When Sen. Bob Corker met with this newspaper’s editorial board a week after Easter, he predicted the Senate would pass a banking reform bill soon with credible bipartisan support. Sen. Corker should know: He worked tirelessly hand-in-glove for a month recently with Democratic Sen. Chris Dodd, chairman of the Senate banking committee, to fashion the committee’s banking reform bill — until Sen. Dodd shut down their partnership to complete the bill on his own.
Even so, Sen. Corker expects to see most of what he helped develop in the bill, because, he says, they had worked through all the tough issues — consumer protections, reform of banking regulations, checks on “too big to fail” banks, and rules for transparency and oversight of derivatives trading, the critical source of the viral casino-style trading that spread from Wall Street around the globe and sank the economy in the deepest trough since the Great Depression.
Sen. Corker’s prediction
Indeed, Sen. Corker said that his and Sen. Dodd’s teamwork got the reform football down “to the five-yard-line.” That’s why he was confident, he said, that after the initial political skirmishing, the Senate would pass a truly credible, bipartisan banking reform plan — one that, at the least, would stand “until the next (financial) crisis,” which he said inevitability would come as financial instruments evolve.
We hope he’s right. Nevertheless, the looming battle over banking reform, which may begin in earnest this week, is shaping up to be as fiercely contested by Republicans in its intensity, if not its popular engagement, as health care reform.
The banking lobby’s power
The banking industry’s lobbyists, whose deep-pocket campaign contributions are coveted by both sides in the Senate, is fighting furiously to protect its lucrative derivatives-trading prerogatives. It also is trying to defuse a mandate to establish a $50-billion-to-$150 billion industry-financed bailout fund, and to generally water down stiffer standards for reserves, transparency and securities trading. Other actors in the consumer lending industry (think: pay-day lending) are also bent on diluting consumer protections.
GOP’s sabotage shell game
Republican reactionaries are boxing themselves in the contradictory act of trying to look like they are for strong reform to appeal — to angry voters who lost their savings, if not their jobs, in the great financial meltdown — while simultaneously savaging another Democratic reform bill that’s far tougher than most Republicans actually want it to be if they are to appease the banking industry.
It’s almost impossible for them to carry off that shell game. That’s why Senate Minority Leader Mitch McConnell sounded so ridiculous when, in his opening salvo against the Democratic bill last week, he shrieked that it would “allow endless taxpayer-funded bailouts.” Sen. Dodd rightly called that a “lie.” In fact, it’s the nearly impossible banner for the GOP’s political strategy on banking reform: To make the Democratic bill sound bad, while at the same time drilling it full of loopholes.
Some Democrats reasonably want the bill to be much tougher. More than one advocates re-establishing the Glass-Steagall Act, the Banking Act of 1933 that established the FDIC and fixed banking rules that, among other things, banned commercial banks from Wall Street-style securities trading. It was only after that critical firewall between commercial and investment banks was eliminated by the Republican Congress and Clinton administration in 1999 that trading in derivatives exploded.
In 1999, derivatives trading, mainly related to agricultural commodities, amounted to $2.5 trillion. By 2009, derivatives trading on Wall Street, relating to almost any risky instrument or toxic mortgage security, had skyrocketed to $25 trillion in outstanding contracts. And even after the meltdown, commercial banks over the past year were back in the derivatives markets. They were minting profits (and big bonuses) again on market trading, while still refusing to help revive the economy by lending money to their traditional commercial customers, who were starving for credit.
The nation cannot afford for the impasse on banking reform to continue, nor can the United States afford the risks of caving to the banking industry and refusing to fix fair, competent and comprehensive banking rules.
Congress must deal straight up in the coming weeks in at least three or four key areas of reform: derivatives, strictures on “too big to fail” banking institutions, consumer protection and general banking rules.
Key areas for reform
Derivative trading must be transparent, reported and listed on open exchanges, regulated and restricted. If commercial banks are allowed to continue in speculative market trading, they should be required to strictly segregate their trading activities from their commercial banking business and their customers’ revenue base.
The proposed Consumer Financial Protection Agency should be established as an autonomous, independent agency with its own policy-making and enforcement authority. It should not be under the Federal Reserve or FDIC. It should fix rules and monitor consumer lending products at all levels, from home mortgages to car loans to pay-day lenders.
Banking reform must encompass a range of stricter rule-setting. One piece must be a strong resolution authority, akin to the FDIC’s power to seize troubled banks, for regulators to monitor the nation’s giant banks for systemic risk, and break-up those that approach the too-big-to-fail limit. Other powers should be formulated to set higher reserve ratios and limits on debt, borrowing, acquisitions and trading leverage.
Political minefield
None of this will be easy to accomplish. Banks don’t want limits or strict oversight on their lucrative trading practices, or on their size and power. Republicans don’t want to cooperate in a bill that validates and enhances the Democratic agenda. And Democrats don’t want to cave to Republican demands for a weaker bill.
But in fact, both parties could share the spotlight if they could coalesce around meaningful banking reform that works for all Americans. If Sen. Corker can actually find the bipartisan support that he recently envisioned for that result, the country and our economy would greatly benefit.