Wall Street's costly gamble to kill financial reform by betting heavily against President Barack Obama and Elizabeth Warren in the 2012 election has blown up in its face. The only question is how much Wall Street is going to suffer as a result.
At the very least, even if there is no other consequence of the financial sector's failure, the Dodd-Frank reform legislation lives to fight another day.
"If Romney had won, Dodd-Frank would today be dead," said University of Maryland law professor Michael Greenberger.
Wall Street, which supported Obama in 2008, abandoned him in the 2012 election, pouring millions into the campaign of Mitt Romney, who vowed to be friendlier to the banks and repeal Dodd-Frank. Wall Street also bet heavily on Massachusetts Sen. Scott Brown to defeat Warren, the inspiration for the Consumer Financial Protection Bureau and the street's least-favorite human being.
As Omar, Obama's favorite character in "The Wire," once said, "You come at the king, you best not miss." In both these cases, Wall Street missed. Obama survived, and Warren won. And now the payback begins -- although there are signs, despite some of his tough campaign rhetoric against the banks, that Obama will be more merciful than Omar.
The most immediate effect of Tuesday's election result is that it sets an example for politicians of both parties who might have been afraid to stand up to Wall Street and risk missing out on the banks' sweet, sweet campaign cash. Turns out you don't always need it. In fact, tapping into Main Street anger at Wall Street, on the left and the right, could be political gold.
Maybe more importantly, facing a near-certain death under Romney, financial reform has a new lease on life in a second Obama term. Romney might never have achieved a full repeal of Dodd-Frank, with a Democratic-controlled Senate in the way. But even with the shell of the 2010 law in place, Romney could easily have starved it to death, refusing to enforce it, further delaying implementation and appointing regulators who would approach the job like sleepy night watchmen rather than alert watchdogs. That's not going to happen now.
"You don't need to do anything affirmatively to put Wall Street in its place," Greenberger said. "All that needs to be done is for Dodd-Frank to be enforced."
Under Romney, the partisan balance of regulatory agencies such as the Securities and Exchange Commission and the Federal Deposit Insurance Corp. would have tilted toward Republicans friendlier to Wall Street. Investigations into Libor manipulation and any efforts to hold banks accountable for their actions leading up to the 2008 financial crisis would have ended.
"The biggest change with the election is what didn't happen," said Dennis Kelleher of the financial reform advocacy group Better Markets. "There is no question that a President Romney would have delivered on his purchased promises to Wall Street, and he would have no doubt substantively killed financial reform and unleashed Wall Street on the country again."
There's little reason, however, to expect much in the way of new action from a second Obama administration. And there is still a lingering fear among fans of reform that Obama has some kind of burning desire to get Wall Street on his side. After all, this is the president who, instead of seizing a generational opportunity to hold banks and bankers accountable and profoundly change the way they do business, appointed bank-friendly Timothy Geithner to run the Treasury Department and surrounded himself with advisers from the banking industry. Just weeks ago, he regurgitated Wall Street talking points in an interview with Rolling Stone, suggesting that banks should better regulate themselves and dismissing calls to reinstate the Depression-era Glass-Steagall Act separating commercial and investment banking.
Now that the election is over, will Obama soften up his rhetoric and cozy up to the banks again? Some key moments coming up in the next few months will help signal just how serious Obama is about pursuing financial reform in his second term:
Picking the Next Treasury Secretary: Geithner will almost certainly not be sticking around for a second term. Obama's choice for his replacement will send a clear indication to Wall Street, Main Street and Washington about where he stands on financial reform. Will he appoint a known reformer, such as Commodity Futures Trading Commission chief Gary Gensler, or will he stick with another choice friendlier to Wall Street, such as former investment banker Erskine Bowles?
Pushing Through Regulatory Appointees: Republicans in the Senate have repeatedly frustrated Obama's efforts to have lower-court judges and regulatory nominees approved. Will Obama get more aggressive on that front in a second term? There is only so much he can do without filibuster reform -- the Democrats won some seats in the Senate, but are still far short of a filibuster-proof majority. But he can twist arms and maybe not let his Treasury secretary toss reformers under the bus, as Geithner did to Elizabeth Warren.
Fighting Efforts to Water Down Dodd-Frank: For a while this summer, there was growing bipartisan support for requiring regulatory agencies to perform a cost-benefit analysis on any new rules they wanted to make. This would have had the effect of pouring cement shoes on new regulatory efforts and dumping them in the ocean. The Obama administration didn't fight those efforts. It even backed some of them, such as the JOBS Act, which loosened regulations on initial public offerings put in place after the dot-com bubble, raising the risk of fraud.
Even if Obama is still tepid about pushing reform, the Senate should be decidedly less so, with Warren taking her seat, joining other current and future reform agitators such as Sherrod Brown (D-Ohio) and Chris Murphy (D-Conn.).
"She will quickly become one of the primary voices on financial reform," said Kelleher, "and individual senators have an enormous amount of power if they choose to exercise it."
As The Huffington Post's Christina Wilkie pointed out on Tuesday, even before Obama's reelection and Warren's election, it was fairly clear the Senate was going to stay in Democratic hands, meaning a lot of Wall Street's expensive plans to chip away at Dodd-Frank were already coming to naught.
One big question about Warren is whether she will sit on the Senate Banking Committee. Brian Gardner, senior vice president of Washington research at the investment bank Keefe, Bruyette & Woods, points out that Warren might seek to broaden her horizons by sitting on a different committee, if she has designs on running for president some day. Still, Massachusetts sent her to Washington to fight the banks, so she'll probably do just that.
Another question is how banks will react: lick their wounds and accept their fate, or keep fighting regulation every step of the way? History suggests they will keep fighting.