Why Goldman-Sachs has nothing to fear

Obama's reform proposals are too weak to do anything and too strong to become law

Published February 3, 2010 6:20PM (EST)

Most serious discussion of the new proposals for regulating the financial sector floated by President Obama in January focuses on the problem that they are likely too weak. Felix Salmon and Yves Smith both have pointed out that the so-called Volcker rule restricting proprietary trading by banks that are backstopped by the federal government can be easily avoided by the likes of Goldman-Sachs.

The Volcker rule would reduce some risk taking, but not by the entities most likely to destabilize the global financial system. As Salmon bemoans, "My feeling is that the Volcker rule probably won't make its way into law, and that it'll be largely toothless if it does."

But if it's going to be "largely toothless," why are its prospects for making its way into law so meager? Could it be that Congress doesn't want to waste time on legislation that won't accomplish anything?

Not exactly. In the Senate, Obama's proposals are viewed, by influential members of both parties, as overkill.

The New York Times reports that Chris Dodd, D-Conn., despite avowing "strong support" for the Volcker rule, also seems to believe that attempting to pass it will kill any chance that reform legislation will pass.

Mr. Dodd, Democrat of Connecticut, added that the administration was "getting precariously close" to excessive ambition for the legislation. "I don't want to be in a position where we end up doing nothing because we tried to do too much," he said.

The Wall Street Journal catches him in an even more plaintive mood.

Mr. Dodd indicated Tuesday that he wasn't willing to act without Republican support for a financial-overhaul bill. "I don't want to go to the floor of the United States Senate begging for a 60th vote," he said.

Looking for bipartisanship? The Senate Banking Committee is full of it, with Republicans and Democrats speaking with one voice (also from the WSJ).

Also at Tuesday's hearing, several Republicans accused the White House of regulatory overreach. "What we're doing here is we're taking this financial reform, and we're expanding it beyond where we should be," said Sen. Mike Johanns (R., Neb.). "I just question the wisdom of that."

And there you have it: The White House's efforts to push financial regulatory reform manage to pull off a truly marvelous feat: The proposals are too weak to significantly guard against a repeat of the financial crisis, and too strong to get 60 votes in the Senate.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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