Will Democrats Trade A Consumer Protection Bureau For Weak Derivatives Reform?

Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL)

Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL)

Roll Call noted today that Senate Republicans “are girding for battle on financial regulatory reform and using the recess to develop a legislative and political strategy capable of uniting the minority.” However, they have evidently not decided whether or not complete opposition to the entire effort is the tactic that they will use. The failure of that strategy in the health care fight means some attempt to cut deals might be in the cards.

On that note, the New Republic’s Noam Scheiber reported that the Republican strategy may be to mostly let the Democrats have their way on creating a consumer protection division within the Federal Reserve, in return for weakening other provisions of the bill. As Scheiber put it, “if the bet pans out, the [financial services] industry and its GOP allies would, in effect, be trading a robust consumer agency for a chance to scale back a number of highly consequential but below-the-radar reforms.”

One of these “below-the-radar” areas is derivatives reform, and while the bill that Senate Banking Committee Chairman Chris Dodd (D-CT) moved out of committee is tighter than that passed by the House of Representatives last year, “most continue to regard the derivatives provision in Dodd’s bill as a placeholder, which will almost certainly be nudged aside by a compromise negotiated by Democrat Blanche Lincoln and Republican Saxby Chambliss”:

As one lawyer involved in the derivatives industry told me last week, “If they try to push the Dodd bill as currently written on derivatives—it can’t fly.”…The bottom line, this person concluded, is that voters just aren’t very invested in the details of derivatives reform, and so it’s hard to believe the Democrats will be, too.

The prospect of derivatives reform being watered-down was already very real, since Lincoln made some remarks at the U.S. Chamber of Commerce last month that seemed to indicate her willingness to exempt significant amounts of derivative trading from exchanges and clearinghouses. I don’t think swallowing these exemptions in exchange for a consumer protection entity that already deviates from the administration and House’s fully independent Consumer Financial Protection Agency (CFPA) is a deal worth making.

For one thing, I’m skeptical that compromising will really deliver a large number of Republican votes. Sen. Richard Shelby’s (R-AL) on again-off again attitude toward negotiations with Dodd makes it seem like he’s more interested in buying time than genuinely crafting a bill. Also, as more numbers come out showing that the public is still angry at Wall Street, I think the odds that Dodd can pick up enough Republican votes on the floor to pass a decent bill improve. Down the line, no one’s going to remember if regulatory reform passes with 61 or 81 votes, but they will remember who was in charge if reform fails to rein in the banks and prevent another financial meltdown.