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Scott Brown: Inadvertent hero of banking reform?


If Scott Brown's election was very bad for health-care reform, it looks like it was very good for financial reform. Desperate to add a new issue into the news cycle and give Democrats something they can actually fight for, the White House is set to propose a raft of regulatory reforms that go far beyond anything that Congress has suggested so far, or that the White House has hinted might be in the offing.

The new rules would do two things: Limit what banks can do and how big they can get. The early reports aren't so clear on how the administration will handle size (some imply it's just the bank tax while others focus on vague, new regulatory powers), but the new limits seem pretty defined: Banks that have both a commercial banking division (where they take your money) and a proprietary trading division (where they invest in things like subprime mortgages to increase their money) will no longer be able to use the cash from their commercial accounts to finance the trades in their proprietary accounts.

This makes a lot of sense. No one worries about their commercial deposits because they're insured by the government. That means the lenders (me, say) don't worry about what the borrowers (the bank) are doing with that money. Conversely, if my bank account weren't insured, and I heard Wachovia was running a hedge fund funded by my deposits, I'd be out of there in two seconds. This amounts to a large subsidy from the government to the bank's trading arms, and it should stop.

The idea appears to have come from Paul Volcker, who most people thought had been largely sidelined in the administration. This shows, I guess, the utility of keeping a few more radical folks around. When the politics changed and the administration suddenly wanted to go a lot further than the political constraints would suggest, they had someone who'd been drawing up proposals along those lines for some time.

That said, I'd like to see some hard numbers on how many banks this will actually affect, and how much it will affect them. Goldman Sachs got itself a commercial charter at the depths of the crisis because that allowed it to take money from the Federal Reserve. But it doesn't actually have a serious commercial loans division, so it's not clear how this would change its behavior at all. And this wouldn't have done anything to stop Lehman, which also had very little to do with commercial banking.

Photo credit: Lauren Victoria Burke/AP.

By Ezra Klein  |  January 21, 2010; 11:21 AM ET
Categories:  Financial Regulation  
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Prediction - the actual proposal will be worse than anticipated.

Posted by: fuse | January 21, 2010 11:37 AM | Report abuse

Why should I believe this isn't just another issue for which the Democrats won't go to the mat? If the Democrats run from health care reform, as it appears they are doing, they will have no credibility on any issue, even if the words at first sound good. What's happening now represents a major crisis of faith with the entire party.

Posted by: simmonslcsw | January 21, 2010 11:41 AM | Report abuse

...and banking reform overcomes a filibuster how?

Posted by: Ronnie76 | January 21, 2010 11:42 AM | Report abuse

I get the feeling that this going to be another issue that Ezra is wrong again. 0% chance any of this stuff gets through in amy meaningful way.

Posted by: kovachs | January 21, 2010 11:44 AM | Report abuse

That's nice, I guess, but I'd rather have health care reform. Plus, like Ronnie, I'm not seeing how we get 60 votes for this.

Why is Obama changing the subject instead of fighting this nonsense head-on?

Posted by: bupkiss | January 21, 2010 11:46 AM | Report abuse

The effects would be pretty huge: essentially, any of the big commercial bank holding companies that have "investment banking" operations - and this list includes Bank of America, Citigroup, JP Morgan, Wells Fargo/Wachovia, and more- would essentially be forced to give up their (highly profitable) proprietary trading operations. Its a really big deal. Still, its a little inadequate in so far as allowing publicly traded companies to engage in principal trading creates a huge agency problem - shareholders have no way of monitoring the risk taken on by such operations, and no (effective) way to prevent managers and traders paying themselves anything they want. Thus, in 2007 and 2008 Wall Street paid $50B in bonuses, while securities firms overall lost $45B. The advantage of a financial transactions tax would be that it would 1) complement this policy, should it make it through the senate; 2) easily pass muster under the Byrd rule and so could be adopted via reconciliation; and 3) would at the margin deter trading activity while producing revenue for worthwhile purposes (like direct public service job creation).

Posted by: rwclayton7 | January 21, 2010 11:48 AM | Report abuse

Ezra, I love you, but you have to be kidding. This will just get filibustered like HCR.

Posted by: scott1959 | January 21, 2010 11:49 AM | Report abuse

rwclayton7 you are totally correct. The financial transactions tax that targets hyperfast computer trades on tiny arbitrage margins and not individual investors would be both good politics and good policy.

And to Scott1959, Let 'em filibuster this one and see how popular it is. Regulating the big banks is much simpler to explain than the insurance exchanges and complicated formulas for who gets how much of an insurance premium subsidy.

This is a populist friendly measure that it would be worth going to the mat for and maybe losing. The optics for Dems who support this are much better than HCR.

Posted by: srw3 | January 21, 2010 12:06 PM | Report abuse

srw3 I wish I could have faith in this party. But I can't. The big picture looks good I suppose for the optics - right now. But if they change, maybe even just a little, poof. I'm might be ready to leave the party and go to the Greens or something. Used to be I thought that would be a wasted vote.

Posted by: simmonslcsw | January 21, 2010 12:25 PM | Report abuse

Guys, the whole point is that this'll get filibustered. That's the idea. The conservative dems can feel more comfortable knowing that a bill can't pass without republican support, which is unlikely and provides cover if it does happen. It's an issue that's also hugely popular with the public. If you're going to force a filibuster showdown, you want to do it over a bill where the public has your back.

Posted by: etdean1 | January 21, 2010 1:50 PM | Report abuse

Surprised to see a kind word in here for Volcker. There's a lot of support for parts of this bill in the financial community, with the hedge funds, etc. who are tired of seeing a few of the big guys get special treatment/taxpayer dollars. In particular, the proprietary trading desks from which $GS and others derive about 10% of revenue from is going to be limited. In finance, lots of people just want to see this applied to the Fed's proprietary trading desk where they sell our future selves into debt via Quantitative Easing.

Posted by: staticvars | January 21, 2010 1:57 PM | Report abuse

I'm not so sure the Repubs would publicly side with the banks, i.e., filibuster against legislation that is obviously meant to benefit the populace.

Even if they DO filibuster it, I think the Dems should call their bluff and do the filibuster ... and let America SEE that their government is broken ... and that the Repubs are doing the most damage to it at the moment.

I think, from this point on, the Dems need to do this (not try to avoid the filibuster, just do it) on every single piece of legislation they work on. And then, get on the talk circuit and make sure that a single message is broadcast from their camp, repeatedly: we're trying to do something for you and the Repubs are tying our hands.

Posted by: onewing1 | January 21, 2010 2:04 PM | Report abuse

Clearly Ezra is unfamiliar with Rule 23a and the current limitations around how deposits can be invested… I understand Obama needs a win after Tuesday's de facto referendum on healthcare reform, but it is simply unconscionable that he felt it appropriate to take three of four months to consider the Afgham surge, a decision that needed to be made far more rapidly, but he won't take the extra week to flesh-out a few critical first-tier elements of his financial regulatory proposal before going public and throwing more doubt into the marketplace. I can only assume that this is purely a cynical political ploy: Against the backdrop of a very modestly informed public that is extremely angry at Wall Street, he throws-out the dead fish proposal. The Republicans and Blue Dogs all understand that we need significant financial regulatory reform, but just as an rational actor here must, they of course need push back on Obama's potentially damaging over-reach, and Obama will use that against them, whether it comes in the form of a filibuster or merely words of subtle disagreement on the talk ciurcuit. Why not simply lead by putting forth a thoughtful and well considered policy proposal from the outset? In fact, instead of footsying around with healthcare, Obama and congress should have been focused on appropriate financial regulatory reform instead. You want to move the economy forward? Set the rules of the road, remove doubt from the marketplace, and let the financial engines feed the machine. Instead we’ve got a reactionary teenager in the White House who puts his own political agenda ahead of the country. I've never missed Bill Clinton's comparatively adult approach to governance so much...

Posted by: Middleston | January 21, 2010 2:47 PM | Report abuse

Nothing we can do would be too harsh for the criminal bankers who have plunged us into this mess. How many more people have to lose their jobs, their homes, or their life savings before we get to punish and control them? They have, after all, used our money to enrich each other - and to impoverish the rest of us

Posted by: sameolddoc | January 21, 2010 3:27 PM | Report abuse

Might be filibustered, but might not. At least one conservative pundit seems to think Obama's new banking proposal is excellent . . .

Given that many Democrats rely heavily upon the big banks for some of their largest campaign contributions, it might be harder to get some Democrats to support this than Republicans.

In any case, I too support many aspects of Obama's new banking proposal. It's pretty much the first thing he's gotten right, in my estimation.

Posted by: Kevin_Willis | January 21, 2010 4:12 PM | Report abuse

Time will tell if Sen. Brown supports any regulation of the finace industry. And why should he? The empowered and weathy own many congressman who beckon to the lure of perks and big bucks, and the Party of No's reluctance toward reform would put Brown outside the fold if he were to champion any regulation. Our country no longer belongs to us; the rich have bought/stolen it from us.

Posted by: robjen116 | January 23, 2010 12:17 PM | Report abuse

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