Will Obama’s Campaign Funding Kill Financial Reform?

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Here we go again. The Obama administration is itching to woo back its highest rolling donors for its 2012 re-election bid, according to a piece out by the New York Times. Indeed, campaign season is inspiring a much softer tone with Wall Street, after Obama’s many months of harping on the private sector for making our jobs and deficit problems worse. The renewed coziness may win Obama some favors from corporate heavyweights to help jack up jobs and growth. But, with financial regulation still hanging in the balance, the detente spells trouble for the economy long-term.

Congress passed the Dodd-Frank financial overhaul bill nearly a year ago, but actual reforms to the financial world are barely in play. The Wall Street Journal reported that most of the 387 mandated rules haven’t been squared away by the agencies responsible for fleshing out the specifics; a mere 21 rules are already set.  And as of April, not one of the regulators had met its Dodd-Frank-related deadlines scheduled for that month. You can chalk up the delays to partisan wrangling over choosing agency heads and ramping up needed agency staffs. But Obama — frightened of fueling Republican griping that he’s an anti-business over-spender — seems evermore content to let Republican stallers have their way now that campaign season is in play. The foot-dragging isn’t just putting reforms on hold; it’s washing them all away.

In the absence of strong-willed regulators, lobbyists have been streaming in. According to the Center for Responsive Politics, there were as many organizations lobbying on Dodd-Frank reform in this year’s first quarter as there were in all of 2009. Not surprisingly, the Commodity Futures Trading Commission, the Fed, the FDIC, and the Office of the Comptroller of the Currency were among the biggest targets — all agencies that have vacancies at the top, making them weak and easy prey.

Anti-regulation Republicans in Congress are also gaining steam. Their latest maneuver is to repeal key parts of Dodd-Frank through a seemingly benign economic development bill. South Carolina’s Jim DeMint proposed an amendment to kill Dodd-Frank altogether; another Republican amendment would take away the Financial Stability Oversight Council’s authority to deem a company “too big to fail”;  yet another would replace the new consumer watchdog agency with a piddly 6-member board. And this week, bank lobbyists are targeting proposals that would increase their capital requirements by arguing such curbs would hurt the struggling recovery.

What’s more, even the names rumored to be Obama’s upcoming regulatory picks are more in Wall Street’s camp. Martin Gruenberg, the likely pick as new chair of the FDIC, has been pegged as more “conciliatory” than strong-willed consumer advocate Sheila Bair. Elizabeth Warren, the Harvard law professor who bulldozed through the consumer protection agency’s creation at all costs, could be leapfrogged by her deputy, Raj Date, a former finance boss at Capital One and Deutsche Bank. While still considered pro-regulation, Date is thought to offer banking bigwigs a more sympathetic ear.

All this adds up to a much softer approach just as the real moves on financial reform are finally in play. The White House may view the detente with Wall Street as a way to push through stronger reforms in a second term. But feeble rules made now won’t be easy to reverse. And as lighter-touch regulations start to roll in, the rest of the world will follow. Treasury Secretary Tim Geithner’s recent calls for other countries to amp up their financial regulations will ring hollow if U.S. banks don’t step up first.