In a Wall Street speech, the President seeks support for regulatory fixes aimed at preventing another banking crisis
One year after Lehman Brothers collapsed, triggering the worst economic tumult since the Great Depression, President Barack Obama traveled to the epicenter of the crisis—Manhattan's financial district—on Sept. 14 to call for passage of his proposed overhaul of financial regulations. The President also issued a challenge to Wall Street to take responsibility for assisting a broader economic recovery.
In a midday speech at Federal Hall, Obama cited economic progress that has taken place since his Administration took office, saying that "while there continues to be a need for government involvement to stabilize the financial system, that necessity is waning." He noted that banks have repaid more than $70 billion in bailout money and the government has made a profit on some of its investments.
On the other hand, Obama warned against misinterpreting the situation. "We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences and expect that next time American taxpayers will be there to break their fall."
With the financial regulation speech, Obama is hoping to reinvigorate his slow-moving effort to pass comprehensive financial reform, much the same way his prime-time speech before Congress on Sept. 9 fanned new life—at least momentarily—into the Democrats' efforts to push ahead on reforming the insurance industry and the American health-care system.
Moving Reform Forward
The challenge this time will be far simpler. After all, few would argue that the fate of Obama's entire Presidency rests on successfully completing legislation to create a new regulatory structure for the financial system, as many both inside and outside the White House believe is the case with health care.
Still, amid growing criticism that little has changed on Wall Street in the 12 months since the crisis began—that many of the dangerous and risky practices that caused the near-collapse of the financial system continue largely untouched and still constitute a threat to the economy—the Administration faces a critical test in moving forward its various proposals to lower the risk of another cataclysmic crisis.
"It remains to be seen if the speech will be a game changer," says Howard Glaser, a former housing specialist in the Clinton Administration and lobbyist for the Mortgage Bankers Association of America who now runs his own consulting firm. He believes the Administration has been far too anemic in its efforts to promote its reform proposals so far. "If the speech is the beginning of a sustained effort, they still have a chance to salvage their plans. But if it's a one-time shot and they lose focus, they won't see a bill signed this year."
Monday's speech was designed to focus on the financial reforms that the Obama Administration has laid out since March, including most dramatically a new Consumer Financial Protection Agency. The President also highlighted proposals for revamping regulatory schemes to better regulate derivatives, eliminate gaps in oversight, improve international coordination, and provide greater supervision of the biggest and most integral financial firms and create the tools to dismantle those firms safely and rapidly when they fail. The President stressed recently announced plans to require large financial firms to boost their capital and reduce leverage, in order to lower the chances that a bet gone wrong inside one firm can again create risks that threaten the entire financial system.
"Obligation to a Wider Recovery"
As with the President's health-care speech, which was targeted both at calming public worries over the proposals and wooing recalcitrant Democrats and moderate Republicans into backing the plans, Obama's Wall Street speech was aimed at more than one audience.
To a public feeling battered by the recession and still-rising unemployment and unhappy with what many perceive to be Washington's slow and inadequate response, the President hammered home how far from the brink the economy has come and how much worse things would have been had his Administration not taken the aggressive steps it has.
"When this Administration walked through the door in January, the situation remained urgent," he said. "The markets had fallen sharply; credit was not flowing. It was feared that the largest banks—those that remained standing—had too little capital and far too much exposure to risky loans. And the consequences had spread far beyond the streets of lower Manhattan. This was no longer just a financial crisis; it had become a full-blown economic crisis, with home prices sinking, businesses struggling to access affordable credit, and the economy shedding an average of 700,000 jobs each month."
He also had some sharp words for financial firms about a quick return to greed and risk. "The fact is, many of the firms that are now returning to prosperity owe a debt to the American people. Though they were not the cause of the crisis, American taxpayers through their government took extraordinary action to stabilize the financial industry. They shouldered the burden of the bailout and they are still bearing the burden of the fallout—in lost jobs, lost homes, and lost opportunities. It is neither right nor responsible after you've recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system, and a more broadly shared prosperity."
President's Popular Support at Risk
Political strategists and analysts warn that with unemployment expected to continue rising past 10% in 2010, when midterm elections will be held, the Administration needs to do a better job of convincing the public that it's doing all it can for the economy or face a continued backlash. And if by bashing Wall Street fat cats Obama can regain some of the populist credibility that would help him win over the left wing of his party on health-care ideas, all the better.
"There's a big gap between the perceptions of the average American and of Washington right now," says Gregory Valliere, chief policy strategist for institutional broker Soleil Securities. "The average American feels bitter and alienated." It's as though "D.C. has moved on and forgotten too quickly how traumatic the crisis was, what it did to their 401(k)s and mortgages." If the average American doesn't see the economy getting better, Valliere adds, Obama's popular support will continue to suffer.
Republicans are counting on continuing pain on Main Street to derail Obama's plans. Republican National Committee Chairman Michael Steele said in a statement following the speech: "For more than 3 million Americans who have lost their jobs this year, the President's policies have been a failure. His $787 billion stimulus bill has led to wasteful spending but hasn't created the jobs he promised. And every time he has wanted to expand the government's influence over the economy and our daily lives, from his takeover of GM and banks to his proposed government-run takeover of our health care, it has meant spending more money we don't have and digging America deeper into debt. Those are the real results of the President's experiments on our economy, and no amount of speeches will convince the American people otherwise."
The President also needs to rev up his congressional troops in order to have any hopes of passing substantive financial reforms. With financial-services lobbyists working furiously to water down the proposals they don't like, Washington's multitude of regulators battling to protect their turf, and a Congress that seems far less inclined to take aggressive steps now that the worst of the crisis seems to have passed, the Administration needs to put some muscle into passing the host of regulatory reform proposals it offered up last spring or watch them wither away.
Momentum for a Finance Fix Could Fade
The big danger, warns one lobbyist who recently left the staff of a leading Democrat on Capitol Hill to move to K Street, is that the economy is continuing to stabilize and memories of the crisis are receding. "With Congress so bogged down on health care and the growing sense that the economy and the markets are getting back to normal, the momentum for regulatory reform could die out," he says.
That's why Obama needed to make a forceful case on behalf of his proposed reforms. The question, however, is how much difference even the most powerful speech can make when it gets down to the nitty-gritty task of getting Congress to craft and pass effective legislation. In a note to clients, Jaret Seiberg, a financial-services policy analyst at Washington Research Group, argues that while the speech will attract enormous attention, "we question if it will meaningfully alter the path of financial reform."
Given the powerful opposition to the proposed consumer agency, Seiberg doesn't believe it can pass without significant modification. On other issues, the President doesn't need Congress. The Treasury recently proposed higher capital standards for banks, and it can move on those by changing regulations. And though Seiberg believes some legislation is likely to pass regulating the credit-rating agencies and derivatives trading before the election, there is enormous debate over how stiff those measures will be. Obama has given another strong, clear speech. But the President, his advisers, and his allies still have plenty of work ahead of them, in financial reforms as in health care.