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Banking on it

Economy | President Obama takes his argument for financial reform to Wall Street

NEW YORK-When President Obama spoke in New York Thursday about financial reform, he closed his speech with a quote from Time magazine:

"Through the great banking houses of Manhattan last week ran wild-eyed alarm. Big bankers stared at one another in anger and astonishment. A bill just passed . . . would rivet upon their institutions what they considered a monstrous system . . . such a system, they felt, would not only rob them of their pride of profession but would reduce all U.S. banking to its lowest level."

The quote was not from last week's Time but last century's-June 1933. This century's financial reform has yet to pass, so today the president took to Cooper Union in New York City to argue that reform is not just good for Main Street; it's good for Wall Street, too.

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Obama stayed away from ramping up populist rage and spoke directly to the financial and government sectors, decrying "a failure of responsibility-from Wall Street to Washington-that brought down many of the world's largest financial firms and nearly dragged our economy into a second Great Depression."

He argued five points: that financial reform would end bailouts, bring transparency to financial dealings, protect consumers, give shareholders greater power, and require bipartisan support to steer clear of extremes.

In typical Obama style, the president praised the middle road-the line "between markets unfettered by even modest protections against crisis, and markets stymied by onerous rules that suppress enterprise and innovation." He tried to persuade Wall Street by claiming that limiting the size of banks and their risks would instill market and investor confidence. Regulating derivatives (a complicated finance deal that involves placing a bet on the future price of an underlying asset-a practice that spurred the last financial crash) would ensure that Wall Street knows what it's betting on, he said.

The president said his goal is to prevent more taxpayer bailouts. The Senate bill would ostensibly do this not by reducing the size of banks but by requiring them to keep more capital to offset their risks. It would also keep a pot of money, made up of contributions from the financial industry, that would help those banks that are "too big to fail" to liquidate without taxpayer help. In addition, it would establish a council to scrutinize financial companies whose downfall would endanger the country's financial stability.

The Senate bill regulates derivatives and requires hedge funds to be more open about their trades and portfolios. And a new consumer bureau would protect consumers with rules banning abusive mortgage and lending practices. Shareholders would have the power to limit executive pay.

Nicole Gelinas, senior fellow at the Manhattan Institute and author of After the Fall: Saving Capitalism from Wall Street and Washington, said the president named some worthy goals: "But the question is do the details live up to the rhetoric? And I would say no." Gelinas argues that it is better to start small, by regulating derivatives and trading them on a public exchange, along with putting stricter limits on what banks can borrow. This, she says, would do more toward stopping the next "too big to fail" bailout than creating a council to regulate systemic risk.

As far as the pot of money designated to help banks liquidate, there is some debate as to whether or not it's sufficient to stop taxpayer bailouts. Senate Minority Leader Mitch McConnell, R-Ky., has said that this "guarantees future bailouts," although the bill specifically states that the money is not supposed to be used to preserve a company. The bill, however, does not actually ban bailouts, and most experts (including Gelinas) agree that the $50 billion currently in the bill is not enough to liquidate a company without taxpayer help.

Senate Majority Leader Harry Reid, D-Nev., said on Monday that he plans to move ahead with a vote to end talks and proceed to a vote on the legislation. With a 59-41 majority, Democrats will need one Republican vote to end debate. Democrats are looking to moderate Republicans like Sens. Susan Collins of Maine and Scott Brown of Massachusetts to break ranks and vote to move forward with the bill.

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