As former Federal Reserve Chairman and Obama economic advisor Paul Volcker testifies today before the Senate Banking Committee, fresh hints of compromise are in the air that could sink, or at least severely defang his proposal to restrict proprietary trading at banks. That’s bad news for Volcker, but good news for financial regulatory reform legislation.
The so-called Volcker Rule has won only tepid support on Capitol Hill. While Volcker will make a strong case for his proposal, Republicans, whose support in the Senate is crucial for successful passage of financial reform legislation, will not accept it as currently construed. Many Democrats, for their part, have reservations as well. Now, a Deal Reporter article republished on the Financial Times’ Web site late yesterday indicates that Senate Banking Committee Chairman Chris Dodd is prepared to lay the Volcker Rule on the alter of bipartisan compromise.
While the president’s bank tax proposal provides an additional complicating factor, Dodd’s reported retreat on the Volcker Rule indicates a willingness among Democrats to prioritize finding a path forward that allows the passage of financial services legislation above defending proposals that have been widely derided as crass attempts to stoke a populist maelstrom.
Even while the White House political team is busy laying traps for Republicans that will force fights on issues that enable Democrats to associate the GOP with Wall Street, they know that ultimately the president’s party cannot go into the November elections without a legislative accomplishment. With health care all but off the table, the financial regulatory overhaul represents the president’s best chance to score a legislative win before November. It’s a good bet that the White House will prefer a deal to sending Democrats out to face voters empty-handed.
Senate Banking Committee Chairman Chris Dodd will ultimately do whatever it takes to pass a bill—financial reform is as much about his legacy as it is about the White House’s legislative agenda. This includes scaling back or scrapping the Volcker Rule and reaching a compromise on the proposed Consumer Financial Protection Agency, another major sticking point for Republicans who see the proposed agency as another counterproductive government bureaucracy. In addition, we found it telling that after taking a hard-line on the CFPA the week before, the president completely omitted mention of the controversial provision from his State of the Union address. While it’s anybody’s guess whether this was deliberate, given the strong thread of anti-Wall Street populist rhetoric throughout last Wednesday’s speech it seems unlikely that the President would pass up this easy pitch unless he had a good reason. That reason, it could be speculated, may be a post-Massachusetts shift in strategy to clear a path forward for financial regulatory reform.
If they are prepared to deal, Democrats will find receptive negotiating partners. Republicans on the Senate Banking Committee are by and large a pragmatic bunch who are supportive of a financial regulatory overhaul bill that protects against a future crisis but doesn’t overreach. For its part, the financial services industry is ready to have a bill done as well. The uncertainty brought about by the continued wrangling in Congress has its own costs.
The Obama camp will continue to push a populist anti-Wall Street message, but must tread carefully. GOP Senators will resent being used for political ends. Expect tension in the West Wing between political advisors enamored with ensnaring Republicans in a populist political trap and legislative affairs staffers eager to get a bill passed. In addition, voters have an uncanny ability to sense when they are being pandered to – an added risk to the White House’s populist strategy.
While compromise sufficient to win Republican support for financial services reform legislation may be more promising now, constructing a bill that can pass the Senate is still going to be an uphill battle. Exactly what form the necessary compromises will take remains an open question. There are more contentious issues on the table now than ever and an inclination for compromise does not mean a deal is certain. Look for a hard fight. Republicans will flex their newfound political muscle to force concessions on provisions like the Volcker Rule and the Consumer Financial Protection Agency. Democrats will lurch between their dueling political objectives of trying to position Republicans as obstructionists on measures to reform Wall Street and scoring a legislative accomplishment before the midterm election—and in the middle of it all, a Senate Banking Committee Chairman looking for one more victory to cap a long career.
Taylor Griffin is a founding partner of Sulgrave Partners LLC, a strategic communications consulting firm in Washington, D.C. Taylor is a seasoned communications strategist and veteran of the Treasury Department, the White House, a public policy association representing Wall Street CEOs and three presidential campaigns. Most recently, Taylor served as a senior communications advisor to the McCain presidential campaign.