On the heels of a stinging defeat in the Massachusetts Senatorial race that dealt a major blow to passage of health care legislation, President Obama abruptly pivoted yesterday to change the subject to the state of the US economy and to back sweeping regulatory reforms on “too big to fail” banks.
The president noted that it was those too-big-to-fail banks that brought the US financial system to the brink of total collapse a year ago by taking “reckless risks” to generate profits and bonuses.
Clearly struggling to channel the populist anger sweeping the country, he proposed legislation that would govern how big the big banks can become and what lines of business they would be permitted or forbidden to run.
Bank holding companies – which include the major commercial and investment banks – would be prohibited from engaging in the hedge fund or private equity fund fields.
The legislation Obama outlined would also seek to place limits on industry consolidation. It would achieve this by curbing the growth of the market share of liabilities at the biggest firms. The New York Times reported that an existing cap, put in place in 1994, put a limit of 10 percent on the share of insured deposits that can be held by any one bank. That cap would be expanded to include liabilities other than deposits.
Bank holding companies would also be barred from proprietary trading – using bank funds to invest on behalf of their own accounts, often resulting in banks taking investment positions against the interests of their shareholders.
Calling this “the Volcker Rule,” the president said commercial banks needed to get back to their core business – taking customers’ deposits and lending money. Former Federal Reserve Chairman Paul A. Volcker has long advocated this position.
Volcker – who reportedly fell out of favor with Treasury Secretary Tim Geithner and former Treasury Secretary Larry Summers, now chairman of the president’s National Economic Council – has long championed barring commercial banks from using deposits to finance trading in financial securities such as mortgage-backed securities. The losses sustained by commercial banks active in this kind of trading is generally thought to be a major cause of the 2008 crash and subsequent taxpayer bailout.
Most of the regulatory changes Obama proposed require legislation by Congress. This will not be easy, particularly since Republicans have already telegraphed their intention to oppose change – and since, as of Tuesday, the Democrats have lost their filibuster-proof, 60-vote majority.
That loss came in the defeat of Democrat Martha Coakley in her quest to win the Senate seat occupied by the late Ted Kennedy for decades. Victory in the race went to Scott Brown, a conservative Republican, who bragged about being the Republicans’ 41st vote against the health care bill. He will be the 41st Republican in the Senate, reducing the Democratic caucus to 59. Major legislation in the Senate usually takes a super-majority of 60 votes to pass.
In a reliable poll, conducted the morning after the election, 51 percent of those Obama supporters backing Brown “said that Democratic policies were doing more to help Wall Street than Main Street.”
In an interview with “ABC News,” Obama said Americans have a “feeling of remoteness and detachment” from Washington. “I think we lost some of that sense of speaking directly to the American people about what their core values are and why we have to make sure those institutions are matching up with those values,” he said.
Last week, Obama said the American people provided “extraordinary assistance” to the financial industry and “continue to face real hardship in this recession.” Yet, at the same time, Wall Street is expected to dole out a record $145 billion in bonuses to its employees this year.
“Instead of sending a phalanx of lobbyists to fight this proposal, or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities. And I’d urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives,” Obama said.
Predictably resisting the kinds of changes Obama proposed, the banking industry warned of its opposition. But Obama evidently anticipated that reaction. He said he expected an “army of industry lobbyists” to fight his proposals. “If these folks want a fight, it’s a fight I’m ready to have,” he declared.
The president also pushed the establishment of a Consumer Financial Protection Agency (CFPA), to regulate financial products including credit cards and mortgages.
Scott E. Talbott, the chief lobbyist for the Financial Services Roundtable, which speaks for most of the major lenders and insurance companies, said the Obama proposals would “reduce liquidity and increase risk.” He added, “That is the direct opposite of the goals we want to achieve.”
Bank lobbyists also attacked the proposed CFPA. “Maybe the administration will decide that they want to turn this into a partisan battle but, coming out of health care, I don’t think the majority of senators want to have a partisan battle,” said Edward L. Yingling, president of the American Bankers Association. “They want a bipartisan bill.”
But Harvard law school professor Elizabeth Warren, chair of the Congressional Oversight Panel created to oversee the banking bailouts, has said that without the CFPA, “the tag on US financial regulation reform may as well say ‘Made on Wall Street'” and is “the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants.”
And New York Times columnist Paul Krugman proposed “a simple solution” for passing CFPA and other financial reforms: Make Republicans (or Democrats) vote against it. “Expose the hollowness of their populist posing,” Krugman wrote. “In short, take on the banks – and force those who are covering for them into the open.”
But many expert observers of the current recession feel that little will be achieved in the way of financial services regulation until lobbyists’ money is removed from the political landscape.
One such observer is Dr. Jack N. Behrman, emeritus professor at the University of North Carolina business school, who served as JFK’s assistant secretary of commerce for domestic and international business. He told Truthout, “No Congressional campaign funds should be permitted to or through either party organization, and lobbying should be permitted only where no funds are involved – merely persuasion. PLUS – no Congressman would be allowed to become a lobbyist until four years after retirement.”
The already favorable lobbying environment for the financial sector may become even more favorable as a result of Thursday’s 5-4 Supreme Court decision. The five Conservatives on the court ruled that corporations, as persons, have free speech rights. And since money is considered speech, spending limitations cannot be placed on corporations. The decision means that significant parts of the McCain-Finegold law limiting campaign contributions by corporations are unconstitutional. Corporations – including businesses, labor unions and not-for-profits – will now be free to spend as much money as they wish in support of specific candidates in federal elections.
Anticipating reduced profitability in the financial sector, bank stocks fell sharply on Wall Street. Investors read in The Wall Street Journal that Obama’s “goal would be to deter banks from becoming so large they put the broader economy at risk and to also prevent banks from becoming so large they distort normal competitive forces.”