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Regulators, Mount Up

Going into this week, the Obama Treasury department had an extensively choreographed plan for closing the deal on financial reform. On Monday, Secretary Tim Geithner would deliver a sharply-worded speech at the American Enterprise Institute, making the case for why conservatives should support real reform. (Geithner had been itching to give the speech for weeks but was waiting for an opening.) The same day, Treasury would dispatch a team of financial wonks to help Chris Dodd shepherd a bill through his Senate Banking Committee. Then, on Wednesday, Deputy Secretary Neal Wolin would deliver another fiery speech, this one at the U.S. Chamber of Commerce. On and on it would go, Treasury reckoned, until this painstaking mix of inside game and outside pressure gradually nudged the bill over the finish line.

That was the plan, in any case. But on the way back from Geithner’s AEI speech, a member of the secretary’s entourage got an email from Treasury’s Hill contingent. “It’s done,” the email said. “They just voted on it. We’re going to the W for drinks.” To the shock of everyone in the car, the Republicans had withdrawn hundreds of proposed amendments and allowed Dodd to move the bill on an anti-climactic, party-line vote. “The whole team was at the bar by 6:30,” says one administration official.

Geithner and his troops were hardly the only ones pleasantly surprised at the way the ground had shifted. Pretty much no one who follows the regulatory reform issue can quite believe the sudden change. In the span of a few days, reform has evolved from one of those debates newspaper editorialists have among themselves to Washington’s NEXT BIG PUSH. Clearly much of this derives from the parties’ changing fortunes, as Democrats bask in the glory of their health care victory and Republicans suddenly lack self-esteem. Indeed, try to recall the last time a GOP senator lacerated his party for blowing a chance at bipartisanship, as Tennessee Senator Bob Corker did on reg reform this week, and you begin to understand how far we’ve come.

The key shift is arguably the one that’s taken place at the White House. Prior to late last week, it wasn’t entirely clear whether the White House actually wanted a bill this year, or whether it simply wanted to bloody Republicans over their opposition to reform. But, as health care began to look like a fait accompli, the White House seemed to subtly change its posture. One administration official says it wasn’t so much that the White House was ambivalent, as that it was massively preoccupied with health care--and that it wasn’t sure until recently that a solid bill was achievable. “We didn’t want to do the thing … where you cut a deal here and there with every special interest available,” says the official. Whatever the case, the shift was as palpable as it was significant: Another official was impressed that the president delivered a radio address about reforming Wall Street last Saturday, the day before the most historic health care vote in 45 years.

The Dodd bill would, among other things, set up a process for dismantling failed megabanks so they don’t end up on the government dole; give the Fed new powers to regulate institutions that could bring down the entire financial system; set up a new consumer financial protection agency within the Fed; make the trading of derivatives (the financial instrument that blew up AIG) safer and more transparent; and change the way the New York Fed president, the system’s chief Wall Street overseer, is appointed. (The bank’s board, which features several Wall Street executives, currently enjoys the power to hire and fire its president; Dodd wants the New York Fed president to be a White House appointee.) 

The bill differs in certain respects from the version the House passed in December—one difference is the New York Fed provision, which the House bill lacks. But, on Wednesday, Obama told Dodd and his House counterpart, Barney Frank, that he could more or less live with either version, according to an official knowledgeable about the meeting. (Though he stressed that he’d like to combine the toughest elements of both, as with an exemption from derivatives regulation for non-financial companies, which is stricter in Dodd’s bill.) Mostly, he just encouraged them to press ahead, emphasizing the win-win dynamic at work. If Republicans dig in, the president argued, that’s a fight he’d welcome. (Administration officials have seen polling suggesting the public will assume Republicans are carrying Wall Street’s water, regardless of their arguments.) And if Republicans want to join in the effort to rein in Wall Street—well, no one at the White House would turn down a big, bipartisan victory. 

On Wednesday afternoon, Commodity Futures Trading Commission Chairman Gary Gensler appeared at the Chamber of Commerce conference not long after Wolin. Gensler has made a name for himself this last year as one of the most aggressive advocates of regulation in Washington. He delivered a typically forceful speech on derivatives, calling on the Chamber to fight for the interests of all 3 million of its members, not just the big financial institutions that seem to dominate the organization at times. On his way out, Gensler ran into the Chamber’s always-dapper president, Tom Donohue, and couldn’t resist cracking a joke—complimenting him for his prescience in scheduling the conference for the week health care reform passed. Donohue just smiled dyspeptically.

Of all the groups who’ve been caught off guard by the latest twist in the reg-reform saga, none has been more so than the banks and their Washington representatives. The big banks have been resigned to some sort of comprehensive reform for months now, but planned to make a stand on particular issues, like the consumer protection agency (which JP Morgan Chase has led the charge against), and the so-called Volcker Rule restricting government-backed banks from making speculative bets. (Goldman has taken the lead on this front.) The smaller banks were up in arms about the possibility of a string of new regulatory mandates. And all were operating under the assumption that they had a lot more time to make their case. One administration official who’s seen internal emails from a leading Wall Street lobbying group told me flatly, “They’re not ready for this to be now.”

Before health care reform passed, according to this official’s reading of the emails, the banks had assumed they could rally a group of Democrats to block any measure they deemed excessive—the kind of thing that used to pass for bipartisanship in Washington. Since health care, says the official, “Democrats are seeing the value in holding together,” and so the banks are scrambling to produce a far-inferior plan B: holding the line with all 41 Senate Republicans. The problem, of course, is that a reform counteroffensive composed entirely of Republicans looks suspiciously like the party is doing Wall Street’s bidding—precisely what the banks and the GOP want to avoid.

The fundamentals look pretty good for the reformers, in other words. Still, Democrats are guarding against overconfidence. If nothing else, there’s a concern that the banks could make inroads on some of the bill’s more arcane provisions—the details unlikely to gin up public outrage but which are fundamental to reforming the financial system. “The consumer agency, the Volcker Rule, too big to fail, to some extent the Fed stuff—they’re the meat of it. Derivatives--there’s not going to be a lot of showy big floor fights on that,” says one anxious Senate staffer.

And so the administration is keeping the pressure on. Wolin’s speech at the Chamber was positively blistering—accusing the organization of launching “a lavish, aggressive and misleading campaign to defeat the proposed [consumer] agency.” And Obama, perhaps having learned the lesson of health care reform, has urged Dodd and Frank not to dither. “With a two week recess coming--notwithstanding the acknowledgment that something’s going to happen here by Republicans on the committee--we want to continue to build momentum,” says one official. It looks like this bill is headed toward the finish line with more than just a nudge.  

Noam Scheiber is a senior editor of The New Republic. 

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