Coalition of the Unwilling

In theory, financial reform should dismantle the same deregulated system that produced toxic credit-default swaps and toxic credit cards. But on every aspect of financial reform except perhaps for basic consumer protection, the necessary structural reforms won't be passed in 2010. If the greatest financial-market meltdown in history couldn't spur deep, structural reform, what will?

The battle-within-a-battle for consumer protection offers some clues. A new federal regulator dedicated solely to keeping unfair and deceptive financial products out of Americans' hands was what the advocacy community wanted and, more or less, got. What advocates didn't get has filled the pages of this special report.

Why was consumer protection so different? Partly, it's not quite as opaque as Wall Street's insider stock-in-trade. Derivatives, proprietary trading, off--balance-sheet reporting, hedge-fund regulation, and the like aren't exactly the stuff of kitchen-table conversations. Even so, when polled about the shadowy "casino economy," likely voters in swing districts responded viscerally, with four to one in favor of more regulation. Yet consumer protection hasn't just fared better because it is simpler. It has benefited from a simple truth: Taking down the system requires a revolt from within -- a revolt of customers. And we need more such revolts.

With trillions of dollars in economic power lined up to protect the deregulated status quo, the best dissidents have turned out to be the purported beneficiaries of the system. On consumer finance, the revolt happened years ago when middle-class borrowers broke up with their lenders over credit-card abuses, deceptive mortgages, and ridiculous overdraft fees.

Of course, the banking industry quickly learned the lesson. To make the case against regulation of derivatives, the bankers didn't show their faces, even though the big five mega-banks control 97 percent of the market and have $78 in derivatives exposure for every $1 held by actual businesses. Instead, they lined up the corporate buyers of traditional and defensible derivatives such as options and futures to hedge against changes in the price of supplies. These so-called end users from Apple to John Deere fronted for bankers and lobbyists and argued that aggressive reform would hurt ordinary corporations. Suddenly, the reformers' argument that exchange trading would bring price transparency and benefit the real economy had nowhere to go.

Americans for Financial Reform, the umbrella advocacy coalition established to promote real reform, quickly organized an impressive array of other end users who had been burned by speculative price spikes in commodities like food and energy. But it was nearly impossible to break through in the media or Congress once other corporations had presented a united front with bankers.

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Achieving financial reform that's more than just tinkering around the edges will require a revolt of many more unsatisfied customers. One unorganized potential base: the dozens of state and local governments who bought aggressively marketed interest-rate swaps on bonds during the boom and are now being hammered on both ends by Wall Street. On the one end, the Street caused the Great Recession, which is decimating tax receipts and community budgets. On the other, the same bankers have refused to renegotiate outrageous interest-rate spreads even though, as a result of the crisis they created and due to taxpayer largess, their borrowing costs are next to zero.

Banks like Goldman Sachs and JPMorgan Chase will collect over $1.25 billion from cash-strapped school systems, towns, and states over the deals in 2010. The insult of having to pay an investment bank money for nothing while it cuts city services stirred the Los Angeles City Council into action in March. Faced with a $19 million annual payment to Wall Street, the council voted to move nearly $30 billion in city business away from any company that refused to renegotiate a derivative deal. A number of states are even considering their own "public option" -- cutting out the private sector altogether and opening their own banks to fund infrastructure and lend to citizens. This is exactly the type of "end user" revolt that, once organized, could pave the way to a real financial-reform agenda.

Though largely focused on health care and the Employee Free Choice Act for the past year, organized labor is beginning to tell a broader story about how productive, jobs- and goods-producing American businesses have suffered in an economy dominated by finance. (Finance overtook manufacturing as America's largest sector by profits in the 1990s.)

"We want real growth in America, not just growth in the debt markets," says Heather Slavkin, a senior policy adviser at the AFL-CIO. With Wall Street's current business model, those two are increasingly incompatible. Unregulated hedge funds and private-equity funds bought up over 3,000 American companies during the leveraged buyout boom. The buyout model -- use Wall Street–financed debt to purchase companies, extract equity, and leave companies highly vulnerable to loan defaults -- has put millions of American jobs at risk. Experts estimate that half of the bought-out companies will go bust in the coming years. Such a reckoning could add the executives and workers of America's private-equity-owned companies to the ranks of Wall Street's dissatisfied customers.

Pitting the banking business against the rest of American business could create just the opening progressives need, as the U.S. Chamber of Commerce understands perfectly. That's why it insists that financial reform isn't aimed at big banks -- it's aimed at "businesses that have little to do with consumer finance," such as the local butcher who lets customers buy ground chuck on a tab.

Besides proving how out of touch the chamber is with modern life, its multimillion-dollar "local butcher" ad campaign showed how toxic the real targets of financial reform are -- even within their own trade group. Fortunately, health-care reform has battle-tested new progressive groups to represent the actual butchers of America (who may not extend credit anymore, but they certainly need it, and fairly priced). Small businesses that are priced out of affordable health care did not join big businesses in opposing health reform, and organizations like Business for Shared Prosperity, the MainStreet Alliance, and Small Business Majority will be essential to dismantling the business case for predatory finance.

Another improbable ally in the structural critique of the banking system is the Independent Community Bankers of America, which supports breaking up the large banks and reinstating the Glass-Steagall Act. True, the ICBA lobbied hard to exempt their members from the proposed Consumer Financial Protection Agency, but when the agenda moves on to truly dismantling "too big to fail," count on them to be there.

In sum, there is a huge, majority coalition of unhappy customers of Wall Street. This is the prime constituency for real reform. The trillion-dollar question, of course, is where the White House will be. President Barack Obama got a taste of the fruits of progressive leadership when he won health reform. But on banking, at least for now, the Bush administration's mission to preserve the system in 2008 has ended up being the same mission of the Obama administration's reform plans in 2010. But the system -- highly leveraged, opaque, overconcentrated, and dominated by shadow market players and practices that didn't exist even a decade ago -- is fundamentally not worth saving. In the years ahead, we will need many more voices to convince the powers that be of that truth.

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