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.
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?
"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.