Where financial regulation goes to die

Don't blame Obama for a failure to crack down on Wall Street. The Senate is the real villain

Published February 12, 2010 7:58PM (EST)

When President Obama nominated Gary Gensler for the job of Chairman of the Commodity Futures Trading Commission, the outcry from the left was immediate, and, on first glance, utterly justified. Not only was Gensler an 18-year veteran of Goldman-Sachs, but during a stint at the U.S. Treasury during the Clinton administration he fought hard for the passage of the Commodity Futures Modernization Act -- one of the critical pieces of enabling legislation allowing derivates markets to run wild. Bernie Sanders, I-Vt., even put a hold on his nomination, releasing it only after Gensler made a commitment to aggressively push for derivatives regulation.

A long and detailed Bloomberg News story by Ian Katz and Robert Schmidt confirms what the econoblogosphere has been saying for months: Gensler has become the Obama administration's toughest crusader for regulatory reform -- with a special focus on derivatives. Significantly, he's won plaudits from both Brooksley Born, a former CFTC chair, and Michael Greenberger, a former CFTC staffer, who were both on the losing side of the derivatives regulation battle in 1999 and 2000 and who have been saying "I told you so" ever since.

Read the Bloomberg piece for the full details. The point I want to make here is that Gensler is an example of an executive decision made by the White House that should please anyone who wants to see Wall Street irresponsibility reined in. Just as Obama's appointments at the EPA and Energy Department are working every day in pursuit of goals that environmentalists and renewable energy advocates share, so too is Gensler moving forward on the financial front.

But now let's turn our attention to the Senate, where any meaningful legislation on regulatory reform or energy or the environment or anything else must negotiate a landscape where White House goals hold rather less sway than they do in Cabinet departments or regulatory agencies.

Example #1: Bloomberg is also reporting that "Lobbying May Push Fiduciary Rules for Brokers Off Reform Agenda":

Consumer advocates want brokers to play by the same rules as investment advisers: Specifically, they should have the legal responsibility to make sure that their client comes first, rather than their company. But the prospects for any such rules being included in upcoming legislation seem dim.

Tim Johnson, the South Dakota Democrat in line to become the next chairman of the Senate Banking Committee, is circulating a proposal that would drop the so-called fiduciary standard for brokers from the panel's reform package, according to a copy obtained by Bloomberg News. Johnson instead proposes that the U.S. Securities and Exchange Commission conduct an 18- month study to see if there's need for a new broker standard.

An 18-month study! Johnson, incidentally, was the only Democratic Senator to vote against the Credit Card Reform Act passed in 2009.

Example #2: Bloomberg completes the regulatory trifecta in "Obama's Consumer Agency Imperiled by Senate's Bipartisan Talks":

Republican Senator Bob Corker's decision to work with Senate Banking Committee Chairman Christopher Dodd may speed passage of a financial overhaul bill at the expense of President Barack Obama's biggest goal: a standalone Consumer Financial Protection Agency....

"Everybody knows that a freestanding agency is a non- starter," Corker, a Tennessee Republican, said yesterday in a telephone interview after announcing he would work with Dodd.

Everyone? Really?

Bloomberg's Alison Vekshin also reports that the so-called Volcker rule is likely doomed: "Senators are unlikely to include an Obama proposal to bar banks from running proprietary trading operations solely for their own profit and sponsoring hedge funds and private equity funds, according a person familiar with Senate discussions."

Huh. I thought Chris Dodd "strongly supported" the Volcker rule. Oh well. And what does all this mean for Gensler's push for tighter regulation of derivatives? The prognosis is grim, and it's hard to see what in the world Obama can do about it, other than threaten to veto legislation that doesn't go far enough -- a scenario that might allow for some moral satisfaction, but will achieve nothing, practically.

By Andrew Leonard

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

MORE FROM Andrew Leonard

Related Topics ------------------------------------------

Bank Reform How The World Works