Treasury and Progressives on the Financial-Reform Bill.


My friend Mike Konczal has an interesting post on the Treasury Department's role in the financial-reform bill, but I think his analysis is wrong on a number of issues. The idea that the administration consistently undermined the bill is a common perception on the left -- and one so deep-seated that I doubt I'll change anyone's minds in the following paragraphs -- but it's simply not the case that Treasury pushed against reform in every, or even most cases. Most of the time, Treasury was reacting to the concerns of regulators who worried about their ability to enforce the law and senators who didn't want to vote for the law, but they consistently supported proposals designed to limit risk on Wall Street. Let's walk through some examples:

  • Collins amendment. Treasury initially opposed this amendment because they worried about its effect on the Trust Preferred Securities that the government had bought in 2008 in an effort to shore up the banks and reinforce their capital positions. Whether or not you disagree with their strategy, it is foolish to pass a law that would discount them from being considered as capital after the administration went out of its way to stabilize the banks. When a compromise was reached that allowed a transition period -- note that Treasury had already excluded TRUPs from its international capital negotiations -- the administration backed this provision and the amendment passed. It's easy to forget that in June 2009, before many people even paid attention to the issue of financial regulation, Treasury was arguing in favor of higher capital requirements for banks.
  • A variety of vote-getters. A lot of people mistake the Treasury's work trying to get much-needed votes on the bill with their normative positions, particularly on issues like the Scott Brown compromises, end-user exemptions in the derivatives title, and the ex-ante resolution fund. Without Republican votes, they would not be able to pass this bill. Without Brown and the moderate Republicans who would vote with him, the entire bill was at risk -- especially with Feingold's decision not to offer his support for a strengthened Volcker rule. It's silly to criticize Treasury for doing what it had to do to get the bill to the finish line. I have yet to see anyone lambasting progressive Sen. Dick Durbin for his epic arm-twisting of Rep. Luis Guiterriez, who supported an ex-ante resolution fund but voted to kill the idea after Durbin made clear that it wouldn't get past the Senate.
  • Derivatives. It's a subtle distinction, but since the details matter in these things, it's worth noting that Treasury only fought Section 716 when it was a vaguely written provision that could have introduced more problems into the derivatives markets than it corrected; when it was rewritten to clarify what Sen. Blanche Lincoln apparently expected it to do, Treasury got behind the provision. Throughout, Treasury pushed for strong clearing requirements, perhaps the most important part of the derivatives title.

The idea that Treasury "always end[s] up leaving their fingerprints on the side of less structural reform and in favor of the status quo on Wall Street" is false. In terms of structural reform, Treasury -- and President Obama in particular -- were the strongest advocates in government for an independent consumer finance regulator. Other structural reforms that they supported, including merging two bank regulators, the Volcker rule, the (delayed but still real) Franken amendment for ratings-agency reform, serious constraints on the Fed's emergency bailout powers, the new derivatives regime, the new liquidation authority, and higher capital requirements for the largest banks, including new-fangled contingent capital. Treasury had been talking about reducing risk since this project got under way.

You can tag Treasury for not supporting the Kaufman-Brown amendment to break up the banks. For some short-sighted observers, that's enough to make them villains. But the administration didn't block a vote on K-B or spend much time lobbying against it. And even though K-B was an important idea, it's not the heart and soul of financial reform, nor is there a unanimous case that size was the critical culprit in the crisis. You can also blame Treasury for moderating the Fed audit, likely out of a loyalty to Fed Chair Ben Bernanke, but even so, a relatively strong Fed audit is in the bill. Finally, they didn't support specific leverage requirements, in part because of the ongoing Basel III process to decide them globally and partially because they believe those rules can be easier for banks to elide, an argument I've heard from regulators as well. 

I sympathize with reformers who are disappointed by what isn't in this bill, and recognize that folks in the Treasury didn't share their desire to punish the banks or even perform a complete overhaul of the financial sector. But that doesn't mean they were on the side of the status quo -- far from it, they found themselves angering the banks as they sought to change the way they do business in a number of fairly specific ways, all while bulking up regulatory supervision. Meanwhile, many of the major failures in the bill came not as a result of Treasury's meddling but because of Congressional politics, whether it's the auto-dealer exemption or the Brown loopholes.

Konczal seeks to put all accountability for this bill on the shoulders of the administration and wash progressive hands of any ownership. While I'm sure the administration doesn't mind that responsibility, doing so would be a mistake for progressives and discount what fruits of their efforts are in the bill, akin to saying that health-care reform isn't progressive because it doesn't have a public option. This bill is a start, not an end, and people who want more reform need to work to augment and expand this legislation, especially given the challenges of starting anew.

-- Tim Fernholz

Update: Economics of Contempt has some good thoughts on this issue as well.

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