesday, saying that it would make future
bailouts more, rather than less, likely.
What surprised and angered the White House was his decision to
stick to the same line of argument despite language in the Bill that
explicitly rules out the use of taxpayers’ money to save failing banks
in the future.
Austan Goolsbee, chief economist of the White House’s Economic
Recovery Advisory Board, said that he was stunned by Mr McConnell’s
stance. It was “totally disingenuous” to claim that the Senate Bill
enshrined the “too-big-to-fail” concept, he said, when in fact it
required that the management of failing financial firms be fired and
their shareholders be wiped out.
Even before the passage of a $940 billion health reform Bill last
month, there was no love lost between the White House and the
congressional Republican leadership.
Sensing weakness in Mr Obama’s deliberative style in the healthcare
debate and in the three months that he spent reaching a decision to
send more troops to Afghanistan, it imposed tighter discipline on
moderates who might have been tempted to back Democratic Bills on
merit, in the hope of branding the Administration incapable of
governing, and recapturing the White House in 2012.
One result was that the finance Bill approved by the Senate Banking
Committee lacks the support of a single Republican despite months of
negotiations aimed at winning over moderates, including Richard Shelby,
of Alabama, and Bob Corker, of Tennessee.
In a shift that may have strengthened Mr Obama’s hand, Senator
Shelby, the senior Republican on the banking committee, hinted that he
might break ranks as pressure builds from Democrats for the 60 votes
they need to pass the Bill. “It is a bad concept to bail out anybody,”
he told CNBC, adding that he still held out hopes of a reform package
passing by early June.
Since January the Democrats have needed at least one Republican
vote to be sure of passing anything in the Senate except by the
controversial reconciliation process used to make crucial amendments to
the health reform Bill.
This is the first serious test of Mr Obama’s ability to sway
Congress since senior Republicans, including Senator John McCain, vowed
to block every item on his domestic agenda after their defeat on
Democrats still fear that victory may cost them dearly at the
midterm elections but they are confident that when it comes to reining
in Wall Street they will have the public behind them.
“This ought to be a bipartisan Bill and I think in the end it will be,” Mr Goolsbee said.
The White House is calculating that Republicans who choose to
remain opposed to the most sweeping Wall Street reforms in several
generations will risk being punished by voters for appearing to support
irresponsible bankers at the expense of Main Street.
Senator McConnell and others had a private meeting in New York this
week with hedge fund managers and their lobbyists. Democrats have since
gleefully accused him of parroting Wall Street’s talking points. On
yesterday’s evidence, he may have to find some new ones.