Only hours after Vermont Senator James M. Jeffords announced his defection from the Republican Party on May 24, the Democratic chair-apparent of the Senate Banking Committee, Paul S. Sarbanes, called a briefing to talk up his plans. As the Maryland Democrat entered the Banking Committee's hearing room, New York Representative John J. LaFalce--Sarbanes' ideological and policy soulmate--marched up, fell to one knee, and kissed his ring.
LaFalce won't be the last in that position. The Democrats' takeover of the Senate has flipped Washington's agenda for financial services. Consumer-oriented issues that outgoing Chairman Phil Gramm (R-Tex.) wouldn't give the time of day--stronger financial privacy, predatory lending, credit-card abuses, and growing household debt--will now seize the spotlight. Facing this unexpected challenge, lobbyists for banks, brokers, and insurers are lining up to court Sarbanes.
PRIVATE WAR. But can Sarbanes reap more than obeisance from his fellow senators? More likely, the 68-year-old Baltimore native will have a tough time getting any legislation passed. He faces a Banking Committee that's conservative on both sides of the aisle and a narrowly divided Senate. And even if Sarbanes can push bills through the Senate, House Financial Services Committee Chairman Michael G. Oxley (R-Ohio) isn't inclined to take up what a GOP aide calls "Sarbanes' ultra-left financial agenda."
Still, if any issue can break through this gridlock, it's privacy, a favorite of Sarbanes. Since 1999, he's been pushing legislation to limit the consumer information that financial firms can share with other businesses, with mixed results. The 1999 Gramm-Leach-Bliley Act allows consumers to bar any transfer of account information when, for example, a broker sells its account lists. But banks, brokers, and insurers can freely share customer data in-house with other divisions.
Now, Sarbanes wants to require firms to give consumers a chance to opt out of that in-house sharing too. He may have a chance. He has allies across the aisle. More important, "members of Congress find it difficult to vote against anything labeled `privacy,"' concedes Edward L. Yingling, head of government relations for the American Bankers Assn.
Nevertheless, privacy advocates aren't guaranteed a win. Most leaders in Congress want to see how the 1999 rules work before they reopen that hard-fought law. And financial industry lobbyists say Sarbanes' leverage is weak. "There's no `must-pass' bill that Sarbanes can hold up to make us swallow his proposals," says a bank lobbyist.
The Senate switch may mean both parties rely more on rhetoric to support their agendas and less on legislation. Some Democrats would like an immediate crackdown on predatory lending, the practice of offering high-interest loans to poor and uneducated borrowers. But Sarbanes has expressed support for regulators, who want to beef up enforcement of existing fair-lending rules before Congress acts. House Republicans, for their part, would like new limits on Fannie Mae and Freddie Mac, the government-backed mortgage lenders. Sarbanes is likely to block that push.
His control of the Banking gavel may also force Bush to moderate his choices for SEC commissioners. Harvey L. Pitt, the Washington lawyer nominated as chairman, should sail through. But with one seat left to fill, Bush's deregulation-minded nominees will have a tougher time clearing Sarbanes' committee.
COLD COMFORT. Indeed, the securities industry may face the most changed prospects. Sarbanes won't push Gramm's efforts to cut transaction fees paid by investors and boost pay at the Securities & Exchange Commission. Nor will the Marylander pursue Gramm's planned top-to-bottom review of securities laws. As a result, Wall Street won't have a chance to roll back some targets--such as conflict-of-interest rules for brokers who both advise and sell stocks to mutual funds--that it had hoped to get rid of.
That's not the only reason Wall Street will miss Gramm. The Texan didn't hesitate to step in when the SEC proposed cracking down on accountants or when Nasdaq pitched a new trading system that would have hurt rival electronic traders. Now, Sarbanes says he'll hear out industry complaints, but "they may not necessarily get their way."
Even if few of Sarbanes' ideas make it into the law books, that will provide little comfort for the financial services industry. A cold shoulder for Wall Street and warm greetings for consumer advocates is reversal enough from the past six years under Gramm.
By Christopher H. Schmitt and Mike McNamee in Washington