On the Death of Brown-Kaufman.

With the failure of the Brown-Kaufman amendment to cap bank size and break up the largest banks, reformers have reason to be discouraged, but they're not back to square one. Take a look at the vote yesterday, and you'll see a fascinating coalition -- liberals and conservatives, Democratic leadership and three Republican conservatives. Interestingly, all but four of 13 Democratic incumbents facing re-election voted in favor of the bill, and of the four who didn't, two are the senators from New York. This suggests the issue remains politically salient.

What does the failure signal for bill-strengthening measures going forward? The pattern we've seen so far is that amendments to weaken the basic financial-reform legislation are rejected decisively, while measures that would strengthen the bill, with the exception of B-K, have been accepted in relatively strong terms. B-K was by far the most aggressive of these amendments, so its failure suggests that there will be more support for other amendments if they can make it to the floor.

Possible amendments that will get higher levels of support than B-K include the Merkley-Levin amendment to impose a real Volcker rule, Jack Reed's effort to make the Consumer Financial Protection Agency truly independent, an amendment from Al Franken to strengthen ratings-agency regulation, and the McCain-Cantwell amendment to reimpose the separation between commercial and investment banks. I'd include the Sanders amendment for a Fed audit, but now that a compromise has given it support from the White House and Congressional leadership, I'd say it's set to pass easily.

What about the project of limiting bank size going forward? The current Dodd bill already includes language based on the House financial reform bill that empowers regulators to break up institutions they deem systemically risky. New data will also be revealed publicly if this legislation passes, and that will likely give reformers more ammunition for their argument. This suggests that with the passage of this bill, bank reformers will next seek to mount a campaign encouraging regulators to use their new powers.

The Dodd bill also includes an incredibly weak gesture at capping the size of banks, but this could be strengthened with the Merkley-Levin amendment mentioned above that would give teeth to the Volcker rule. Support from the president for M-L would put it over the top, but it looks like the White House is content with the current bill's weak language on the topic.

Barring unexpected developments, reformers are now looking at a strong bill, but one that won't fundamentally change the shape of Wall Street -- though it does ease the path for doing just that in the coming years.

-- Tim Fernholz

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