When the US House of Representatives endorsed a voluminous 1300-page financial reform Bill in a contested vote (223 ayes to 202 nays) last Friday, it poured half a life into the most comprehensive package of changes meant for the gilded sector since the Great Depression. The other half will have to wait until the New Year for the Senate to vote on a different version of the Bill.
The House Bill was a hodgepodge of compromises among different political and economic forces that presently dominate America, with no clear winner or loser. The final version journeyed through a maze of competing interests and bore only faint similarity to the original draft of the summer.
?Populists? rooted for robust regulation of Wall Street to prevent another economic crash that disproportionately hurts the average Joe-six-pack. At the end, they did succeed in empowering state agencies to better oversee and even dismantle giant financial companies that pose a threat to the economy.
The House Bill beefs up the Securities and Exchange Commission?s ability to monitor and provide early warnings of fraudulent investment schemes. A new Financial Services Oversight Council is part of the paraphernalia to identify companies and activities that are of critical mass and ensure that they maintain capital adequacy standards.
A key element of the House Bill aims to reverse existing formulae of profits being privatised and losses being socialised. State regulators will now follow principles to unwind collapsing large firms so that the shareholders and unsecured creditors will bear the brunt rather than taxpayers. Democratic Party politicians tried to score maximum points out of this part of the Bill since it spoke to the anxieties of the lay American public that they are stuck in a system which fleeces them to save gambling ?fat cat? bankers.
A corollary aspect of the House Bill is the ?bailout pool? of $150 billion that will be kept aside as a reserve to cover the costs of disbanding a collapsed company. This fund, unlike the politically suicidal Troubled Asset Relief Programme (TARP), will be financed by contributions from large firms with assets of more than $50 billion and hedge funds worth $10 billion. The idea is to create collective responsibility within Wall Street so that all its icons bear a portion of the burden in the event of one or more biggies kicking the bucket.
Republicans railed against this fund as an unfair burden on good businesses and a moral hazard for companies considered too-big-to-fail. Without exception, all Republicans in the House voted against the Bill, contending that it would muffle innovation, impose shackles on the entrepreneurial genius of Wall Street, and stifle economic recovery.
The real drama behind the scenes before the House voted was the possibility of many Democrats defying one of the Obama administration?s cornerstone Bills of the year under the spell of Wall Street lobbyists, the US Chamber of Commerce and influential banks. Newsweek revealed in early December that ?in the first three quarters of 2009, financial-industry interests have spent $344 million on lobbying efforts?, a new record not counting expenditure on political donations and issue-based advertisements.
The power of special interest lobbying was evident both in the voting pattern of the House Bill (27 ?pro-business Democrats? went against it) and some of its contents. The Obama administration had initially recommended regulation of the entire $600 trillion derivatives market, but ironically, a Democratic House member pushed through a last-minute amendment to carve escape clauses for companies that use derivatives as ?a hedge against market fluctuations rather than as a speculative investment?.
Heavy hitters like Goldman Sachs are rumoured to also have squelched attempts of some Democrats to usher in rules to deter abusive trading practices. Consumer protection groups expressed disappointment that hedge funds which are not bona fide hedgers of commercial risks ?will slip through? the current language in the House Bill.
President Obama?s aides alleged that the watering down of far-reaching initiatives in the Bill was a product of brazen meetings between Republican leaders and ?about 100 lobbyists for the financial industry? before the final vote in the House. Obama gave an interview on the day of the vote, accusing Wall Street banks of ?fighting tooth and nail with their lobbyists against regulatory control?.
With mid-term Congressional elections in 2010 on the horizon, Obama is increasingly worried about his own popularity ratings. Like all politicians with survival instincts, Obama is ratcheting up criticism of the usual suspects on Wall Street to convince the American people that he is accountable only to the latter.
His latest interview mirrored the frustrations of the public that executive compensation-setting power was slowly slipping out of the hands of the government-appointed ?pay czar?. As most emergency-aided banks are repaying their bailouts in a collective show of independence from the state, Obama argued that some of them were doing so not upon returning to economic health but deliberately to escape government controls. While a Democratic rout in the upcoming Congressional races is still farfetched, Obama can be expected to increasingly crack at least the verbal whip against Wall Street in months to come.
If and when the financial regulation Bill passes the Senate, it will be trumpeted as a major achievement of Obama and the Democratic Party before a jobless American electorate. But the balancing acts in the Bill that keeps the sacred cows of Wall Street untouched raise doubts as to whether Obama is opportunistically employing please-all ?triangulation? rhetoric. Roger Cohen recently wrote in the International Herald Tribune that
Obama ?hovers in the centre despite left-of-centre inclinations and ideals.? The financial regulation drama buttresses this judgement and might entail political costs for a President whose honeymoon with the harried public seems to be over.
?The author is associate professor of world politics at the OP Jindal Global University