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Obama Stands At Crossroads On Financial Reform

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If the Obama administration had taken a different stance, financial reform would have been stronger, columnist Jesse Eisinger writes. (Saul Loeb//AFP/Getty Images)

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The banks have fought their war against financial reform on four fronts.

They have pushed for delays, lobbied allies in Congress to repeal aspects of Dodd-Frank, worked over regulators to make the rules as loose as possible and threatened legal challenges and filed lawsuits.

The battle has been overwhelming, with a scrappy band of pro-reform rebels outnumbered and overpowered by the empire's resources. The public appears to be on the side of the insurgents, but perhaps can't follow or understand debates about whether "swaps" — what are those? — should be "pushed out" or not — what's that? (English translation below.)

During all of these fights, the banks have had a stalwart ally holding back greater reform: Establishment Democrats.

Such Democrats, the Robert E. Rubin wing of the Democratic Party, opposed moves to break up the big banks after the 2008 global crisis. These stalwarts prevented a reinstatement of the Glass-Steagall separation of commercial and investment banking.

Of course, most Republicans opposed such bold moves, but they weren't in control of Congress in the immediate aftermath of the crisis. The lack of sweeping financial reform begins at the top. President Obama did not back such a vision, and his administration has repeatedly put forward nominees with Wall Street connections for major oversight roles.

If the Obama administration had taken a different stance, financial reform would have been stronger. Indeed, the White House actively squelched efforts for broader reform. During the debate over the Dodd-Frank Act, for example, the administration lobbied against an amendment offered by Democratic Sens. Sherrod Brown of Ohio and Ted Kaufman of Delaware to cap the size of banks.

As detailed by "Act of Congress: How America's Essential Institution Works, and How It Doesn't," a 2013 book by the Washington Post reporter Robert G. Kaiser, Dodd-Frank was built mostly on legislation and ideas that were developed before the crisis, not after.

The Obama administration sees it differently, of course. To the president, the law is a signature achievement, capped by the creation of the Consumer Financial Protection Bureau, an entire agency to protect the little guy from financial predators.

All the while, the Obama administration, Sen. Charles E. Schumer, D-N.Y., and the other Rubinite leaders of the Democratic Party could tell themselves a story that they were standing firm against the Visigothic know-nothings of its populist wing.

So that's the story of how the American public got a law of incremental tinkering with existing rules. Dodd-Frank is the Clement Attlee of legislation: a modest law with much to be modest about. This history and context needs to be understood to grasp what is happening now.

Republicans have taken over Congress. Among their early acts has been to deliver for the banks. After splitting their contributions more or less evenly for years, the financial industry switched to favor Republican candidates. In the last two election cycles, 62 percent of finance sector donations in 2014 and 69 percent in 2012 went to Republicans.

Even before Republicans secured control of the Senate, their counterparts in the House attached an amendment to a must-pass budget bill to avert that pesky "swaps push out" that I referred to above.

The arcane phrase refers to a provision in Dodd-Frank that required government-insured banks to "push out" the riskiest derivatives (like metals and energy swaps) into a separately capitalized unit. The idea was to insulate financial institutions from the effects of a volatile transaction gone wrong. In the new year, House Republicans have pushed a series of provisions aimed at gutting financial reform. Excuse me: The proper terminology, according to the Republican supporters, is "technical corrections."

Not only that, but many Democrats support these "fixes." Plenty of moderate Democrats are lily-livered about taking on the banks.

Now the Obama administration has a choice in the next two years. One is to fight a series of rear-guard actions on any specific Dodd-Frank provision the Republicans choose to make a target.

The Republicans' favored technique will be to stick provisions into bills that are viewed as "must-pass," like the budget bill. Last week, Republicans slipped a provision loosening derivatives rules into the Terrorism Risk Insurance Act.

The most obvious fight to come will be over the Consumer Financial Protection Bureau. Republicans would like to change its funding to make it overseen by Congress, and therefore subject to political pressure. Currently, its money comes from the Federal Reserve. And they'd like the bureau to be supervised by a commission, like the structure of the Securities and Exchange Commission. This is a none-too-subtle emasculation by any other name.

Republicans will seek to loosen the Volcker Rule, which bans banks' from speculative trading with money backed by government insurance. They will fight regulators' ability to curtail systemic risk in the financial system. They will try to make it easier for corporations to sue regulators for overreach.

Battling over each provision is the least favorable terrain for the pro-reform crowd. In a series of conversations I've had recently with Democratic strategists and reformists, an alternative is clear: Go big. Obama and his administration could argue clearly and publicly that the banks have not learned their lesson from the financial crisis. That they have obstructed the reform process. That they are so big, they can buy the political process. That because of this, the financial system is once again in danger. Obama could then call for real reform — this time, a significant overhaul of our financial system.

Framed like this, the fight over last year's budget bill can be seen for what it was: a tactical defeat, but a strategic victory. Financial reform proponents, led by Sen. Elizabeth Warren, D-Mass., exposed a back-room deal whereby the leadership of the Democratic Party sacrificed a provision of Dodd-Frank — one that the Obama administration never supported anyway — in exchange for budget harmony. Democrats were forced to make an uncomfortable vote.

"The swaps push-out fight was very helpful to get people engaged — elected officials, administration and others — as to coming threats," said Dennis M. Kelleher, the chief executive of Better Markets, a financial reform group. The banks "put swaps push out over funding defense, homeland security, funding epidemics. They were willing to crash funding for entire government for their special interest provision."

The administration seems to be awakening. Jacob J. Lew, the Treasury secretary, wrote in an op-ed article in The Washington Post that the administration was "prepared to oppose more disguised attacks on financial reform, such as bills that would make it easier for opponents of Wall Street reform to use the courts to stymie the regulatory process when their efforts are unsuccessful in Congress."

Republicans have not been universally allied with the big banks. David Vitter of Louisiana, John McCain of Arizona and Bob Corker of Tennessee have taken stances the big banks don't like. How long would Mitch McConnell hold out against growing public perception that he was a lap dog of Wall Street? Let's see some polling on how popular Jamie Dimon and Lloyd Blankfein are in Kentucky.

It is by no means easy to fight this industry, especially in the face of Democrats worried about holding on to their diminishing share of its campaign cash. The alternative is to see a capstone achievement crumble.

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)