New York Times: Senate Liberals Push for Strict Financial Rules

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Senate Liberals Push for Strict Financial Rules

Source: New York Times

By DAVID M. HERSZENHORN

Liberal Democrats in the Senate, emboldened by a wave of populism, are trying to make financial regulatory legislation far tougher on Wall Street, potentially restricting or breaking up the biggest banks and financial companies.

Normally such efforts might attract little concern among Senate leaders or the White House. But the confluence of a high-stakes election year and a pervasive anti-Wall Street sentiment after the recession has given liberals unusual muscle in the debate. It has also raised the prospect that they could succeed in reshaping the bill.

The liberal amendment that could be hardest to defeat -- and is among the most deeply dreaded by Wall Street -- also has some of the purest populist appeal: a proposal by Senator Sherrod Brown of Ohio and Senator Ted KAUFMAN of Delaware to break up the nation's biggest banks by imposing caps on the deposits they can hold and limits on other liabilities.

"Look at what we did to AT&T, look at Standard Oil, basically what you do is you just split it apart," Mr. KAUFMAN said in an interview. "If we don't do that, we have got too big to fail, because when you look at these big complex entities, you cannot resolve them in a major financial crisis."

Already, antibank rhetoric dominates the debate, which began in earnest this week. Odd as it might seem, liberal Democrats are aligned with conservative Republicans on some issues, further lifting the chances of amendments like one by Senator Bernard Sanders, independent of Vermont, to audit the Federal Reserve.

After President Obama rallied the charge for weeks for tough new rules on Wall Street, the strong push by liberal Democrats is forcing the administration to prevent the bill from getting too tough. It has also shifted the lobbying strategy for financial companies, putting them squarely on the defensive.

Some of the liberals view the financial regulatory legislation as a once-in-a-lifetime opportunity to slap handcuffs on big banks that they have long viewed as greedy.

"I have been a reformer and a watchdog all of my life," Senator Barbara A. Mikulski, Democrat of Maryland, said in an impassioned floor speech. "I have a deep suspicion of how big banks treat the little people and what they do with the little people's money."

"We bailed out the whales," Ms. Mikulski continued. "We bailed out the sharks, and we have left the people in the community, the little minnows, to swim upstream and be on their own." She added, "Now is the opportunity to pass real financial reform."

On Tuesday, Senator Richard J. Durbin of Illinois, the No. 2 Democrat, announced that he would support the Brown-KAUFMAN proposal, which would require some of Wall Street's heaviest hitters, including Citigroup and Goldman Sachs, to shrink in size. On Wednesday, the majority leader, Harry Reid, called the proposal "intriguing."

White House officials noted that the administration supported some of the liberal amendments, though perhaps not in the precise form in which they are being offered, and would have ample opportunity to shape the final regulatory package when the Senate bill was melded with the version adopted by the House of Representatives last December.

But in a preview of the legislative pirouettes that the administration may yet have to perform, the Treasury secretary, Timothy F. Geithner, signaled in Congressional testimony on Tuesday that the White House would work to scale back a provision by Senator Blanche Lincoln, Democrat of Arkansas, that would require big banks to spin off most of their lucrative derivatives business.

Mrs. Lincoln, who is facing a difficult re-election campaign this year including a primary challenge by a more liberal Democrat, put forward a much tougher restriction on derivatives than the White House had anticipated.

In response to a question, Mr. Geithner said he was not prepared to take a formal position on Mrs. Lincoln's proposal but he said, "You would not make the system more stable by taking functions that are integral and central to banking and separating and putting them somewhere else. That will create a less stable system."

Another case in point is the proposal by Mr. Sanders, a self-described socialist, who is feeling bullish about his amendment requiring a public audit of the Fed. Mr. Sanders's idea is opposed by the Fed and the White House, which view it as an encroachment on the central bank's traditional independence.

Conservative Republicans like David Vitter of Louisiana also support the idea, and Mr. Sanders says he believes he can win the 60 votes needed to attach his proposal to the bill.

That, in turn, has the White House and the banking committee chairman, Senator Christopher J. Dodd, Democrat of Connecticut, scrounging for ideas for a so-called side-by-side amendment -- an alternate proposal on the Fed that would give senators something to support while offering them cover to vote down the Sanders measure.

The Senate on Wednesday approved the first amendments to the bill, including one that represented a deal between Mr. Dodd, and Senator Richard C. Shelby of Alabama, the senior Republican on the banking committee, intended to prevent future taxpayer-financed bailouts of failed banks.

But while that proposal was approved by a vote of 93 to 5, some liberals said it did not go far enough. And the decision by Senator Byron L. Dorgan, Democrat of North Dakota, to join four conservative Republicans in opposition to the amendment underscored the potential for cooperation of the left and the right in the days ahead.

Other proposals that could win bipartisan support is one that would impose the so-called Volcker Rule, barring banks from proprietary trading. Another would reinstate the Glass-Steagall Act, approved after the Great Depression, which maintained a firewall between commercial banking and investment banking until Congress repealed it in 1999.

Mr. KAUFMAN said that he was motivated not by populist politics, but by a desire to protect American markets from increased competition overseas. "I am not coming at this as a populist," he said. "I am going at this as, "How do we protect our capital markets?' " He added, "God does not guarantee that the U.S. be the center of all capital markets."

Other senators acknowledged that they were driven by years of conviction that tougher rules were needed for big banks and Wall Street.

"It is time that we pull the sharks out of the tank," said Ms. Mikulski, who is one of six senators still in office who voted against repealing Glass-Steagall in 1999. "Make sure the whales do not crush the little guy, and make sure that the minnows get a chance and that we have an economy that is swimming."

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