Early Friday, when the House and Senate conference committee finished up a marathon session of deal-making and announced they had reached a deal finalizing the financial reform bill, there was a quiet sense of legislative victory. While the Volcker rule -- named after former Federal Reserve Chair Paul Volcker, which would have banned banks from using their customers' cash to trade in derivatives for themselves or invest in hedge funds -- was softened and the loan-peddling of auto dealers was exempted from the purview of a new agency to would regulate consumer financial products, a basic fact remains: there is a limit on bank speculation and an independent agency that didn't exist before.
Advocates of reform succeeded in some other places. The cost of being a big bank is higher than it was before. Derivatives will be hauled out into the light, mostly dealt in a more open exchange and market. Stockbrokers will likely have to face stricter disclosure requirements.
The debate over financial reform has defied the normal laws of legislating: as the final deadline approached, the bill got tougher on Wall Street and more immune to the normal watering-down
delivered by lobbyists, interest groups, and lawmakers friendly with those lobbyists and interest groups (see: the delegation from the great state of New York).
By nearly any measure, and whatever one may think of its flaws -- the big one being that all the new oversight and taxes might not be structurally strong enough medicine for a financial industry that recently had a bad case of unregulated, global meltdown -- the deal reached on Friday morning is stronger than the bill that passed the House in December, and
comparable to the bill that the Senate passed this past May. Now, it looks like both houses will approve the bill, with zero Republican support.
But does that really mean the bill will stay strong? Getting a strong bill through the legislature is a product of short-term momentum, a messy but discrete period of time during which the focus is turned to the process of a bill becoming law. Carving out, diluting the bill, hampering regulators, is a lot easier than building a fence to keep crises, often enabled by loopholes, away.
A conservative approach to nullifying the passage of health-care reform -- arguing that it's unconstitutional -- might not have much legal sway, and it's unlikely any court would roll back the most sweeping social policy legislation of a generation. But the rollback of financial reform would not be ideological -- it would more piecemeal, dependent on complacency and the power of interest groups: imagine the auto dealer exemption writ large (who else needs a way out?), or New York representatives playing the same role for Wall Street that Carolina legislators have long fulfilled for tobacco companies. Right now the challenges to the bill, and the grumbling among major Wall Street banks sounds loud (even if their stock rose), but the real
threat will come as a flurry of narrow attacks that will search for individual, "necessary" loopholes that make a strong bill weak over time.
As of now, the bill looks like a step toward tighter regulation. But just a step. Little battles that happen after combat ends don't seem so deadly, but if they are poorly managed they can doom a war -- or in this case, a financial system.