WASHINGTON — President Obama's State of the Union address Wednesday night is expected to be the most pivotal for the banking industry in recent memory.
The fate of several financial services priorities, including proposed restrictions on large banks and the creation of a consumer protection agency, could receive a boost or lose steam depending on how much attention the president gives them.
Though Obama is expected to focus on the economy, jobs and health care, most observers expect financial reform to take up a significant chunk of the president's speech. The substance — as well as the tone — of what he says will set a significant marker for the financial services agenda this year.
"Financial reform is one of the top priorities of the administration for this year," said Donald Ogilvie, the chairman of the Deloitte Center for Banking Solutions. "This gives the president a chance to make his case to the nation about why his proposal should get passed."
One key variable: Does Obama build on the populist bashing of the past two weeks when he proposed a tax on large institutions, a ban on proprietary trading and limits on growth? Or does he moderate his tone?
Some say he may need to dial back the venting if for no other reason than that the antibank backlash appears to have heightened opposition to the renomination of Federal Reserve Board Chairman Ben Bernanke.
"You have a conflict here between the insider Washington game which Bernanke represents and the populist angst about the economy," said Chris Whalen, managing director at Lord, Whalen LLC's Institutional Risk Analytics.
Obama might even need to use the speech to give the embattled Fed chairman another vote of confidence, he said. "If he really wants this guy reappointed, he's going to have to hit it hard," Whalen said. "He's got to demand that the Senate reappoint Bernanke. He's going to have to put his political capital on the line."
The White House has repeatedly defended Bernanke's renomination, and is expressing confidence he will win Senate confirmation this week despite what is expected to be a difficult roll-call vote.
"There is still a great amount of anxiety in our economy, but Chairman Bernanke helped the president and the economic team steer through some very turbulent times," White House spokesman Robert Gibbs said Monday. "It sends a signal to greater overall stability to have his nomination approved without political games."
Obama's hard stance against banks also raised the bar for enacting regulatory reform legislation. Senate Banking Committee Chairman Chris Dodd already faced an uphill battle in crafting a bill that would win at least some Republican support. But the GOP appears skeptical of the so-called Volcker Rule to ban proprietary trading.
Still, most observers said they expect Obama to give the plan, as well as the proposed tax on big banks, a major plug during his speech in an effort to drum up support. "I would be absolutely flabbergasted if they were not mentioned," said Brian Gardner, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc. "It would seem very odd if they would be just rolled out with some level of fanfare in the last couple of days and then not brought up in the State of the Union."
It remains unclear how much attention Obama will give to other parts of regulatory reform, including consumer protection. Though a bill drafted by Dodd last year would have created a Consumer Financial Protection Agency, the idea of a separate agency remains deeply unpopular with Republicans and many Democratic moderates. Dodd has already begun considering alternatives, including vesting more consumer protection powers with an existing banking regulator.
If Obama touts regulatory reform but does not stress the need for a new agency, some observers said that would signal the administration wants to pass a bill and is willing to compromise. If the independent agency is expressed as non-negotiable or a centerpiece of reform, however, the remarks could make it harder for Democrats to deal.
"It'll be interesting to see if he puts a marker down for the CFPA, which seems to be on life support," said Cornelius Hurley, a former Fed lawyer who directs the Morin Center on Banking and Financial Law at the Boston University School of Law. "It's hard, because it's pretty much a lost cause as far as the Republicans are concerned. There's no way he's going to get that through, except on a partisan basis."
Some observers said the industry should focus less on what Obama says than how he says it.
"The details of the programs that he mentions are far less important than the tone he takes," said Jaret Seiberg, an analyst with Washington Research Group. "The administration for the last two weeks has used attacking the banking sector as a political tool. The State of the Union offers the opportunity to either double down on that bet or pull back, and that is going to be what is most significant. … The problem is you can't be populist and get effective bipartisan reform enacted."
The president is also likely push for proposals to help the middle class. Obama and Vice President Biden offered a preview of those plans Monday, saying the administration would propose requiring that all employers give the option for employees to enroll in direct-deposit individual retirement accounts.
The administration is also seeking to expand tax credits for retirement savings. Both proposals could be an eventual source of income for banks, which frequently manage such accounts.
Cam Fine, the president and chief executive of the Independent Community Bankers of America, said he is hoping Obama will announce new initiatives to kick-start business lending by banks.
"He could announce in broad terms new programs to help banks reach out to small businesses and so forth for credit needs," Fine said. "It is still a priority for the administration to get tough on Wall Street and to assist Main Street with credit enhancements and spurring lending."
One proposal likely to go unmentioned, however, is the future of the government-sponsored enterprises. Though it has been more than a year since Fannie Mae and Freddie Mac were seized by the government and the Obama administration pledged to give an outline for reform of the enterprises in its budget, that outline is expected to include few — if any — details. "I don't think that's ripe," said William Longbrake, executive in residence at the Robert H. Smith School of Business at the University of Maryland. "In fact, I think, back in December, when they made the extensions of the credit lines, they were done with the GSEs for a while."