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Financial Reform at a Crossroads

If a bipartisan strategy is adopted on financial reform, both parties will declare victory and go home. Some of Obama's advisers think this is smart politics. They should think again.
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The financial reform bill now pending in the senate could be a huge win for both restraining the excesses of Wall Street and for Democratic progressives -- or Senator Chris Dodd could snatch defeat out of the jaws of victory. The risk is a replay of the endgame of the health care battle, but in reverse. Instead of Democrats hanging together and passing a bill with the president belatedly leading, we could see a hollow bipartisanship and a feeble bill.

On Thursday, there was an uncharacteristically fractious meeting of the Senate Democratic Caucus. On one side, leading progressives such as Maria Cantwell, Ted Kaufman, Dick Durbin, Byron Dorgan, and Jeff Merkley, argued that this was a moment to put forward floor amendments that would both strengthen the bill and force Republicans to take difficult votes either backing reforms or identifying themselves with Wall Street.

But the Banking Committee Chairman, Chris Dodd, was more inclined to try to strike a deal over the weekend with his Republican counterpart, Richard Shelby, for a bipartisan bill. The price of this would be weaker provisions on derivatives, consumer protection, the Volcker rule, and on resolving failed large banks. The political price would be that progressives don't get to offer floor amendments. Under Dodd's scheme, which is favored by Obama's legislative and economic advisers, the Senate would immediately vote to take up the bill and would then vote cloture by a wide bipartisan margin. The bill -- still a shell with details to be filled in later -- would go directly to the House-Senate conference, where the House-passed bill would become the vehicle for the final measure.

This course would be an appalling abdication, and it would be stupid politics. The protestations by the Republican Senate leader, Mitch McConnell, that the Democrats are proposing a pro-Wall Street bill, have been ringing increasingly hollow. It's mostly Republicans who have been working hand in glove with Wall Street lobbyists. The problem is that so have several Democrats, including Treasury Secretary Tim Geithner.

In the caucus showdown, Dodd's response to the progressives was that he was not sure that he could count on fifty Democrats to back tough reform. That's right -- and one of the unreliable Democrats is Dodd himself. But the solution to that problem is for the leadership and the White House to whip the wavering Democrats, as Obama belatedly did on health reform, not to cave in. And while Obama gave a fairly tough speech on Wall Street, he is not yet walking the talk when it comes to personally weighing in with Senate Democrats to hang tough. Having prevailed as a partisan on health reform, Obama is back in touch with his softer, bipartisan side. Not good news.

If the bipartisan strategy is adopted, both parties will declare victory and go home. Some of Obama's advisers think this is smart politics because it gets financial reform off the table, and presumably gets it off rightwing talk radio because the Republicans will have been enlisted as partners. But think again. Anything that Mitch McConnell can support is not worth having. And if Obama's tactical advisers think that passing a weak bill will make the anti-Wall Street popular sentiment disappear, they are kidding themselves. Regular Americans will just see both parties as sellouts, and the tea parties will get new recruits.

Dodd's argument that he needs a deal with Shelby because he's not sure he has enough Democratic votes is exactly backwards, and also disingenuous. With the latest backlash against Goldman Sachs, the revelations in the Lehman examiner's report, and the new activism by the SEC, a long awaited public backlash is finally building. Wall Street is desperate to contain the momentum for real reform -- and what better way than by rushing a feeble bill through Congress and then declaring the matter closed.

But if the Senate can have an open debate, with tough floor amendments by Democratic progressives, many Republicans and most Democrats will not dare to be recorded as voting with Wall Street. What kind of a party is it that backs off just when reform momentum is on their side? (Maybe a party that is not sure it really wants to be all that tough.)

What stands in the way of this bipartisan deal is the resolve of the Senate progressives and the personal dilemma of the Senate Democratic leader, Harry Reid. Senator Reid faces a very difficult re-election in Nevada this November. He needs to present himself as a fighter for the common American, not as an agent of Wall Street. If Reid weighs in hard with Dodd, and if Obama gets personally engaged, he can still head off a backroom deal with Shelby and the Republicans for a weakened bill.

It would be nice if somebody whose phone calls Obama still takes -- Reid, Dick Durbin, House Speaker Nancy Pelosi -- broke through the wall that Rahm Emanuel has put up and got the president to play a personal role. Otherwise, this could be one of those dreadful lost moments of reform and progressive triumph.

Robert Kuttner's new book is "A Presidency in Peril."

He is co-editor of The American Prospect and a senior fellow at Demos