Is Obama Really Serious About Financial Reform?

Barack Obama is off pursuing his latest passion, nuclear disarmament, flying to Prague this week for the signing of the new START agreement and then attending the Global Nuclear Security Summit to be convened in Washington starting April 12. Oh, and by the way, the president is telling Rep. Barney Frank and Sen. Chris Dodd offhandedly, he'd also like to sign their financial-reform bills by Memorial Day. Later, guys! It is yet another sign that Obama has other priorities, even as he's rhetorically still attacking the titans of Wall Street.

Which leaves, as the only remaining scourge of Wall Street, none other than ... Phil Angelides. The Nancy Pelosi crony who is head of the Financial Crisis Inquiry Commission has scheduled his second set of public hearings this week. Angelides will attempt to deconstruct the fall of Citigroup by putting former execs Robert Rubin and Chuck Prince before the cameras. But as NEWSWEEK reported last year, Angelides's commission has been hurt by dissension and a slow start, and its chairman has been dogged by questions over his fundraising practices while California treasurer.

The White House insists the president is still intent on fundamental financial reform. "Members of the economic team have been out in full force on this issue delivering speeches on the need for strong reform, fighting efforts from trade groups and lobbyists to weaken and kill the [Dodd] bill," an administration spokesman said. Still, despite previous promises that Obama would turn his full attention to financial reform after health care—for which, recall, he postponed an important trip to Asia—all signs are that he continues to leave the issue entirely to Treasury Secretary Tim Geithner and the administration's chief economic adviser, Larry Summers. This duo, in turn, seems willing to let the Senate do what it wants as long as it doesn't get too specific in placing new restraints on Wall Street. Rather than putting new rules into law that will break up the banks or restrict them from certain risky practices, Geithner and Summers are banking on the same financial regulators who fell asleep last time, expecting they will use their discretion appropriately to keep an eye on things in the future. As evidence, consider Geithner's letter to Rep. Keith Ellison, who recently asked for advice on what kind of leverage requirements to put into the bill. None, Geithner replied. "We do not believe that codifying a specific numerical leverage requirement in statute would be appropriate," Geithner wrote. To impose "fixed, numerical capital requirements in statute," the Treasury chief added, would only create an "ossified safety and soundness framework."

Summers, meanwhile, told ABC's This Week on Sunday that the Dodd bill contains certain requirements that institutions have much more capital so they won't need to be bailed out. But in fact the language of the Dodd bill leaves it entirely up to the Fed's Board of Governors to decide "prudential standards" for "risk-based capital requirements, leverage limits, liquidity requirements, a contingent capital requirement, resolution plan and credit exposure report requirements, concentration limits, and overall risk management requirements." Similarly, the Senate bill says the "Volcker Rule" that the president declared he would fight for in January—restricting federally guaranteed commercial banks from proprietary trading—will be left to the discretion of the new Financial Stability Oversight Council.

As Paul Volcker pointed out in remarks to the Peterson Institute for International Economics on March 30, there's a danger in leaving things uncodified in law. Regulators can take years to figure out what they want to do—witness the more than decade of negotiations over the Basel II capital standards—and they can be swayed in good times by "experts" who seek to assuage them that firms will do just fine. "I do not believe we can or should rely on supervisory discretion," said Volcker. Sen. Ted Kaufman of Delaware, who's almost the only senator still digging in against the legislative givebacks to Wall Street, made a similar point in a recent speech: "Chastened regulators may try in the coming years to be harder on the megabanks, to increase their capital requirements, and to keep a close eye on their liquidity levels, liabilities, and leverage ratios," he said. "But even if they do, history has shown us that the tango will reach the end of the dance floor, and the big banks will execute the turn and lead again, leaving our regulators hopelessly aside in understanding the complex and opaque transactions that interconnect the giant banks." Asked to respond, Assistant Treasury Secretary Michael Barr told me that markets will "undoubtedly evolve" beyond what any law says and added, "We are pushing for new global capital standards this year." He said these "will be more robust, higher and better quality, less procyclical, and include global agreement on a leverage ratio."

Volcker, the august former Fed chief, has had an on-again, off-again relationship with Obama, who has alternately ignored him and embraced his sometime adviser over the last two years. What's most disturbing, however, is the president's on-again, off-again focus on financial reform. Despite its arcane nature, the issue is still a politically hot topic as we head into a fall election with the economy still rocky and Wall Street apparently still unrepentant and unrestrained. "Everybody's just deferring to Summers and Geithner. Doesn't the president realize he's got a big flank exposed here?" says one Democratic staffer who is pushing for tougher restrictions on Wall Street. "We get through health care, we finally have the opportunity to do something positive on Wall Street reform and we just go ahead and focus on nuclear disarmament and climate change?"

The bottom line is that apart from a new "resolution authority" used to take over and liquidate failing nonbanks—a power that is likely to affect what happens only after the next crisis hits—the Dodd bill is fast turning into a nonevent. And that may become more likely if the Connecticut senator seeks yet again to compromise with Republicans, watering down the bill further (for example, by stripping the Consumer Financial Protection Agency, which Dodd has already housed at the Fed in deference to the GOP, of some of its independent powers). Compromise will become the easier path as the economy gradually improves, the memory of the Wall Street–engendered crash recedes and Dodd approaches his retirement desperate for a legacy. "We're gonna wake up one day, tomorrow or two weeks from tomorrow, and there's going to be a deal between Dodd and the Banking Committee Republicans," the Democratic staffer says. And that will be the end of reform. One can only hope the president realizes what's at stake.