Banking is hotter than ever in Washington, making it tougher to sort the rhetoric from the reality.
In the past two weeks alone, President Obama has proposed two major initiatives — one to tax the largest banks and another to curb both their growth and their risk taking.
"So long as I'm president, I'll never stop fighting to protect you from the kind of deceptive practices we've seen from some in the financial sector," Obama told an Ohio audience Friday in the first stop of his "White House to Main Street" listening tour.
"I want to charge Wall Street a modest fee to repay taxpayers in full for saving their skin in a time of need. You can rest assured, we're going to get that money — your money — back, each and every dime."
No doubt "fat-cat" bankers will get some attention in his State of the Union address Wednesday.
While talk can be cheap, it can also be expensive — just ask credit card issuers who are scrambling to make up fee income wiped out by the CARD Act.
So below we explain five pending policies and handicap the likely outcomes for each.
Consider it a scorecard of sorts, but with this caveat: many variables will impact the endgame and it's impossible to know with certainty what will happen. For example, if the Senate does not confirm Ben Bernanke to a second term as Federal Reserve Board chairman this week and the stock market plunges, policymakers may be scared into backing off banks. But as things stand today, a shift has occurred; support for regulatory reforms has morphed into a desire to punish banks, at least the largest banks.
CURBING GROWTH, RISK
President Obama's Jan. 21 plan to rein in banks' size and activities has a good shot, but only in a narrower form and at the cost of slowing down the broader regulatory reform legislation.
On Thursday, President Obama asked Congress to bar large banks from trading for their own accounts and from working with hedge funds and private-equity firms. He also proposed curbing growth by imposing a cap on any bank's share of the market for nondeposit liabilities.
The president's plan lacked detail, including a definition of proprietary trading, but banks are expected to be able to continue to work with clients. Only pure or "naked" proprietary trading is expected to be banned, possibly even by regulators, which would be much simpler than getting an act of Congress.
The cap on nondeposit liabilities faces way longer odds. The idea echoes the existing limit on a bank expanding through acquisition after it holds more than 10% of the national deposit market. But while the total amount of deposits is easy to pin down, the nondeposit liability market is much bigger, more varied and global so the simple mechanics of this would be difficult.
The president's proposed 19 basis point tax on bank liabilities — a "responsibility fee" designed to recoup the cost of the government's bailouts — is a tough call.
Arguing for adoption is the fact that the tax will be part of the fiscal 2010 budget, legislation that is must-do. It would help reduce the federal deficit, and the total cost of $90 billion over 10 years is not so onerous that the industry will oppose it fiercely. In fact, some bankers, realizing the industry will be hit with some sort of punishment this year, contend accepting the tax may be the best of bad options.
But Republicans oppose the tax and some moderate Democrats may join them. What's more, the policy runs counter to the government's other priority of spurring lending. There is even some sentiment that the tax is unfair, because it would apply to large banks that have already repaid the government's capital with interest while car companies would escape it.
Odds appear next to nil that the Consumer Financial Protection Agency — an independent agency with blanket rule-writing and enforcement for all financial services providers including banks, mortgage brokers, check cashers and payday lenders — gets enacted.
Senate Republicans have threatened to kill any bill that allows consumer protection to trump safety and soundness and have suggested alternatives like establishing a consumer division under a new national bank regulator or under the Treasury Department. Moderate Democrats also have suggested letting prudential regulators enforce consumer protections for banks. The House bill allowed such a tradeoff for community banks but still failed to find any Republican support and any bill that can clear the Senate will have to be bipartisan to pass.
If Senate Banking Chairman Chris Dodd cuts a deal with GOP members and sacrifices the agency, he may suffer a backlash from the left. Obama reportedly told Dodd that the agency is "nonnegotiable" and two powerful members of Senate Democratic leadership — Sens. Charles Schumer of New York and Richard Durbin of Illinois — were the first to sponsor legislation to create the agency in the Senate and are unlikely to let it go without a fight.
Some form of enhanced consumer protection that Democrats can point to as a victory would have to be included in a final bill but the agency as conceived does not have the votes.
Curtailing systemic risk, or more bluntly, putting an end to the problem of "too big to fail," is the cornerstone of reg reform and the goal of Democrats, Republicans and community banks.
There is general agreement that regulators need to work together to identify and knock down emerging threats. Expanding their mandate to do so is very likely to be in a final bill. But there are some differences of opinion on the best approach.
The House bill would band regulators together as a council to flag risk but entrust the Fed to act upon it. That position is supported by the administration whose proposal is heavily pro-Fed.
But the Fed is out of favor in the Senate. Dodd proposed gutting the central bank's supervision and the committee's ranking Republican, Richard Shelby of Alabama, has called the Fed a failure.
There are still many who insist the Fed is likely to have a role in supervising the most systemically significant firms but it's hard to imagine the Senate approving a bill that anoints the Fed the systemic-risk regulator.
The Senate is expected to set up a council for monitoring systemic risk, but let a new federal regulator act as the enforcer.
The general consensus among regulators and lawmakers is that a key component toward ending "too big to fail" is to improve the process for letting a major, interconnected firm go down without taking the economy down, too.
How to achieve that end is complicated, but is critical to Shelby. The Banking Committee is looking to expand the resolution process with an emphasis on exhausting bankruptcy as an option first and is even considering creating a new financial services bankruptcy court. The details are still being worked out, but the bill is also likely to include a narrowly crafted resolution process.
The chief architects working on that section of the bill — Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn., — have said they want to let firms fail. They have said they oppose bailouts, conservatorship or any structure that leaves an institution in limbo and propped up on life support.
The House bill included an enhanced resolution process that would impose assessments on large firms of $10 billion or more. Setting up a fund for resolutions or dissolutions as the House dubbed it though is unlikely to survive. Dodd's proposal did not call for it, Warner and Corker do not support it and the big banks adamantly oppose it. What's more the Treasury opposes it and House Financial Services Committee Chairman Barney Frank was originally against it and is unlikely to fight for it.
Dodd's idea of establishing a single bank regulator may make sense but because it would be such a radical change from the current system and sets off a fight with every entrenched interest in the debate it was considered dead on arrival and never got off the ground.
The idea of further consolidation has plenty of support however and there are a few core pieces that are very likely to stick.
No one besides the Office of Thrift Supervision is making the case for its survival and it is expected to be rolled into a revamped Office of the Comptroller of the Currency. Additionally, the Fed stands at risk to lose much of its supervisory authority. The Federal Deposit Insurance Corp. is likely to keep state banking supervision and could pick up the Fed's.
Finally several former regulators have made the case for consolidating bank supervision and holding company oversight in the same regulator. This idea has gained steam and consolidation along these lines could very likely stick.
Most of these policies depend on Congress adopting a broad regulatory reform bill. At one point it seems impossible that Congress would not do something in the wake of the financial crisis. And both Dodd, who recently announced his retirement, and Shelby want a bill.
But the upset in Massachusetts last week that turned over the seat long held by the late Sen. Edward Kennedy to a Republican has not only emboldened the GOP, it has sent the White House into a tailspin to rethink its strategy. While health care reform has proven to be a disaster for the Democrats, the Obama administration is intent to capitalize on public anger over the economy and may the big banks pay.
But the heightened rhetoric and spate of additional proposals has led many political analysts to question whether the goal is to enact reform or simply win on an issue.