Why Isn't Obama Leading Financial Reform?

Last year Barack Obama journeyed all the way to Copenhagen to promote his home town, Chicago, for the Olympics (with no success). A few months later, he flew back to Denmark's capital to push for a global deal on climate warming (with only partial success). And these days Obama is stumping all over the United States for health-care reform. So why is Capitol Hill seemingly too great a distance for the president to travel in order to rein in the robber banks of Wall Street?

You won't be hearing a lot this week about financial reform, even though Senate Banking Committee Chairman Chris Dodd announced his long-awaited bill on Monday, minus all Republican support. Instead, you will continue to hear mostly about health care, which by popular acclamation and the White House's tacit assent has become the litmus test of success or failure for the Obama administration.

This is more than a little strange, since it wasn't the lack of proper health care that almost destroyed the global economy a little over a year ago. It isn't insufficient health care that's threatening to disrupt the biggest single market in the Western world right now (the Eurozone). No, the culprit was, and is, an out-of-control financial system that is resisting all efforts at fundamental change. Yet the White House has permitted this truly global challenge to be championed by a handful of obscure legislators on Capitol Hill and poorly resourced if gutsy regulators such as Gary Gensler, chairman of the Commodity Futures Trading Commission. Together, against Wall Street's army of lobbyists, these outnumbered champions are mounting an offensive that presently looks about as promising as the Charge of the Light Brigade. And yet the big guns of the Obama administration—starting with the president himself—have been only sporadically engaged.

White House and Treasury officials assure me that's about to change. "This continues to be a top priority for the president and we're looking forward to taking every step we can to move the process forward," says White House spokeswoman Jennifer Psaki. "Certainly that means speaking publicly about it as well as working behind the scenes." Obama himself, in a statement issued just hours after Dodd's announcement, lamented that "the same failed system that brought on this crisis remains in place" and said "we cannot wait any longer for real financial reform." The administration's MO has been to let Capitol Hill sort out the details on important issues, including financial reform, health care, and climate change, even though that strategy has had meager results so far.

But it's striking the degree to which the Obama team deemphasized financial reform and put other priorities first once it felt that the economy had stabilized. The last time the president jumped into this issue with both feet was January, when he held a press conference to announce that he was suddenly embracing the ideas of a man he had largely ignored for a year, former Federal Rerserve chairman Paul Volcker. Obama said he wanted to bar federally insured banks from risky trading and restrict the size of the biggest banks, declaring that if "If these folks [Wall Street, that is] want a fight, it's a fight I'm ready to have."

But that was two months ago. Now he's spending all his time fighting for health care, even as Dodd is apparently scrapping on his own for his bill's life. And Dodd, retiring next year, is plainly close to panicking about the possibility of failing to pass financial reform before he leaves office. On Tuesday he called for the Senate to work through Easter recess. Dodd's main concern is what he calls "the 101st senator. And that is the clock. And particularly in an election year." Dodd figures that between the Easter-Passover break, the August recess, and the toxic politics that will consume the fall election, he has no more than 60 legislative days left in the year. "The time is shrinking to get this done," he said.

His proposals appear to be shrinking too, in a bid to gain even one Republican vote, though overall the 1,336-page Dodd bill is impressive in its detail and scope. The Consumer Financial Protection Agency, which Obama has said he was committed to, will be tucked inside the Fed, but if approved as it is proposed, it would have sweeping powers. Dodd is leaving the details of the "Volcker rule" to be defined later on, and he has done a virtual 180 on the future role of the Fed (his original "working draft" reduced the Fed's influence; the new bill expands its influence. The language on what kinds of exemptions will be granted for derivatives trading—a major sticking point of the House version and crucial to real reform—will also be hotly contested.

Meanwhile, the administration is spending much of its time kibitzing on Wall Street's behalf, taking the banks' side against Europe, which has erupted over the U.S. financial industry's role in helping countries like Greece disguise their debt. Dodd won't say this, of course. In a news conference last week he insisted he had full administration backing. "The administration cares deeply about this bill, and they want a bill. And we're constantly in touch with them," Dodd said. He said he talked almost every day with Treasury Secretary Tim Geithner and White House chief of staff Rahm Emanuel, who is constantly badgering him about the bill's status.

But the actual effort is being conducted like a war without a general. The president needs to be leading not just on Capitol Hill, but globally. The G7 and the G20 continue to drift, and now squabbles have broken out between Geithner and the European ministers, prompting Geithner to warn last week against protectionism that would harm U.S. private equity and hedge funds. Global generalship is desperately needed in part because there remains a cultural difference in the way Washington and Europe see solutions to financial-system problems. The Obama administration wants curbs on capital that will make it more expensive for banks to be big; the Europeans don't have as much of a problem with the size of their huge banks but want to curb speculation instead. Hence, if left to their devices, European regulators might place an outright ban, for example, on "naked" credit default swaps (where the holder of the swap doesn't have to hold any of the underlying debt he is betting on), the kind that speculators are using to bet against Greek debt. That sounds good, except that if these instruments were banned outright then it's highly possible the markets would simply sell Greek stocks short, which would be worse.

What needs to be addressed is not so much what kind of products are out there but the way they are traded. The real mischief occurs when credit default swaps and other arcane derivatives are privately negotiated out of sight of regulators. That's when the Street can play its customers for patsies, and purvey super-risky products that would normally alarm markets. Indeed, if these products were traded on open exchanges rather than behind closed doors in corporate suites, then it's likely the market system would purge the worst and riskiest of these trades simply by exposing their flaws. But that would cost Wall Street its enormous profit margins, and the bank lobby is out in force to create loopholes that will allow it to continue with trillions of dollars worth of off-exchange trading.

A Treasury spokesman indicated that Geithner would soon take up the leadership role so desparately needed, but when and how remain a little unclear. With or without health care, the executive branch can't begin talking about this soon enough.

Michael Hirsh is also the author of At War with Ourselves: Why America Is Squandering Its Chance to Build a Better World.