President Obama will travel to New York City on Thursday to push for expansive financial regulatory reform on Wall Street's home turf. Obama says the legislation is crucial for the nation's economy, but the big banks are already pushing back, arguing that tougher rules could do more harm than good.
Congressional Democrats today seized on the news of a $3.5 billion quarterly profit at Goldman Sachs, hoping that popular unrest over the banking industry's outsize profits will ease passage of the legislation. As Goldman fights an SEC lawsuit alleging it tricked investors into buying mortgage securities doomed to fail, Democrats are promising that their legislation would prevent similar fraud in the future.
The Obama administration says that the $600 trillion global derivatives market must become transparent and regulated. As it stands, derivatives are completely unregulated, and experts say that secretive trading is one of the factors that led to the financial crisis in the first place.
"With financial reform, we will bring derivative markets out of the dark," said Treasury Sec. Timothy Geithner.
President Obama echoed those sentiments Monday night during a speech at a Los Angeles fundraiser for California Sen. Barbara Boxer, emphasizing the importance of tighter regulatory rules.
"One of the main reasons our economy faltered was because some on Wall Street made irresponsible bets, with no accountability. The rules weren't adequate," said Obama.
In the past, the president has vowed to fight the banking industry's efforts to influence the bill and to veto any watered-down legislation.
"What we've seen is an army of industry lobbyists from Wall Street descending on the Capitol. If these folks want a fight, it's a fight I'm ready to have," Obama said in January.
Banks Send Lobbyists to Capitol Hill
By some accounts, banks have hired more than a thousand lobbyists to deliver their message to lawmakers. The banks say that the derivatives markets have turned enormous profits that have fueled the U.S. economy in the last two decades.
"Be careful what you wish for, because if you knock this industry down too much, it is the lifeblood of the American economy," said Jon Hilsenrath of the Wall Street Journal, summarizing the banks' views.
"You need these institutions to be strong, liquid and ready to lend, and if you tax them, put greater regulations on them, sure you make them less profitable, but those profits go into making loans," said Anton Schutz, portfolio manager for the Burnham Financial Industries Fund. "If you take money out of the system, then there's less of it, and you have a system that grinds to a halt."
With federal regulators failing to catch the Lehman collapse and Bernard Madoff, the banks ask, where's the proof that more government regulation will work?
Goldman Sachs' Profit Fuels Democrats Argument for Regulation
"By not enacting our legislation, by filibustering it, stopping it, we leave the American public vulnerable once again to the kind of shenanigans that have occurred in our large financial institutions across the country," said Sen. Chris Dodd, D-Conn., the chairman of the Senate Banking Committee.
When Democrats originally introduced the legislation, they claimed it would prevent the kinds of bank failures that led to the 2008 financial crisis. It would likely only have only an indirect effect on banking fraud.
The most contentious part of the legislation involves a $50 billion fund, paid for by the big banks and intended as an insurance policy to prevent bank failure. Republicans have argued that the fund sends the wrong message, offering banks a guaranteed bailout that would be funded by taxpayers in the event that $50 billion doesn't cover the losses.
Signs of Compromise
On Capitol Hill, there have been some signs of compromise, though. Congressional Democrats today showed some willingness to abandon the fund if it would ensure passage of the overall bill.
"I don't think the fund is central to what we're doing. What is central to what we're doing is put the referee back on the field," House Majority Leader Steny Hoyer, D-Md., said today.
The Obama administration has said it would not object to the removal of the fund from the legislation.
Goldman Earns $3.5 Billion in Profit
Fears that the push for new regulation might dampen Wall Street's spirits today proved unfounded. Stocks actually rose on the news of Goldman Sachs $3.5 billion quarterly profit, which was significantly better than analysts' expectations.
Still, some Wall Street watchers believe Goldman could have done with a little less attention, as it tries to fend off fraud allegations.
"Ironically, if there was a day that Goldman Sachs wishes that their results were not so good, it'd probably be today," Suzy Welch, an ABC News business and economic issues contributor, said today on "Good Morning America". "Their reputation is at stake."
Goldman Sachs has defended itself in recent days against the SEC's claim that it sold investors faulty mortgage products which were designed to fail. In a lengthy statement on its Web site, the bank asserted that it lost $90 million in the deal itself, which wouldn't make sense if it designed a rigged system.
Many expect that the SEC suit is just the beginning of the feds' clamp down on Wall Street firms. Some believe that Merrill Lynch, UBS, and Deutsche Bank will be targeted by federal regulators since they were some of the largest backers of the risky CDO derivatives that helped bring about the economic collapse.
SEC Filing Timed for Political Reasons?
Some Republican lawmakers have hinted at their suspicion that the SEC lawsuit was actually timed to gin up popular support for the legislation by feeding anti-bank sentiments.
"It must be nice for Democrats that the SEC's filing against Goldman Sachs so conveniently fits into their political agenda," wrote Rep. Darrell Issa R-Calif., the top Republican on the House Committee on Oversight and Government Reform, in a letter to the SEC.
The White House flatly rejected Issa's suggestion, saying that the independent SEC does not coordinate with the administration on its enforcement actions.
ABC's Rich Blake, Huma Khan and The Associated Press contributed to this report.