Was the Obama administration's $75 billion homeowner rescue program doomed to fail? Is it the federal government's version of Goldman Sachs' now-notorious Abacus deal, the complex financial product Goldman allegedly peddled to customers knowing it was destined to implode? That's what the Wall Street Journal's Evan Newmark asked in a Wednesday column—a question sure to rile up folks at the Treasury and White House. But as someone who's covered Obama's housing relief efforts, in particular the flailing Home Affordable Modification Program (HAMP), I think Newmark makes a clever connection here about a program that's left millions of struggling homeowners out to dry.
Newmark notes that he all but predicted HAMP's demise back in February 2009, when Obama first unveiled his housing rescue; that from the outset, he knew HAMP wouldn't at all work. Likewise, a few months into the program, I cited housing experts who'd identified major flaws in the design of the program, which was intended to help millions of homeowners by lowering their monthly mortgage payments and keeping them in their homes. These experts also ripped the Treasury for rushing a program that mortgage servicers—on whom the brunt of the program's responsibilities fell—were woefully under-equipped and unprepared to handle. The result was long delays, mass confusion, disorganization, and measly success rates. That logjam continues more than a year later, suggesting that HAMP never recovered after stumbling out of the gates. And as I recently wrote, the pace of trial modifications—a test run for homeowners entering the program—is slowing considerably, signaling a slow death for the initiative.
Senate Majority Leader Harry Reid's (D-Nev.) effort to end the floor debate on financial reform and move to a full vote on the bill just failed. This doesn't threaten the bill's ultimate passage. That's because the key senators who voted against cloture—Democrats Russ Feingold and Maria Cantwell, both avid reform supporters—did so because they want tougher amendments to still be considered. They voted against cloture to get a vote on those amendments, and there's no doubt they'll ultimately back the bill.
Here's Ezra Klein's take on the failed cloture vote:
[Reid] lost because he lost Democrats. Republicans Olympia Snowe and Susan Collins actually voted for cloture. Their votes were canceled out by Democrats like Maria Cantwell and Russ Feingold, who aren't ready to give up on their amendments.
Before getting to what that means, it's worth saying why Reid wants to move to a final vote. The answer is floor time. Next week, the Senate is scheduled to take up the next war supplemental, which will have funding both for Iraq and Afghanistan and also for various disaster-relief efforts, and it will take up a bill to extend economic supports for the jobless. If the Senate doesn't finish financial regulation this week, it probably can't do those bills next week because the GOP's routine filibusters mean that each vote will require days of floor time. And the plan, as of now, is for the Senate to adjourn come Memorial Day. Of course, the Senate could just choose to work past memorial Day, which would solve the problem of floor time.
As for what happens now, debate on financial regulation will continue. More amendments will be considered, at least if Democrats and Republicans can come to an agreement on whether to consider them. And another cloture vote will have to be called. That might be bad for the Senate schedule, but it's probably good for the bill. This is the rare process in which the amendments are making the legislation substantially better. If the Senate has to work over Memorial Day to accommodate that process, so be it.
It's time to put to rest a lingering myth that, all evidence to the contrary, just won't die. On the Senate floor this morning, Senate Minority Leader Mitch McConnell (R-Ky.) repeated, for the umpteenth time among Republicans and conservatives, a pernicious misconception that places most, if not all, of the blame for the financial crisis on the government-sponsored housing corporations, Fannie Mae and Freddie Mac:
"[The financial reform bill] does nothing—nothing—as I indicated, to rein in Fannie Mae and Freddie Mac, the main protagonists in the financial meltdown. This is absolutely worse than irresponsible; it's the legislative equivalent of wrongful conviction."
Not only is McConnell's basic grasp of storytelling wrong—if Fannie and Freddie are to blame, shouldn't they be the antagonists?—but his understanding of what caused the financial crisis is deeply flawed. Sadly, this misconception is a longstanding meme among Republicans and conservatives. In 2008, then-Republican presidential candidate John McCain said Fannie and Freddie were "the catalyst for this housing crisis" and thus the spark that ignited the broader economic meltdown. House Majority Leader John Boehner has said, "How you can attempt to fix [the financial system] without going to the root of the problem, Fannie Mae and Freddie Mac, is really beyond me." And a roster of conservative pundits has played the Fannie-Freddie blame game so many times it's hard to keep track.
After nearly two weeks of cruising through financial reform and passing amendments that have noticeably improved the bill, Senate Democrats now face an 11th-hour scare on their Wall Street overhaul. A clutch of Democrats, including Sheldon Whitehouse (D-RI) and Byron Dorgan (D-ND), have signaled that they may not vote for the Senate's reform bill. And with complete GOP opposition practically guaranteed, that means the fate of financial reform is a lot less assured than it was earlier this week.
Majority Leader Harry Reid (D-Nev.) said yesterday and today that he wanted a final vote on financial reform as early as this afternoon or tomorrow, in effect cutting off debate on additional amendments. Reid's charge, however, has left some Democrats feeling burned.
Dorgan, for instance, wants a vote on his amendment to ban a particularly risky type of financial trading called naked short selling. That's when a trader bets that a stock or bond will fall in price without having any skin in the game—no cash or securities in hand to pay out in case the bet goes bad. Experts say naked short selling is particularly pernicious because it artificially drives down stock or bond prices, and distorts markets. (Matt Taibbi wrote a good—and highly entertaining—piece on this.) Dorgan has an amendment pending that would ban naked short selling, something Germany has temporarily done. But earlier today it didn't look like Dorgan would get a vote on his amendment, and in response, he's saying he might not vote for the full bill when the time comes. Whitehouse is pulling the same move over an amendment of his that would cap credit card interest rates and that has yet to be voted on.
Sens. Carl Levin (D-Mich.) and Jeff Merkley (D-Ore.) are also pushing hard to get a vote on their amendment, which would ban big banks from "proprietary trading," that is, trading for their own benefit instead of for clients'. Cutting out prop trading, as it's called, would eliminate the kinds of conflicts of interest seen in big investment banks like Goldman Sachs and Morgan Stanley. Goldman in particular has taken criticism for selling mortgage-linked products to clients the firm itself was betting against. The Merkley-Levin amendment would further block banks from sponsoring hedge or private equity funds, and set caps on banks' growth.
It's unclear whether Levin or Merkley would vote against the full bill if their amendment isn't voted on. Reuters reported today that a back-door compromise had been reached on the amendment, which means it could ultimately see the light of day—and give Democrats the boost they need to reach 60 votes (or more) when they vote on the full financial bill.
[UPDATE]: Talking Points Memois reporting that Dodd intends to drop his death-by-study amendment on spinning off big banks' swaps desk. TPM quotes a couple of anonymous Senate Democratic aides who say the Connecticut senator plans to ditch the amendment after taking a lot of heat from the financial sector, liberal lawmakers, and especially the proposal's author, Sen. Blanche Lincoln (D-Ark.).
Sen. Chris Dodd (D-Conn.) quietly sought to end yesterday one of the most contentious battles in the Senate's Wall Street overhaul: how to reform derivatives, the complex financial products that can be used safely—to hedge risk and protect against swings in the market—or to make risky gambles on swings in financial markets. A proposal from Sen. Blanche Lincoln (D-Ark.), who's emerged as a derivatives reform crusader, would've forced big banks like JPMorgan Chase and Citigroup to cut out their lucrative, highly profitable "swaps" trading desks and make them separate subsidiaries. The logic behind Lincoln's proposal is that banks engaging in risky swaps trading shouldn't have access to federal (i.e., taxpayer) support when needed, and that if they want to retain access to those funds, they need to cut loose their swaps desks. Lincoln's proposals have been vehemently contested by Wall Street, and opposed even by the White House and respected outsiders like Paul Volcker, the former Federal Reserve chairman.
Just before Tuesday's deadline for submitting amendments, Dodd, a top Democratic senator on financial reform, filed one that he presumably thought would appease everyone. To his credit, the Lincoln swaps desk language will remain. But here's the catch: The rule will be "studied" for two years before any action. As I've written before, calling for a study is essentially committing a rule to a slow, prolonged death. It's a tactic straight out of the GOP playbook in this year's financial reform battle when they wanted to kill a part of the bill without blatantly doing so.
From the looks of it, few people—except Dodd himself—are happy with the swaps-desk study. Lobbyists for the financial industry said the uncertainty created by the study amendment would "introduce a comic amount of uncertainty." In a statement to the Washington Post, Lincoln said, "I remain fully committed to my provision and will fight efforts to weaken it." But with time for debate in the Senate just about over—Majority Leader Harry Reid wants to vote on the bill in the next day or two—it looks like Dodd's study amendment, despite Lincoln's avowed opposition, will most likely end up in the Senate's reform bill.