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Parsing Obama's Wall St. Speech

[Guest post by Noam Scheiber:]

Substantively, there wasn’t a ton of news in Obama’s Wall Street speech earlier today. Certainly the proposals were familiar to anyone who’s followed the debate these last few months.

Politically, there were two important signals. First, it appears that the administration is beyond the demonization phase of its campaign for financial reform. Instead, what we saw today was vintage Obama unity. I don’t have the precise text of the speech in front of me, but my notes show that he used the phrase “urge you to join us”—as in, urging Wall Street to help enact reform—at least twice. He waxed lyrical about the “power of the free market” and stressed the “legitimate role” that financial instruments like derivatives play in the real economy.

Sure, there were a couple of low-intensity jabs—addressing the bank executives in attendance, he quipped about the crush of lobbyists in Washington who “work for you.” Obama also closed by reading from a June, 1933, Time magazine piece in which bankers screamed that the recently-created FDIC—now one of the most lovable agencies in Washington—would “rob them of their profession.” But, all in all, this sounded like a president who’s ready to cut a deal if he can get 80 percent of what he wants.

Second, it was telling that, when it came to specifics, Obama led off with "resolution authority." This is the provision that would give an administration the power to take over a failing megabank, fire its managers, wipe out its shareholders, sell off its assets, and even imposes losses on creditors. That would be an improvement over the status quo, in which the government has to choose between letting a megabank fail or bailing it out, though there’s some ambiguity about how resolution authority would work in practice.

The catch is that, because unwinding a big bank this way could take months, the bank would need a kind of bridge loan to keep operating in the meantime.* As written, the Senate bill would raise $50 billion through a fee on big financial firms to cover these bridge-financing needs. Predictably, Republicans have seized on the idea of such a fund as the bill’s soft underbelly, insisting it’s designed to institutionalize bailouts. (What makes the charge especially annoying is that the provision was basically hashed out by Democrat Mark Warner and Republican Bob Corker.)

But the flip side of the fact that Republicans are focusing all their attention on resolution authority is that they’re implicitly endorsing the rest of the financial reform bill—which covers everything from a new consumer protection agency to tough derivatives regulations. That leaves the White House and congressional Democrats with a huge opening: If they can just knock the leg out from under the “permanent bailout” critique, the GOP’s rhetorical opposition to the entire bill will collapse.

And that’s what Obama was essentially trying to do today. He explained that the idea is to respond to a future Lehman Brothers or AIG “in a way that doesn’t force taxpayers to pick up the tab,” and ensures that “customers and taxpayers are protected.” He noted that the idea would be to “recover all the money—every dime” and derided the permanent bailout mantra as something that “makes for a good sound-bite but is not factually accurate.”

If this rhetorical push on resolution authority succeeds—and it sounds like Obama is taking his pitch on the road over the next several days—then I’d expect the administration to have a very strong hand going into the financial reform endgame. That 80-percent deal would start to look a lot more like a floor than a ceiling.

*A big bank needs to keep operating will its being unwound because shutting down, as Lehman did, would separate creditors from their money for months, risk a financial panic as they raced to withdraw it from other institutions.