US financial reform: Banks had better hope US Democrats have a Plan B. Yes, big lending and trading institutions face hard changes from the passage of US financial reform. But legislative failure – suddenly less far-fetched than it seemed – might be worse. Democrats are racing to find 60 Senate votes. If they fail, the uncertainty, haggling and headlines may drag on into 2011.
Lobbyists who started the July 4 holiday early following last week’s congressional compromise are probably regretting it. There are now just 57 solid Democratic votes for the proposal, assuming support from the unknown successor to the late Senator Robert Byrd. Reformers need three of the four Republicans who voted for an earlier version, but who don’t like the inclusion of a last-minute $19 billion bank tax to pay for the bill.
Scuttling a major piece of legislation over such a trivial sum may seem unlikely in an era of trillion-dollar budget deficits. Then again, a similar fiscal debate is preventing the Senate from approving a new jobs bill despite high unemployment. If reaching 60 proves impossible, the calculus will change. There’s an existing Republican counter-plan, and the party is apt to increase its ranks in the next Congress. The GOP reform plan isn’t all that different from what Democrats have put forward, but the banks consider the changes less onerous.
But 2011 Republicans, infused with Tea Party populism, might be a more combative lot. The House-Senate conference committee offered a preview. Conservatives tried to force banks to pay for the wind-down of $140 billion bailout recipients Fannie Mae and Freddie Mac. Incoming Republicans might also be more amenable to shrinking the banks as the only way to prevent the problem of “too big to fail.” And the GOP would find plenty of kindred spirits across the aisle.
At the very least, the messy process would generate vast, new uncertainly for industry executives and investors. No wonder banks’ shares rose on news of the compromise agreement, despite its potentially heavy costs. Better the reform you know than the one you don’t.
