Obama Rejects Bipartisan Bank Deal

Although Senate Banking Committee Chair Chris Dodd and his sometime
Republican ally Richard Shelby continued to make noises on the Sunday
talk shows about a possible bipartisan deal, both President Obama and
House Financial Services Chairman Barney Frank have personally urged
Dodd not to cut a deal with Republicans. I asked Frank point blank why
Dodd would want such a deal, and he said--on the record--"I have no
idea, but both President Obama and I have urged him not to."

This is a welcome sign that Obama realizes that public opinion is
moving in the direction of tougher banking reform, and that he learned
from the health debate that bipartisan compromise on key reform issues
is a snare and a delusion. Kudos to Chairman Frank and to the President.

Assuming that Dodd doesn't cave, the Democrats still need 60 votes if
Republicans decide to filibuster the motion to take up the bill. But
with tide turning strongly against coddling Wall Street, it is hard to
imagine that a few Republicans won't break ranks. If so, there may be no
filibuster at all.

On one of the most contentious issues, derivatives reform, Maine
Republican Senator Olympia Snowe sent a letter to Majority Leader Harry
Reid on Friday urging him to back Senator Blanche Lincoln's tough
derivatives provision, which not only narrows exclusions in the draft
legislation, but keeps big banks from trading derivatives for their own
accounts. It's hard to imagine Snowe backing this measure and then
joining in a filibuster to block consideration of the reform altogether.
Here is part of her letter:

"I believe that strong derivatives regulation goes to the
heart of an effective financial reform bill and that Chairman Lincoln's
legislation is a strong step towards realizing this fundamental
component to financial reform......I believe that we should err on the
side of caution and finally bring full transparency to these markets
once and for all and allow regulators to preemptively identify these
damaged firms.

"Accordingly, I believe the Senate should start with a comprehensive,
strong derivatives reform proposal and defend attempts to weaken it,
not the other way around and the legislation produced by the Senate
Agriculture Committee includes the strongest safeguards and most robust
transparency provisions on our expansive derivatives market.

I urge the Majority Leader to incorporate these provisions into the
regulatory reform bill."

Then we have the case of the accidental senator from Massachusetts,
Scott Brown, who is facing re-election in just two years. His special
election last January was a fluke--a perfect storm of voter backlash
against recession and a weak Democratic campaign. Brown ran as a kind of
regular-guy economic populist. I can't believe that Brown will stand up
for Wall Street against Main Street and vote to filibuster against even
taking up the bill (Elizabeth Warren should run for the Democratic
nomination to take him on in 2012. Now that would be one helluva race.)

In short, Republican leaders McConnell and Shelby are bluffing. They
know they can't hold their troops, and that's why they so desperately want a deal with Dodd for a weaker
bipartisan bill that Republicans can support.

If Dodd avoids such a deal, my hunch is that several Republicans will
not support the filibuster and that debate will proceed. And once it
does, there will be several votes on key strengthening amendments. These
will also put Republicans in a bind.

Senator Chuck Grassley supported the Lincoln bill in the Agriculture
Committee. Will he now join Snowe and vote to add it to the reform bill?
How could Grassley vote to strengthen the derivatives position, but
vote to block taking up the whole bill?

My sources tell me that one key Democrat, Treasury Secretary Tim
Geithner, is actually somewhat more pro-banker than moderate and
heartland senate Republicans when it comes to derivatives reform. He is
sympathetic to Wall Street complaints that the Lincoln bill would eat
into derivatives profits, and has weighted in on the side of watering
down her bill. Happily, he doesn't vote, but President Obama should
decide the administration position and not leave it to Geithner.

Two other key amendments: One will be offered by Senators Sherrod
Brown, Ted Kaufman, Bob Casey and Sheldon Whitehouse, limiting the size
of large banks; another by Senators Jeff Merkley and Carl Levin would
write into law the Volcker Rule separating commercial banking from
financial gambling. These will also put Republicans in a deliciously
awkward spot--though they may also be opposed by pro-Wall Street
Democrats such as Evan Bayh of Indiana and Mark Warner of Virginia. And
watch closely to see how Chuck Schumer votes on these strengthening
amendments. Schumer, once known as the senator from Wall Street, is
remaking himself as a financial reformer in preparation for a possible
run for majority leader against Dick Durbin should Harry Reid go down
this November.

Bottom line: If the Senate Democratic Leadership can resist the snake
oil of a bipartisan deal and if Obama personally works the phones and
takes control of his own administration, the bill will probably get
stronger as it works its way through Congress. This is the right kind of
bipartisanship--a progressive bill so clearly demanded by public
opinion that many Republicans don't dare to oppose it.

Even so, this bill is far from the final chapter of reform. While
banks will not be able to do quite as much damage to the rest of the
economy, entire areas of abuse such as credit rating agencies, hedge
funds, and private equity are largely untouched and the basic business
model of the financial conglomerates will be only partly constrained.
Real mortgage relief is also put off for another day.

A little history is reassuring. For all of his personal resolve, it
took Franklin Roosevelt seven years and several pieces of landmark
legislation to complete the New Deal structure of financial regulation
that kept Wall Street well harnessed until the late 1970s - including
the Securities Act of 1933, the Securities Exchange Act of 1934, the
Public Utility Holding Act of 1935, ending with the Investment Company
Act of 1940. Even in that golden age of reform, Wall Street wasn't tamed
in a day.

If the Democrats don't extinguish the momentum with a premature
bipartisan deal, public understanding and indignation are still
building. Regulatory agencies are beginning to do their jobs, and
Democrats are starting to sound like a progressive party. It's about
time.