Progressives Drive Hard Bargain On Wall Street Bill

At just about every stage of the Senate financial reform process, the changes to the bill have trended towards the left–and that may well be borne out again if Democrats successfully add provision to the bill that will, among other things, ban big banks from using their own capital to engage in market speculation.

The provision is called the Volcker Rule–named after former Fed Chair Paul Volcker who now heads the President Obama’s Economic Recovery Advisory Board. Currently, two Democratic senators–Carl Levin (D-MI) and Jeff Merkley (D-OR)–are pushing to add the rule to the Wall Street reform legislation and have built up quite a head of steam. That development was not a sure thing even a few days ago but with the political climate so anti-Wall Street even progressives’ failures can turn into successes, which is what sort of happened with the Volcker Rule.

Last week, Sens. Sherrod Brown (D-OH) and Ted Kauffman (D-DE) pushed hard to get their very progressive ‘too big to fail’ amendment passed. Even though it failed it helped pave the way to enshrining the Volcker rule in the bill.“I think we will have had a positive effect on the bill,” says a Democratic aide, adding that Brown and Kaufman’s efforts to shrink ‘too big to fail’ institutions built momentum for the Volker proposal.

Unlike the ‘too big to fail’ proposal, the Volcker rule has the support of the Obama administration, and Senate Banking Committee Chair Chris Dodd, and stands a good chance at passing, particularly if it’s held to a majority-vote threshold.

There’s a large appetite in the Senate for putting downward pressure on the size of big financial firms, and the risk they pose to the economy, and the trick for Democrats thusfar has been figuring out how to accomplish this without running afoul of the administration, which has drawn some bright lines over the issue. And with opening bids, like Brown-Kaufman, which the administration opposed, progressives have moved the negotiations in the Senate over how strongly to regulate Wall Street to the left. Dodd included a watered down version of the Volcker Rule in the initial draft of his bill, leaving regulators a great deal of discretion, but finding what he described as an appropriate balance between progressives, who wanted him to go farther, and conservatives, who don’t like the rule at all. Now he supports significantly strengthening it.

That doesn’t mean progressives are getting everything they want. They obviously didn’t end ‘too big to fail’ by statute. And, though some would like it, they’re unlikely to reinstate Depression-era rules segregating banks from other financial institutions.

A separate, outstanding question surrounds a far-reaching proposal, authored by Sen. Blanche Lincoln (D-AR), to regulate derivative trading, and force firms to spin off their derivatives businesses, or risk losing federal safeguards, including deposit insurance. Like ‘too big to fail’, the administration opposes the spin-off provision. So does Volcker, who has become perhaps the most influential shaper of the financial reform legislation. He holds that his rule does more than enough to prohibit dangerous derivative trades.

But as wary as many Democrats are of Lincoln’s plan, they are also reluctant to go on the record to strip it–unless, of course, they have some cover to replace it with something equally restrictive. And that, too, may be giving the Volcker Rule additional momentum.

We should have a bit more clarity on how this all plays out in the days ahead.