29 Oct 2010

Crossing Wall Street

By Lindsay Renick Mayer, Michael Beckel & Dave Levinthal on November 16, 2009 11:45 AM
(N.B.: For the most up-to-date charts and downloadable spreadsheets that go with this series, check out our finance policy tools page.)

As the United States continues digging itself out of a recession, the nation is poised to re-emerge in a dramatically altered financial climate. And after years of enjoying relatively little regulation, commercial banks, credit companies, hedge funds and securities and investment companies are facing the most extensive overhaul by the federal government since the Great Depression.

That could spell retribution for those who are jobless, broke and have lost their homes to predatory lending, albeit 14 months after headlines announced the onslaught of an economic recession and one year after voters elected a new president to lead them out of the gloom.

But if a lack of money is the crux of the economy's troubles right now, the abundance of money pouring into the political sphere may, in part, mean that sweeping change doesn't look so...sweeping. There's no doubt about it: Despite a moribund economy, the financial industries that have enjoyed relatively little regulation over the years continue pouring big money into ensuring the government's control over them remains limited.

"You've got all these industries protecting their turf," said Lawrence Baxter, a law professor at Duke University whose research focuses on regulation of financial services. Baxter previously held senior positions at Wachovia Corp. "It's amazing how some industries can stay in the game when common sense says they clearly need to be regulated. But then you look at their campaign contributions and you understand why. Campaign contributions are very effective at slowing down reforms that need to be done from a public interest perspective."

Case in point: The finance, insurance and real estate sector has given $2.3 billion to candidates, leadership PACs and party committees since 1989, which eclipses every other sector. Nineteen percent of total contributions from the employees and political action committees across all sectors came from the financial sector.

The overriding question today? Whether Washington lawmakers are willing to cross Wall Street, which has bankrolled their campaigns for so long, in the name of reform.

Wall Street, for its part, continues to woo lawmakers, while simultaneously girding for battle.

Even with a number of large financial institutions folding or merging since last fall, the sector has still given more to federal candidates and party committees than any other sector this year at $78.2 million. Current lawmakers have brought in $661.6 million from the sector through their candidate committees and leadership PACs, with Democrats collecting 53 percent of that.

The financial sector has also been a voracious lobbying force, spending an unprecedented $3.8 billion since 1998, while sending an army of lobbyists to Capitol Hill to make its case. That's more money than any other sector has spent on influence peddling. Not even the health care sector, which spun up a lobbying frenzy this year over health reform, has spent more.
All of these efforts have seemingly paid off. Over the years, Congress hasn't seriously considered regulation intended to protect consumers.
"I'd say for the first time that I can remember, we are talking about a real challenge to the myth that financial markets can regulate themselves," said David Min, associate director for financial markets policy at the liberal think tank Center for American Progress. "Why did people start accepting this [myth]? I think it was because that particular ideology had a lot of backers with deep pockets who were pushing their agenda. At the same time, financial markets really did seem to be working."

Financial regulation ranks among the Obama administration's top priorities, and it's encouraging Congress to act swiftly, seven months after it released its own map to reform. As lawmakers consider ways to prevent the economy from again faltering, they've concocted a complex stew of regulation and oversight proposals that the finance industries don't find particularly appetizing.

The debate that has gained the most attention so far seems to be over the Consumer Financial Protection Agency, a consumer watchdog agency that would have the power to regulate a number of financial products, including credit cards, insurance, hedge funds, mortgages and the financial instruments known as derivatives.

"One of the problems that's developed is our national regulatory system mirrors the industry 20 and 50 years ago. There is a wide variety of new types of financial products that are out there that were never imagined the last time regulatory reform was looked at," said David John, senior research fellow at the conservative Heritage Foundation. "We would like to see a financial regulatory system that better reflects the products that exist today, but we are also very hesitant about proposals that could micromanage parts of the industry."

The House Financial Services Committee has already passed the measure that would establish the executive branch agency. But lawmakers face obstacles in determining the new agency's scope of power and whether states could override the agency's standards.

Lawmakers are also trying to determine how to handle financial institutions that fail, thereby endangering the country's economic well-being.

Some lawmakers want to use taxpayer money to bail these companies out at the time of their collapse, much as the government did last fall for firms such as American International Group (AIG) and Citigroup. Taxpayers would bear the initial burden, but the companies would be expected to return that cash over a certain period of time. Other legislators would rather have companies with more than $10 billion in assets pay fees into an insurance-like fund, creating a safety net for faltering outfits.

Some of these discussions pit Republicans versus Democrats. Others divide members of the same party. The financial sector, therefore, appears to be playing it safe, at least as far as its political contributions are concerned.
During each election cycle since 1994, the sector has, on balance, always given a greater percentage of its political cash to Republicans. But the PACs and employees of the financial sector gave 51 percent of their total $475.4 million to Democrats in 2008 and have given 58 percent of their total $78.2 million to Democrats so far this cycle, including candidate committees, leadership PACs and party committees.

Although the economy rapidly declined throughout 2008, the finance sector contributed more than it ever had to federal candidates, parties and leadership PACs in the 2008 election cycle. President Barack Obama pulled in $39.5 million from the sector, which is 30 percent of the total funds the sector gave to all presidential candidates in that time, and makes the sector his third most generous backer.
The debates over the financial crisis aren't just about regulating the sector and protecting consumers. Lawmakers are also mulling how to best bolster the economy, or at least nurse it back to health.
Will that effort materialize in the form of a second stimulus bill? Funds for infrastructure? Tax breaks for businesses that create jobs?
And even as lawmakers look to the future, they're also engaged in a venomous reminiscence, pointing fingers and trying to decide which companies, industries, agencies and laws set up the framework for the recession in the first place. Among the questions they're asking: What role did the Federal Reserve play, and should it have more -- or less -- power? Are the executives at big commercial banks and securities and investment companies responsible? Should they be taking lavish bonuses on top of taxpayer money? Did the deregulation enacted as part of the 1999 Financial Services Modernization Act set up this crisis?
Over the next seven days, Capital Eye will be following the special interest money as both the House and Senate tackle these issues. Follow along as our "Crossing Wall Street" series explores:

•The high-profile industries with a stake in the debate's outcome, and their politicking strategies.

•Where the primary lawmakers shaping the debate are getting their campaign cash and how they view the various proposals.

•American International Group's (AIG) extensive attempts to influence lawmakers before the company accepted billions from the Federal Reserve to stay afloat -- and the lawmakers financially bound to the company.

•The financial industries filling the campaign coffers of the moderate Blue Dog Democrats and members of the New Democrat Coalition who are breaking ranks with their party.

•The former congressional staffers now lobbying their former bosses on financial regulation for commercial banks, hedge funds, insurers and the like.

•Which lawmakers dumped personal investments ahead of the announcement that certain companies were folding or accepting taxpayer funds.

•The campaign contributions and lobbying expenditures by companies that have received billions of dollars over the last year from the Toxic Asset Relief Program.

CRP Senior Researcher Douglas Weber and Lobbying Researcher Matthias Jaime contributed to this report.

Looking for further links to the "Crossing Wall Street" blog posts and analysis? Check the original article as per the link provided in the title...

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