By Alexander Bolton - 05/31/12 09:00 AM EDT
Senate Democratic leaders have shown little appetite for taking on Wall Street before Election Day, despite urging by one of their star recruits, Massachusetts Senate candidate Elizabeth Warren.
Warren has called on Congress to resurrect the 1933 Glass-Steagall Act, which established a firewall between investment banks that traditionally specialized in speculative trades and commercial banks that historically earned money primarily from lending.
Senate Democratic leaders have carefully avoided a major confrontation with Wall Street this year, when millions of dollars are already flowing to Republican-allied super-PACs from anonymous donors.
Many Democrats are already squeamish about President Obama's campaign attacks on Mitt Romney's career at private equity firm Bain Capital, worrying they are being seen as attacks on Wall Street.
“We didn’t get Glass-Steagall in the big reform,” said Robert Weissman, president of Public Citizen, which supports stronger federal regulation. “That and many other limitations of Dodd-Frank are testament of the power of Wall Street.
“I don’t think the JPMorgan debacle is sufficient to overcome the political power of Wall Street. It’s going to come from some combination of more financial crisis and grassroots demand,” he said.
Critics of Wall Street’s trading practices believe the law’s repeal ultimately led to the 2008 financial crisis and still poses a serious risk to the economy.
They cite the recent revelation that JP Morgan lost at least $2 billion and possibly much more over the course of a few weeks because of a massive bet.
Former Sen. Byron Dorgan (D-N.D.), who was the Senate’s most outspoken defender of Glass-Steagall while in Congress, said Warren should expect a forceful pushback.
“It’s very hard because you’re taking on Wall Street, and Wall Street has substantial clout in Congress,” he said. “They were able to substantially dilute Dodd-Frank. Even what it required was fought bitterly by Wall Street. It will be hard to get it done but not impossible.
“There are plenty of members of the caucus who believe you have to re-impose Glass-Steagall,” Dorgan said.
It is one of the few proposed reforms of Wall Street to draw bipartisan support.
Sens. Maria Cantwell (D-Wash.) and John McCain (R-Ariz.) introduced legislation in 2010 to restore the safeguards of Glass-Steagall and Sen. Richard Shelby (Ala.), the ranking Republican on the Banking Committee, voted against the repeal of Glass-Steagall in 1999.
For more than six decades, the law prohibited commercial banks from engaging in the risky trading business of investment banks, containing the national economic impact of financial meltdowns. The lack of a firewall in 2008 allowed big commercial banks such as Citibank to get sucked up in the financial crisis, freezing the credit businesses rely on.
Some advocates of re-enacting Glass-Steagall believe doing so could become politically viable if Republicans such as McCain, Shelby and Sen. Bob Corker (R-Tenn.), a reform-minded member of the Banking Committee, sign on to the effort.
But Wall Street banks are strongly opposed to further regulation and have focused their lobbying power on watering down the impact of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
Ed Mierzwinski, consumer program director at U.S. PIRG, said New York Sens. Charles Schumer (N.Y.), the third-ranking Senate Democratic leader, and Kirsten Gillibrand (D-N.Y.) could oppose any effort to reestablish Glass-Steagall.
“You wouldn’t get all the Democrats, and I don’t know if you’d get the Democrats from New York. The Democrats from New York would be under a lot of lobbying pressure,” he said.
Passing Glass-Steagall legislation through the Senate would require the full support of the Senate Democratic leadership and Bartlett Naylor, financial policy advocate at Public Citizen, said he has not seen any desire by leaders to take up the fight.
“I haven’t seen it,” he said.
Democratic leaders may calculate such a battle is not worth the political cost, given Republican control of the House.
House Republicans, who are attempting to repeal parts of the 2010 reform, would block Glass-Steagall-type legislation from reaching Obama’s desk.
Naylor said the focus by Senate Democrats such as Sen. Carl Levin (D-Mich.) is to ensure regulators do not water down the Volcker Rule, which Congress passed as part of Dodd-Frank, and to beat back efforts by House Republicans to undo the 2010 reforms.
Reinstating Glass-Steagall would represent a whole higher order of regulatory assertiveness.
Weissman, the head of Public Citizen, said the Volcker Rule, which bars banks from risking their own assets in speculative investments — with certain exemptions — does not go far enough.
“The Volcker Rule is Glass-Steagall light,” he said. “We need something more aggressive. We don’t know how the Volker Rule implementation is going to turn out. We’re pushing for the best outcome and there’s a lot of pressure on agencies to peal it back.”
The Volker Rule is designed to prevent banks from risking the assets of depositors and their own financial demise by making big bets.
Warren and other advocates for greater regulation say there should be a clean break between speculative and commercial banking activities.
"JP Morgan's recent losses show that there are still serious risks in our banking system, and if we don't act, then the next trade that goes bad could threaten our whole economy," Warren said in a statement last month.
"A new Glass-Steagall would separate high-risk investment banks from more traditional banking. It would allow Wall Street to take risks, but not by dipping into the life savings and retirement accounts of regular people," she said.
Barbara Roper, director of investor protection for Consumer Federation of America, said J.P. Morgan’s massive loss has “supplied a bit of a wake-up call” and said Warren “is concerned about moving risk out of banks.”
Roper said she does not see “any evidence right now that there’s a new wave of support building” for Glass-Steagall but predicted if regulators fail to effectively implement the Volcker Rule, “you could see revived interest on the Democratic side.”