The tide has dramatically turned in favor of financial reform. As the Dodd bill has worked its way through the Senate, many Republicans joined Democrats to approve strengthening amendments that were politically unthinkable just a few weeks ago. Several more will be considered this week, prior to final passage.
This fight is not over, either short term or long term. There are several weakening amendments as well as more toughening amendments still to come next week. The financial lobby is fiercely fighting derivatives reform, and wants to weaken the right of states to go beyond federal regulatory minimums. Nor will the cleanup be complete with this bill.
But for the first time since the meltdown began, drastic reform has serious momentum. And Republicans are usefully on the defensive, embarrassed to vote with Wall Street. The long sought grail of bipartisanship is finally with us -- and it is an emerging bipartisan consensus to cleanse the evils of high finance.
It's not that the Republicans and corporate wing of the Democratic Party have come to Jesus -- only that Wall Street has become an albatross to the right. When Republican Senator Bob Bennett of Utah came in third at the party nominating convention last week, losing his right for a place on the primary ballot (and his three-term seat) critics held his vote for the TARP bailout against him.
Thus, by a wide margin of 64-35, with eleven Republicans supporting, the Senate passed Sen. Al Franken's surprise amendment to reform corruption in credit rating agencies by having financial clients allocated randomly rather than by paying agencies to give good ratings to junk. Franken's bill also creates a new supervisory body. This was neither in the administration bill nor in the original Dodd bill.
Another important amendment, offered by Senators Jeff Merkley of Oregon and Amy Klobuchar of Minnesota, requires strong underwriting standards on all mortgages, and prohibits kickbacks to mortgage companies who peddle high-risk, high-cost products to unwary customers. Had this been in force in 2006, there would have been no sub-prime crisis. That measure, also neither in the Dodd nor White House bill, was approved 63-36, with several Republican crossovers.
The Senate voted to regulate the transaction fees on debit and credit cards, and allowed merchants to give discounts to customers who used credit cards that took less of a middleman cut. In this case, the business elite was divided, and several Republican senators joined sponsor Dick Durbin of Illinois.
And the Senate turned back efforts to gut the Consumer Financial Protection Agency, and to weaken derivatives reform. However, the final vote on the stronger Blanche Lincoln provisions on derivatives are expected next week. This vote is expected to be extremely close, since Wall Street lobbyists have gone all out to get rid of the provision that would compel banks with federal deposit insurance not to also speculate in derivatives. On this issue, the banks have sometime reformers Paul Volcker and Sheila Bair of the FDIC as well as Tim Geithner lobbying on their side, because derivatives trading for their own accounts has become such a large share of bank profits.
Yet senators even voted 98-0 to approve an amendment sponsored by the Senate's most reliable progressive, Bernie Sanders of Vermont, to audit the Federal Reserve. The right preposterously attacks Barack Obama for being a socialist, but this time they found it expedient to vote with an actual self-described socialist.
What happened? Despite the immense power of the banking industry, three factors have been game changers.
Goldman. The Securities and Exchange Commission's suit against Goldman Sachs dominated the media for several days. Ordinary voters started seeing through the bewildering insider terms like credit default swaps to the essence of the game: Goldman was creating securities it knew to be junk, helping favored clients bet against them, and then selling them as sound investments.
The press recently reported that the big financial houses racked up 61 straight days of trading gains, whether the broad market was up or down. The public finally grasped that the game is rigged in favor of the house. You might say Wall Street has become more radioactive than Bernie Sanders.
Back Benchers. This new wave of reform was led by a couple of dozen progressive senators, many of them freshmen, with names that are not exactly household words, including Ted Kaufman of Delaware, Merkley and Klobuchar, as well as the better known Franken, Sherrod Brown, and Maria Cantwell of Washington, and senior progressives such as Durbin and Carl Levin. Kaufman, appointed to serve out the remainder of Joe Biden's term, was expected to be just a seat-warmer; he has emerged as a leading progressive player.
Though far from a majority, the progressive back-benchers led public opinion. They pushed the Obama Administration to embrace increasingly bolder reforms and the Banking Committee Chairman, Chris Dodd of Connecticut, to reject a deal for a weak bipartisan bill.
For the most part, Obama was characteristically disengaged, and senior Administration officials, notably Tim Geithner, have been on the wrong side of key measures such as derivatives reform and auditing the Fed. The White House chose to weigh in strongly and publicly on one issue -- subjecting deceptive lending practices by new and used car dealers to the protections of the new consumer agency. I suppose if you poll-test everything, used car dealers are a pretty safe adversary.
Citizen Power. Americans for Financial Reform (AFR), a coalition of some 250 consumer and labor organizations, coordinated expert testimony, lobbying, and information gathering on the reform side. With a tiny core staff headed by veteran organizer Heather Booth, AFR is out-spent at least a hundred to one by the banking lobby, but its foot soldiers, donated by participating groups, have daily strategy calls, head counts, regular discussions with the administration, and target wavering senators of both parties. AFR, many of whose member organizations in turn connect to millions of people at the grass roots, has emerged as a model of how citizen power can move public opinion and match the power of high finance.
With this dramatic shift in momentum, Senate Majority Harry Reid was able to negotiate a remarkable no-filibuster arrangement with the Republican leadership. Under this deal, amendments considered last week were voted up or down by simple majority. But over the weekend, the Republicans threatened a filibuster on key amendments coming up next week, such as the Merkley-Levin amendment, which would write into law the wall between commercial banking and investment banking.
Final passage is likely, because even though the overall bill is too strong for the right, the Republicans don't want to be seen as toadies for the banks. Two key Republicans, Chuck Grassley of Iowa and Olympia Snowe of Maine, have voted with Democrats on the most important measures, and several other Republicans have crossed the aisle on others. But at least three corporate Democrats -- Carper of Delaware, Warner of Virginia, and Bayh of Indiana -- have voted with Wall Street much of the time.
Still, in a kind of jiu-jitsu turnabout, the immense power of Wall Street has become more liability than asset. Progressives have turned it against itself. And as the results of more criminal investigations against financial houses gradually come to light, the momentum will only keep shifting.
(Oddly, the nation's flagship daily paper, the New York Times, has written almost exactly one piece -- buried in the Sunday business section and with a misleading headline -- on this unfolding drama during the past several days. Along with health care, this is clearly the most momentous legislative struggle of the year. Where are you people?)
This bill should be understood as just a first step. It will only partly transform the business model of the post-1980 financial industry, in which creation and trading of abstract securities rather than traditional banking are the main source of profits; and middlemen add too much risk to the economy and take too much of a cut for themselves.
The entire financial industry needs more drastic simplification and shrinkage. Exotic instruments that add no value to the economy need to either be banned entirely or rendered unprofitable with taxes or reserve requirements. The pervasive conflicts of interest need to be expunged from the system. Banking needs to revert to the quasi public utility role that it played during the 30-year boom after World War II. High rollers need to play only with their own money.
The dynamics of deeper reform are very reminiscent of the 1930s. In that decade, it took progressive senators and grass-roots movements to push Roosevelt and his financial advisers beyond their comfort zone. The Roosevelt White House did not always lead -- the FDIC was imposed on Roosevelt by Congress -- though FDR led rather more than the Obama Administration is current leading. Ultimately, it took six landmark reform bills stretching over seven years, beginning with the 1933 Glass-Steagall Act and ending with the Investment Company Act of 1940 before the edifice of New Deal financial reform was complete. By that calendar, it is only May 1934 right now, and we have a long way to go.
Thanks to that epic cycle of reform, the financial economy efficiently served the real economy for nearly half a century, until a new round of "innovation," regulatory end-runs, and speculative excess caused the cycle of collapse and reform to repeat. We are witnessing only the opening chapter in a long battle to restore the financial economy to its proper role as servant of the real economy.
Robert Kuttner's new book, A Presidency in Peril, addresses the economic crisis and the Obama administration. He is coeditor of the American Prospect and a fellow at Demos.