For Wall Street, financial reform legislation takes a bad turn in Senate

Wall Street is watching financial reform turn into a full-on crackdown by Washington.

Banks have spent more than a year trying to weaken legislation and win carve-outs for special industries, but the core remains. And now lawmakers are on the verge of approving a bill that is tougher in some respects than President Barack Obama’s proposal from a year ago.

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The Senate, where House bills often flail, is considering amendments that could cost Wall Street tens of billions of dollars. Senators opened debate this week as public opinion polls continue to show strong support for new Wall Street regulations.

“The old rules have been totally reversed,” said Brian Gardner, a research analyst at Keefe, Bruyette and Woods. “The world we’re all used to living with — which is the House overreaches and the Senate cools it down — is not true.”

Paul Miller, of FBR Capital Markets, said investors and the financial industry haven’t fully grasped the full power of the legislation. He said the bill could have a material impact on bank earnings. “I’m shocked about how tough it’s gotten,” he said.

Senators and House members could still move to exempt industries and alter major provisions. But the bill promises a wide range of new consumer financial protections, regulations on financial derivatives and provisions to wind down failing financial firms.

“The final story isn’t written,” cautioned Travis Plunkett, legislative director at the Consumer Federation of America. But he agreed important areas of the bill have gotten tougher with time.

Obama, congressional Democrats, consumer advocates and labor unions have spent months keeping the pressure on Wall Street. Obama himself has told banks to call off their lobbyists and vowed to fight efforts to write in loopholes and exemptions.

And while the banks have roared back from the depths of the financial crisis and are now posting massive profits, they have been unable to shake more than a year of public scorn.

Wall Street’s most storied bank, Goldman Sachs, is caught in the highest-profile inquest of the financial crisis. On the eve of the Senate taking up the financial overhaul, the Securities and Exchange Commission (SEC) charged the bank with defrauding investors.

Senators held an all-day congressional hearing this week into the bank’s practices that perhaps only deepened the disconnect between Wall Street and Washington. Goldman repeatedly denied wrongdoing; senators from both parties repeatedly bashed the bank. Both left angry.

As the bill has advanced, lobbyists have seen their battles get harder. Two weeks ago, financial, energy and agriculture lobbyists were looking at a variety of nuanced changes to regulations of the multitrillion-dollar market for complicated financial derivatives. Then came Senate Agriculture Committee Chairwoman Blanche Lincoln (D-Ark.).

Her bill wound up being much tougher than most had expected. Bank lobbyists were forced onto their heels.

The measure now pending in the Senate requires banks to spin off their derivatives desks. Neither the Obama administration nor the House sought the provision. Banks argue it would be crippling; analysts say the provision would require banks to raise billions of dollars to capitalize their derivatives desks.

The provision may ultimately be changed or taken out entirely, but the dynamic is at work in several other parts of the bill.

When the House Financial Services Committee was preparing to mark up legislation late last year, the financial industry was vigorously fighting an amendment from Rep. Paul Kanjorski (D-Pa.) that would give regulators pre-emptive powers to break up large institutions that pose a risk to the financial system.

"I pushed it as far as I thought it could go politically," Kanjorski said on Thursday. The amendment became part of legislation that passed the House.

That was before Paul Volcker, the Obama adviser and former Federal Reserve chairman, pushed for greater restrictions on big banks in January. Volcker wants to limit commercial banks from engaging in proprietary trading.

Now senators, including Sherrod Brown (D-Ohio), Ted Kaufman (D-Del.), Carl Levin (D-Mich.) and Jeff Merkley (D-Ore.), have much tougher amendments on the size and scope of big banks.

"We have just started talking with Republicans," Merkley said of an amendment he is backing with Levin. "Several of the folks I've talked with are very interested in the issue. This is not a liberal-conservative issue."

And Kanjorski is now looking at the legislation, thinking that his amendment is the "very least" that will be in the final bill.

"It’s become a populist thing," Kanjorski told The Hill. "People want to do something that actually has an impact. When you look at the entire proposal, as it was presented to the House and Senate originally, it was materially lacking because everyone was talking about bailout but there was no mechanism to stop the bailout."