Obama's Wall Street Window Closes

| Tue Dec. 15, 2009 3:50 PM EST

This week the last of the big banks—Citigroup and Wells Fargo—announced they're repaying their TARP funds, ending a major chapter in the Great Bailout Era. (It's not the end of the Era entirely, as many banks still benefit from the Federal Reserve's guarantees and other means of support.) As the banks exit TARP, they proudly shed the bailout's stigma—namely, needing the federal government as a crutch—and are free from the scrutiny of compensation and governance that came with federal assistance. But from a financial-reform standpoint, the bailout represented a huge, once-in-a-lifetime opportunity for the Obama administration: They had leverage, huge amounts of it, Long-Term Capital Management-sized leverage over Wall Street and its "fat cats." Obama, Geithner, Summers, and their allies in Congress (i.e., Rep. Barney Frank (D-MA)) had a window in which they could enact rigorous, meaningful, lasting reforms in the way our financial markets and institutions do business.

Now's as good a time as ever to ask: How'd they do?

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Chief among their accomplishments is the sweeping legislation recently passed in the House, the Wall Street Reform and Consumer Protection Act of 2009. It calls for a new Consumer Financial Protection Agency, regulation of derivatives, a plan for dissolving too-big-to-fail banks, higher capital requirements, tighter oversight of credit rating agencies, and more shareholder influence over executive pay. The legislation, which the Senate likely won't take up until early 2010, is arguably the most influential set of financial reforms since the regulatory frenzy following the Great Depression.

Not that there aren't holes in the legislation. Critics say loopholes have gutted the derivatives legislation, and that the big three credit rating agencies—Moody's, Standard & Poor's, and Fitch—got off with a slap on the wrist. And the best chance for immediate recovery in the housing industry—letting judges in bankrputcy court modify mortgages, a.k.a. "cramdown"—didn't even make it into the bill at all, thanks to Big Finance's lobbying efforts. In other words, the Wall Street Reform Act is very far from perfect, but it's a first step in the right direction.

These reforms aside, though, has anything really changed on the Street? Will Wall Street actually discourage exorbitant compensation packages that reward egregious levels of risk-taking and beget Lehman-like meltdowns? The answer, I believe, is a resounding "no." Some banks are once again reaping the benefits of their overleveraged ways. Back are the lucrative compensation packages allegedly needed to lure the Street's best and brightest. Back is the pre-meltdown mindset, clearly illustrated by three major bank heads who couldn't bother to make it Washington, DC ("inclement weather"?!) to meet the President of the United States about increasing small business lending.

Obama's Wall Street window is now closed, his leverage all but dissipated. Some, like Matt Taibbi, believe that Obama never intended to change much in the first place. The Wall Street Reform Act is certainly cause for celebration, but you can't help but think Obama could've accomplished so much more.

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