Financial Overhaul Advances

March 23, 2010

Wall Street Journal

DAMIAN PALETTA

Democrats advanced legislation to rewrite financial rules without Republican support as part of a broader strategy by the Obama administration to pressure the GOP to vote on the regulatory overhaul.

The 13-10 vote in the Senate Banking Committee comes as Republicans and business groups rethink their strategy about how to shape or derail the financial bill, which some of them argue would reduce credit and potentially cost U.S. jobs. Some Republicans have faulted the White House for pressuring congressional Democrats to push forward without a bipartisan deal.

"Have things been about as dysfunctional as they could be as far as things coming out of committee?" asked Sen. Bob Corker (R. Tenn.). "Yes, and certainly there's plenty of fault to go around."

Treasury Secretary Timothy Geithner, in some of his most forceful comments to date, warned on Monday policymakers and the public to "be careful whose voice you listen to" in the debate over new financial rules. His comments, in a speech at the conservative American Enterprise Institute, appear squarely aimed at Wall Street executives and other business leaders who have warned about the unintended consequences of the bill.

Mr. Geithner's pitch came a day after the White House cleared a huge hurdle by marshaling its overhaul of the health-care system through the House of Representatives. With that debate largely settled, much of Washington's focus is expected to shift to reworking financial-market rules. In an illustration of the White House's growing presence in the process, close to 10 administration officials sat through the Senate panel vote.

Democrats and White House officials, emboldened by the belief they have public support for efforts to rewrite financial rules, have intensified their push in recent weeks. They have stepped up their warnings about the consequences of inaction, with Mr. Geithner saying Monday that "risk will build up again … and future governments will have to act again to socialize private losses in the interest of preventing catastrophic damage."

Deputy Treasury Secretary Neal Wolin is expected to make a similar pitch later this week in a speech before the U.S. Chamber of Commerce.

"I urge those in the Senate who support these efforts to resist pressure from those who would preserve the status quo and to stand up for long overdue reform that will protect American families and the long term health of our economy," President Obama said after the committee vote.

The growing pressure from the administration comes as Republicans shift their approach. On Friday afternoon, Republicans filed more than 200 amendments to the bill written by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) to overhaul financial regulations. On Monday, in a surprise move, they withdrew all the amendments, essentially letting the bill advance with just Democratic support.

The move came as part of an agreement between Mr. Dodd and Alabama Republican Sen. Richard Shelby to continue working on a bipartisan deal. "It is not our intention to turn this mark-up into a long march, offering hundreds of amendments that will inevitably be defeated," Mr. Shelby said.

Republicans have made clear that a key part of their strategy is to hold all 41 of their members together to retain leverage in negotiations. Sen. David Vitter (R., La.) said Republicans would work to get a bipartisan bill, but if they couldn't they would try to stay united and "hold every Republican to deny movement on the floor," essentially quashing Democratic efforts to pass the bill.

Almost all of the Republican amendments would likely have been defeated and could have played into a burgeoning White House strategy of portraying Republicans as obstructionists opposed to reforming bank rules. Republicans are working to reformulate a strategy, people familiar with the matter said, in part to counter complaints from some Democrats that Republicans are too cozy with Wall Street.

Two possible scenarios could emerge. Democrats and Republicans may hammer out a deal before the bill comes to the Senate floor, ensuring broader support for the bill. Democrats and Republicans on the panel said Monday they would still try to reach a consensus. "I don't underestimate the work that needs to get done on this bill to get a bipartisan deal," Mr. Dodd said.

If a deal can't be reached, Democrats and Republicans could end up engaging in a broader political debate about banks and regulation.

Mr. Dodd's bill would create new regulatory architecture for financial markets, including a new consumer protection agency within the Fed, more Fed powers to regulate large financial firms, tightened oversight of complex financial products and more government power to take over and break up large financial companies.

Republicans and many business groups have complained the bill would reduce access to credit and potentially kill jobs. Democrats have countered that the new rules are necessary in the wake of the financial crisis and will help U.S. companies compete globally.

Dogging the Republican effort is the lack of a unified negotiating tactic. At times, Mr. Dodd has negotiated with the panel's ranking Republican, Mr. Shelby. When talks with Mr. Shelby broke down, Mr. Dodd negotiated separately with Mr. Corker. Ultimately, the Republican strategy during the floor debate is expected to emerge from Senate Minority Leader Mitch McConnell of Kentucky.

Democrats are hopeful even if the issue remains partisan they will be able to win support from at least one or two Republicans during the floor debate, as Democrats still lack the 60 votes necessary to block a potential filibuster.

Business groups are also weighing in, though their influence with Democratic lawmakers and the White House remains strained. Many banks and business leaders have pressed lawmakers to continue negotiating, complaining that the uncertainty about what is going to happen is putting a strain on the economy.

"I think there's going to be some smart people involved that understand if you screw up the financial system, everybody else follows," U.S. Chamber of Commerce Chief Executive Thomas Donohue said.

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