The Huge Looming Fight Over Financial Regulations

Today's the anniversary of 9-11, I guess. Why don't they just make it the following Monday and give us all a three-day weekend?

But another anniversary looms around this same time. On September 14, 2008, Lehman Brothers collapsed, and it sparked the biggest financial crisis since the Great Depression. America and other countries committed trillions in resources to keep the biggest banks afloat, and as a result we have rescued the system without fundamentally changing it or ensuring that the same bubble-and-crash couldn't happen again. Instead of taking advantage of the crash and responding to the bailout by immediately moving to financial regulatory reform, to prove that the banksters weren't getting free reign, the Administration waited, and is now trying to move forward without the urgency created by the crisis. Which is why you see high-fiving in the financial media that this regulatory reform effort will not succeed.

Large staffs of lobbyists with powerful financial interests behind them will use time-honored techniques to water down or kill anything that would drain profits and force the banksters to stop gambling with our money. The same interests killed a proposed Consumer Protection Agency in the 1970s with irrational fears about how it would harm ordinary Americans. And in the Senate, that same kind of coalition is forming to kill the Consumer Financial Protection Agency proposed by the Administration.

Nonetheless, I have a couple reasons to be optimistic, as this article in The Hill was the other day. First of all, the push to empower the Fed as a single regulator for a banking sector that it basically is enjoined to has faded rapidly.

The Obama administration's vision for revamping the nation's financial regulatory system could face significant revisions in the Senate, where proposed reform legislation departs from the White House proposal on several key points, according to staff members, lobbyists and a lawmaker briefed on the plans.

A bill taking shape in the Senate Banking Committee could give the Federal Reserve far less authority than the administration sought in the reform proposal it unveiled in June. Senators on both sides of the aisle have expressed a lack of confidence in the Fed in the wake of the financial crisis, challenging everything from the central bank's transparency to its ability to protect consumers.

Some lawmakers oppose giving the Fed responsibility for monitoring systemic risk in the economy, as proposed by the administration, favoring instead vesting that authority with a council of regulators.

"We really do take what the administration did as advisory. We have our own ideas," said one Democratic staff member familiar with the legislation who was not authorized to speak on the record. "We've been thinking about this a long time."

The second reason why I'm sanguine is that the Justice Department is finally stepping up with enforcement - and I think AIG represents the beginning, not the end.

U.S. investigators are probing the former head of American International Group Inc's (AIG.N) Financial Products unit, Joseph Cassano, and other executives for securities fraud, a law enforcement source familiar with the case said on Friday.

The source said that a grand jury may be impaneled this month in New York to consider potential charges that executives failed to disclose the value of toxic assets to the bailed-out insurance company's outside accountants and shareholders.

"The investigation is really who knew what and when about these assets," said the source, who asked not to be identified because the probe was ongoing. "They were holding toxic credit default swaps and may not have disclosed their real worth."

I don't think there's a single part of this sector that couldn't be probed in the same way. Look at this horrow show of overdraft fees on debit cards, for example. You cannot literally promise lighter enforcement in exchange for tighter regulation, but I think the firms get the message.

This actually will be a more expensive fight than health care reform in terms of lobbying, once everyone gets down to it. Chris Dodd's centrality to it while he fights for his political life is a bit worrying, but he's not the real problem here. It's the Mark Warner types who can deep-six anything meaningful.

...Yves Smith is not so hopeful.