Not Losing is the New Winning for Bank Lobbyists

Backlash against bailouts and bonuses makes it harder for Wall Street to kill financial reform in Washington. But lobbyists have sidestepped some of the harshest proposals

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By Alison Vekshin and Michael J. Moore

(Bloomberg)—Four Wall Street lobbyists and about a dozen lawmakers huddled over eggs and bacon at Tortilla Coast restaurant on Capitol Hill on Dec. 2 to discuss legislation aimed at strengthening bank regulation.

The meeting between fiscally conservative House Democrats and lobbyists for the largest U.S. financial firms turned tense, with a lot of finger-pointing, recalled one attendee. The message delivered over breakfast: We bailed you out last year with taxpayer dollars. Now help us address the needs of constituents by aiding struggling homeowners and lending more.

The backlash against bailouts and bonuses is making it harder for Wall Street to get its way as lawmakers redesign the framework for financial oversight. The biggest banks may be forced to submit to a new regulator for mortgages, credit cards and other consumer products; put $150 billion into a fund the government will use if they collapse; and pay more to insure deposits. Still, the firms that helped precipitate the worst financial crisis in 70 years have so far sidestepped proposals that would have split investment and commercial banking, capped pay or seriously hurt their ability to make money.

"The industry is not losing as badly as it thought it might," said Oliver Ireland, a former associate general counsel at the Federal Reserve and now a partner at law firm Morrison & Foerster in Washington. "The fact that someone had a worse proposal on the table and it doesn't happen — it's hard to view that as a win. It's not as big a loss."

'Memory Loss'

That banks are making any headway "is astonishing," said Travis Plunkett, legislative director at the Washington-based Consumer Federation of America.

"Some members of Congress seem to have memory loss," Plunkett said. "They are forgetting that the very institutions whose amendments they're proposing were the entities that helped cause our nation's financial collapse. The banks are playing death by 1,000 cuts."

The House last week passed a package of measures to create a Consumer Financial Protection Agency, bolster oversight of derivatives and hedge funds, limit incentives in executive pay that spur excessive risk-taking and set up a mechanism to dismantle large firms that fail. The bill reflects the set of regulatory proposals President Barack Obama released in June.

The Senate has yet to consider a bill and isn't expected to vote on one until at least early next year. The Senate Banking Committee is reworking a draft released last month by Senator Christopher Dodd, the committee chairman, after Republicans complained that it would expand the government's powers too far. The lack of consensus in the Senate may offer more opportunity for lobbyists to mold and defeat parts of the legislation before it reaches a vote.

'Water It Down'

"Wall Street is probably happy with the slowness of the process because the slower the process is, the more you can drag it out and water it down," said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. "Right now, all the energy and political capital is going into health care."

Whatever legislation emerges, it likely won't reintroduce aspects of the 1933 Glass-Steagall Act that would split commercial and investment banking. That idea, which could lead to the breakup of large banks such as Bank of America (BAC) and Citigroup (C), has won support from Bank of England Governor Mervyn King and former Federal Reserve Chairman Paul Volcker, now head of the U.S. Economic Recovery Advisory Board. No such proposal is in current legislation before Congress.