Reality dawns for Republicans over Wall St

Reality dawns for Republicans over Wall St
By Edward Luce in Washington
Copyright The Financial Times Limited 2010
Published: April 22 2010 19:34 | Last updated: April 22 2010 19:34
http://www.ft.com/cms/s/0/43382258-4e3a-11df-b48d-00144feab49a.html


Until this week, the Republican party hoped it could turn Barack Obama’s financial regulatory reforms into another healthcare saga. By defeating a signature White House effort, the Republicans would thereby damage Mr Obama.

Somewhat belatedly, the Republicans have awoken to the fact that healthcare arguably ended up being their “Waterloo”, in the words of David Frum, a former speechwriter for George W. Bush, rather than that of Mr Obama, who managed last month to scrape the healthcare bill through the House of Representatives by three votes.

Perhaps more importantly, Mitch McConnell, the Republican Senate leader, has in the past few days signalled recognition that Wall Street reforms – and the stronger rhetoric accompanying the Democratic push for the bill – is popular with the public in a way healthcare reform never was.

“Senator McConnell realised that the impression he was helping Wall Street was playing badly with the Tea Party movement, which is populist on this issue,” said Norm Ornstein at the conservative American Enterprise Institute. “McConnell also realised that it was going to be very difficult to keep the Republican caucus united in opposition to the Wall Street bill.”

A key turning point took place on Wednesday when Chuck Grassley, the Republican senator from Iowa, who serves on the agriculture committee, voted for a measure that would toughen up the regulation of derivatives – a step that Mr Obama on Thursday described as “encouraging”.

In the same way that Mr Grassley’s agonised opposition to any healthcare compromise doomed bipartisan efforts last summer, his support for a stronger version of derivatives regulation signalled the opposite. Unsurprisingly, therefore, Mr Obama’s speech to Wall Street yesterday sounded more like a victory lap than one of his customary last-ditch pleas for bipartisan co-operation.

Indeed, the way the president has handled financial regulatory reform, which looks likely to be passed in the next four to six weeks, is almost the inverse of how he handled healthcare. Many liberal supporters of Mr Obama backed the policy contents of the healthcare bill but believed he mishandled the politics, particularly the political narrative.

They are saying the opposite about financial reform. The White House has sharpened its language, for example by talking of “Wall Street reform” rather than “financial regulatory re-form” and by targeting what Mr Obama said yesterday was the “furious efforts of industry lobbyists”.

And yet many believe the bill’s contents are too diluted to make a big difference to how Wall Street will operate. They point to the fact that the bill “rewards regulatory failure” by giving the US Federal Reserve more powers even though it was widely seen as having failed to enforce existing regulations during the sub-prime crisis.

They also highlight the absence of any measures to limit the size of the largest “too big to fail” financial institutions. And they point out trading in “unique” derivatives, which are almost certainly the most complex and most dangerous type of instrument, will escape the requirement of being shifted on to clearing houses.

“What we have here is a big missed opportunity to overhaul the financial sector’s domination of the US economy and Washington,” says Dean Baker, head of the Centre for Economic and Policy Research, a liberal think-tank. “There is nothing in this bill to suggest that Wall Street will not continue to capture the regulatory agencies in future.”

Whether Mr Obama will come to rue this alleged missed opportunity, in the way that Bill Clinton, talking to ABC News last Sunday, regretted not having chosen to regulate derivatives in the 1990s, is anybody’s guess. But the short-term politics of another big legislative victory ought to boost his party’s bleak outlook for the November congressional elections.

Another legislative success is likely to embolden the White House to push for more reforms, including a clean energy bill, another jobs bill and possibly even an effort to revive immigration reform.

Healthcare reform had no discernible effect on Mr Obama’s low approval ratings, which remain below 50 per cent according to Gallup. Democratic pollsters are hoping a victory over Wall Street, even if more apparent than real, would gain him more political traction. “This bill looks more like a placebo than a radical reform of Wall Street but President Obama is on the right side of populist sentiment this time,” says Michael Lind, a political analyst at the New America Foundation.