Obama's Next Target: Financial Reform

Can he do it again?

With his prime-time speech before Congress on Sept. 9, President Barack Obama reinvigorated—at least momentarily—the Democrats' efforts to push ahead on reforming the insurance industry and the American health-care system. Now, with a mid-day speech on Sept. 14 at Federal Hall in New York City—timed to coincide with the one-year anniversary of the collapse of Lehman Bros.—the President and his economic team are hoping he can provide a similar boost to slow-moving efforts to pass comprehensive financial reforms.

The challenge this time will be far simpler. After all, few would argue that the fate of Obama's entire Presidency could rest 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 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 the various measures it has proposed to lower the risks of a cataclysmic crisis occurring again.

"The speech on Monday will focus on the need to take the next series of steps on financial regulatory reform to ensure that what happened a year ago doesn't happen again and cause the type of havoc we've seen in our economy," White House spokesman Robert Gibbs told reporters on Friday.

addressing two audiencesAs 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 speech at Federal Hall on Wall Street is 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 needs to hammer 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. Political strategists and analysts warn that with unemployment expected to continue rising past 10% in 2010, when mid-term 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.

But 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 whither away.

momentum could fadeThe 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.

So count on Obama to make a forceful case on behalf of his proposed reforms. In a note to clients, Jaret Seiberg, a financial-services policy analyst at Washington Research Group, said he expects the President to demand higher capital requirements and leverage limits for all banks, including even higher standards for the biggest financial firms; enactment of the Consumer Financial Protection Agency; and stronger oversight of the credit-ratings agencies. He also warned clients to expect "an attack on speculators who use derivatives and credit default swaps."

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. Seiberg argues that while the speech will attract enormous attention, "we question if it will meaningfully alter the path of financial reform."

Given the strong 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 on credit ratings and derivatives trading before the election, there is enormous debate over how stiff those measures will be. No matter how strong Obama's speech is, the President, his advisers, and his allies will have plenty of work ahead of them, in financial reforms as in health care.

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