Can Bank-Bashing Help Obama?

Thursday, Jan. 28, 2010

Can Bashing the Banks Help Obama?

By Michael Grunwald and Michael Scherer

The no-drama law professor is going populist.

First President Obama proposed new taxes on big banks, blasting the "twisted logic" of Wall Street executives who keep awarding themselves giant bonuses while resisting government efforts to recoup the cost of their industry's bailouts. "Instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities," the President warned.

A week later, Obama proposed new restrictions on big banks, aimed at limiting their size while prohibiting them from playing the markets with their own cash. "If these folks want a fight," he thundered, "it's a fight I'm ready to have." In case anyone missed the point, Obama used the word fight or fighting 22 times in a speech the next day in Ohio. (See judgments of Obama's first year, issue by issue.)

The new proposals were in the works long before Scott Brown rode his truck to victory in Massachusetts, and they reflect fairly modest shifts in the Administration's finance policies. Even the rhetoric is familiar: Obama took periodic swipes at "outrageous" bonuses and "fat-cat bankers" throughout his first year in office. But the latest bank-bashing does indicate a new strategic approach to his second year, inspired by the same public wrath that produced Brown's upset. As the White House shifts its top legislative priority from health care reform to financial reform, it is hoping to avoid the mistakes of the health effort that have left Obama and the Democratic Party on the wrong side of a grumpy public.

That means more populism and confrontation, less deference to Congress. It's a shift from an inside game to an outside game, from passive leader of a divided party to active agitator for change. The idea is to take an uncompromising stand, make a clear case to the public and then force lawmakers to choose sides — as opposed to announcing general principles, letting Congress hash out its own details at its own pace and then desperately cutting deals to try to cobble together 60 Senators.

That was a bumpy road even before Massachusetts left Democrats with only 59; months of bipartisan Senate negotiations over health care reform attracted zero Republican votes, as did the financial-reform package that passed the House in December. And White House officials admit they underestimated how ugly Capitol Hill's sausagemaking process would look in the spotlight, turning a debate about expanding health coverage, controlling costs and reining in the abuses of profit-obsessed insurers into a brawl over "death panels," taxpayer-funded abortions and congressional giveaways to Nebraska. (See the financial crisis after one year.)

So now they want to draw bright lines: Are you with us or Wall Street, with ordinary families or greedy titans? They figure that if they can't get a legislative victory, they'll get a potent political issue.

But Republicans are already accusing Obama of sacrificing reform on the altar of politics, and it's true that the bright-line strategy could scuttle whatever chances there might have been to build bipartisan consensus in the Senate. For example, the White House recently leaked word that it considers the creation of a new Consumer Financial Protection Agency "nonnegotiable," drawing a clear contrast with Republicans and financial lobbyists on a relatively simple issue that polls extremely well — but risking a stalemate in the Senate Banking Committee, where the GOP and several Democrats have expressed doubts about a new bureaucracy. After health care, that's a price the Administration is now willing to pay. It's no coincidence that the day before Obama announced his latest push to crack down on big banks, his confidants David Axelrod and Valerie Jarrett met with Troubled Asset Relief Program (TARP) watchdog Elizabeth Warren, the intellectual mother of the consumer agency and the most prominent populist advocate for financial reform. "They made it very clear that Wall Street needs to stop acting like nothing has changed," Warren told TIME.

It's also no coincidence that the President made his announcement while standing next to the unlikeliest populist advocate for financial reform, 82-year-old former Federal Reserve chairman Paul Volcker, a previously marginalized Obama adviser who had chastised the Administration for making insufficient efforts to limit the size and risk profiles of big banks. The White House is tired of complaints that its economic team — especially Treasury Secretary Timothy Geithner, the former New York Fed president who helped bail out AIG and other failing firms — is too close to Wall Street. Bringing the legendary gray eminence in from the cold — Obama called his plan to ban proprietary trading by commercial banks "the Volcker rule" — not only lent capitalist gravitas to populist bank-bashing but also reinforced the message that the Administration will not be outflanked in its assaults on Big Finance. That hasn't always been the case.

Allergic to Populism
Shortly after Obama unveiled a $117 billion plan to tax the riskier liabilities of larger financial firms, Geithner hosted a dinner for bankers. A few of them grumbled about Big Government, class warfare and the unfairness of scapegoating financial institutions that already repaid their bailout money while GM and Chrysler keep hemorrhaging taxpayer cash. But one midsize-bank CEO suggested the tax was a reasonable surcharge on too-big-to-fail conglomerates that benefit from an implicit guarantee of federal help in a crisis. "If I fail, the FDIC shuts me down," he said. Then he gestured at a big-bank CEO. "If he fails, the Fed asks how it can help."

Read "Bank CEOs Continue to Fight Financial Reform."

See pictures of TIME's Wall Street covers.

It's a telling story. For one thing, it's a reminder that Geithner is the kind of guy who hosts dinners for bankers. He's not a populist; he's allergic to populists, and so are his aides. Behind closed doors, Treasury officials can sound like their MoveOn.org caricatures, griping about "wacko populists" who use "anticapitalist rhetoric" to "extract their pound of flesh from the Street" — even making excuses for the megabankers who no-showed a recent White House meeting with Obama. ("I wouldn't say they blew him off," said one Treasury aide.) Geithner has opposed proposals to tax Wall Street bonuses as well as financial transactions, infuriating the left. And he made quite a few of those how-can-we-help calls to floundering bankers when he was at the Fed, providing a juicy target for the right.

And yet Obama's bank tax — designed not only to make taxpayers whole but also to discourage excessive risk-taking — came from Geithner. And so did most of the Administration's plans to address the too-big-to-fail problem, create an independent consumer agency for financial products and otherwise overhaul the regulatory system that failed so dramatically in 2008. Geithner sees big banks not as evil empires to be toppled but as moneymaking machines to be restrained, so that the panic and bailouts of two years ago are never repeated. Just because it's populist, he likes to say, doesn't mean it's wrong. (See award-winning pictures of the fallout from the financial meltdown.)

And as was conspicuously not the case with health care reform, the Administration has laid out specific changes it wants to see in financial oversight. In June, Geithner released an 88-page paper with proposals to address just about everything that went wrong before the meltdown, from unregulated brokers who peddled toxic subprime mortgages with brutal fine print to in-the-tank ratings agencies that vouched for house-of-cards financial instruments they didn't even understand. He proposed much tougher oversight of derivatives, hedge funds and nonbank financial firms like AIG, as well as so-called resolution authority to help public officials wind down failed behemoths like Lehman Brothers during a crisis without triggering a panic. Geithner then shipped hundreds of pages of legislative language to the Hill.

The bill the House passed in December closely tracks the Treasury proposals; Geithner's aides say they got at least 80% of what they wanted, including the stand-alone consumer agency, an easy-to-understand innovation for Americans who think mortgages and credit cards should be as safe as toasters. Many of the differences were technical or turf-based: how to structure the resolution authority and regulate systemic risks, a loophole exempting "industrial loan companies" from various regulations, more loopholes shielding community banks and auto dealers (known for their pull with local Congressmen) from the new consumer agency's direct oversight. House Financial Services Committee chairman Barney Frank points out that the Republican alternative to the bill consisted of ending TARP and otherwise maintaining the status quo; he's surprised the GOP hasn't paid a political price. "I'm disappointed with the zeitgeist," Frank says. "The Republicans are so extreme they couldn't help themselves; they actually proposed doing nothing. I would've thought refusing to fix a dysfunctional system would be unpopular." (See how Americans are spending now.)

Republicans say they haven't seen any downside yet to opposing reform. Brown actually stepped into Obama's populist trap by opposing the bank tax, and it didn't seem to help his opponent, Martha Coakley, even though internal polling gave her a 21-point advantage when it came to "taking on Wall Street." Why? "People thought Democrats in Washington would not deliver on these issues," says her pollster, Celinda Lake.

In fact, Democrats in Washington and even within the Administration were at odds over dozens of provisions. As with health care, there are serious differences on financial reform between the House and the Senate, and the Democratic caucus within the Senate is again divided. And as the House bill got watered down a bit, some reformers saw Treasury's fingerprints. For example, Michael Greenberger, a policy adviser to Americans for Financial Reform, a coalition of union, consumer and environmental groups, says Treasury lobbied "vigorously" for loopholes exempting certain over-the-counter derivatives from new regulations, a key objective of centrist New Democrats who took their concerns to Geithner — and one shared by the Chamber of Commerce, the National Association of Manufacturers and big banks.

But for critics who believed the Administration was reluctant to crack down on Wall Street, Volcker became the proof that wasn't in the pudding — the monetary version of the "most trusted name in news" who suddenly sounded like a Daily Kos blogger. If Obama really wanted to stop banks from getting too big to fail, why didn't he take Volcker's advice about how to stop them from getting too big? If Obama really wanted to stop Wall Street's excessive risk-taking, why didn't he take Volcker's advice to stop federally insured banks from gambling on their own accounts? And where was Volcker anyway?

Back in Vogue
Volcker was living in New York City, getting engaged to his longtime assistant, giving speeches around the world, making wry comments about the uselessness of financial innovation and the remorselessness of Wall Street. He was also making cagey references to his lack of influence with Obama, for whom he was chairing an obscure economic-recovery board. Congressman Paul Kanjorski says that last March, when he pitched Volcker on a plan to let regulators break up big banks that threatened the financial system, the former Fed chair said, "I'm out of vogue right now in the White House ... but I agree." Volcker secured his walk-on-water reputation by taming runaway inflation in the late 1970s, jacking up interest rates and ignoring intense public pressure to reverse course. His grandpa-in-the-attic status in Obamaworld seemed to suggest an Administration too cozy with the Street.

Read "Can Obama Profit from a Wall Street Crackdown?"

Read "Bank Earnings: Economic Woes Persist."

In fact, while Volcker did have some policy disagreements with Geithner and National Economic Council chairman Larry Summers — who were not eager to dismantle large banks and did not see how proprietary trading contributed to the crisis — those ideas had support from White House economists like Christina Romer and Austan Goolsbee of the Council of Economic Advisers and Jared Bernstein in Vice President Joe Biden's office. Volcker was never really persona non grata; he's friendly with Biden, and Goolsbee says Volcker spoke "extensively and repeatedly" with all the key players — including Obama. Still, White House officials were increasingly frustrated that they weren't getting credit for going after Wall Street. "It came up in every meeting: This bank stuff is killing us and killing us," a Treasury official told TIME.

The political aides were eager to adopt a more populist tone, urging Treasury to give them something they could use. The bank tax was already in the works, but after Volcker made his case at a White House meeting in October, the rest of the Administration started shifting his way. Giant firms like Goldman Sachs were raking in record profits, and financiers ranging from British central banker Mervyn King to former Citigroup chairman John Reed were endorsing the Volcker rule. (See the worst business deals of 2009.)

By late December, Obama's entire economic team agreed to support the rule, along with limits on the size and scope of banks that go beyond the amendment Kanjorski drew up. Geithner would have preferred to limit risk-taking through tougher rules on leverage and capital — and he's still planning a push on that front — but in an election year, it was easy to see the value of having Volcker inside the tent. "The narrative is changing," Warren says. "In 2010, Congress will have a basic choice between taking the side of banks and taking the side of families."

The question is: Does the new populism make reform more or less likely?

Fight or Fix?
"Your bosses are sociopaths! A bunch of Ted Bundys in $10,000 suits!" The words were hurled by an unnamed Democratic Congressman at a bank lobbyist who must also remain anonymous. Suffice it to say the lobbyist is getting used to hostile greetings. "We get it: we're al-Qaeda, and nobody wants to be seen with us," he says. "Obviously, we're going to take some abuse in 2010." Like most bank lobbyists, he says he supports financial reform — as long as it doesn't include a consumer agency or a bunch of other provisions that Obama supports — but that hasn't stopped his industry from spending millions of dollars to kill it. What's interesting is that now, for the first time, the lobbyist thinks reform is going to stall. "I'm not sure I see the path anymore," he says. (See 10 things that have and haven't changed during Obama's first year.)

The problem, as usual, is the Senate — and, in an election year, the calendar. Republicans are already suggesting that Obama's belated push for the Volcker rule and other add-ons will require new hearings and more delay, and that its line-in-the-sand approach to the consumer agency is a formula for gridlock. Meanwhile, in the post-Massachusetts political climate — and with so much industry cash sloshing around in Washington — centrist Democrats seem to fear getting tagged as Obama liberals more than they fear getting tagged as Wall Street water carriers. And the White House would rather see reform blocked by Republican recalcitrance it can exploit at the polls than watch another round of interminable horse-trading that will ultimately be blamed on Obama.

This is not to say the White House wants an issue rather than a bill. It wants both, especially if health care dies and leaves Democrats short on achievements to brag about in 2010. It's simply decided that the most plausible path to a bill is to warn the public that the financial system is still a ticking bomb, and to try to make opposition to strong reform tantamount to support for the terrorists in fancy suits. The problem is that on an issue this complex, with so many contentious provisions and alternative proposals floating around, naysayers are always going to be able to find a populist excuse to say nay. For example, some in both parties have turned to Fed-bashing, trying to strip the agency's regulatory powers and opposing Chairman Ben Bernanke's nomination for a second term. Who knows? In 2010, "Bailout Ben" could be just as potent a populist issue as "financial reform."

Financial reform, like health care reform, is truly complex. It's hard to explain controversies over pre-emption or end users or proprietary trading; as another Wall Street lobbyist puts it, "Americans don't care whether Morgan Stanley keeps its prop desk." Obama knows he has little chance to transform the system if regulatory reform gets bogged down over health-care-style intricacies. The good news for Obama is that nobody claims our financial oversight is the best in the world. He may have a chance for reform if he can boil it down to one simple question: yes or no.

Read "Is Obama's Financial-Reform Plan Bold Enough?"

See the best pictures of 2009.