It’s no time to cave to the banks.

Going into the Senate debate over financial reform, a cynic would have offered the White House the following advice: Fight aggressively on the proposed consumer agency and settle for the appearance of reform on the rest of the bill. After all, most of us can understand the difference between a powerful new consumer watchdog and a token reshuffling of the bureaucracy. But few Americans grasp the difference between, say, strong derivatives regulations and weak ones. Which meant there was little political upside to facing down Wall Street on such issues, and plenty of campaign cash to lose.

To its credit, the administration resisted this temptation. Both publicly and behind the scenes, it insisted on reining in the market for derivatives—bets on the price movements of other assets, like stocks and bonds, which helped trigger AIG’s collapse. It also worked hard to pass the so-called Volcker Rule, which would block some banks from placing risky bets for their own bottom line, known as proprietary trading. As a result, the bill the Senate approved last month was far tougher in many respects than what the House passed in December.

Over the next few weeks, members of the House and Senate will huddle to iron out their differences. It goes without saying that Wall Street will push for the weaker approach on each issue. What remains to be seen is how the administration will respond. Given the largely closed-door nature of the conference committee, administration pressure may be the only force capable of keeping the legislation intact and bolstering it where necessary. If the substance of the final bill falls short, it will likely be because the administration acceded. And it will be all the more objectionable for having occurred out of public view.

Take derivatives, a type of financial instrument that generates billions in profits each year for the country’s biggest banks. During the boom, one kind of derivative—known as a credit default swap—allowed AIG to place huge bets on the real-estate market. As long as the market was rising, AIG pocketed gobs of revenue. But, when housing went belly-up, AIG was on the hook for billions in payouts. Unfortunately, it hadn’t set aside much cash to cover this possibility, which meant the losses threatened not only the company itself, but everyone it had bet with. To mitigate this problem, the House and Senate have mandated that both sides of such contracts post collateral to a middleman known as a clearinghouse. The clearinghouse could then make a company’s betting partners whole even if the company failed.

The big banks are understandably cool to this change—research by the IMF suggests the regulations could require hundreds of billions more in collateral. The banks have also resisted putting derivatives onto exchanges, which would boost transparency but slash the margins they make connecting buyers and sellers. In both cases, they’ve spent the last year prying open loopholes. The House bill contains a variety of them; the Senate version remarkably few.

The good news is that the administration has vowed to beat back exemptions. “We don’t like carve-outs,” one White House official told reporters on a recent call. The bad news is that the most emphatic of these pledges have come in the context of the consumer agency, the subject of the official’s remark. We hope she and her administration colleagues are just as insistent when it comes to derivatives. Likewise for the Volcker Rule, whose place on the conference committee table is even more precarious. The idea is to eliminate proprietary trading at banks that benefit from government support, such as federal deposit insurance, so that taxpayers don’t have to cover what are essentially betting losses. The House bill doesn’t include a bona fide Volcker-type measure; Senate Republicans blocked a relatively strict version put forth by Carl Levin and Jeff Merkley. The result was a mealy-mouthed provision that could give regulators the right to disregard key elements of the Volcker Rule.

In fairness, administration officials did labor to help craft the Levin-Merkley amendment. But they’ve since suggested that the weaker language could suffice. Even if true in principle, we don’t share their optimism—the current statute has too many slippery phrases like “subject to . . . recommendations and modifications.” We’d like to see the administration keep fighting. 

All of which is to say that we’re at another moment when the crass political play is obvious: The administration has rightly won acclaim for championing a tough bill in the Senate. Its reformist credentials established, there’s little additional upside to finishing the job in conference. The problem is that, substantively, getting a strong bill only 90 percent of the way home is no better than pushing a weak bill from the get-go. The White House has rejected the cynics’ advice so far; now would be a lousy time to heed it. 

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