Crunch Time: Congress Has a Final Chance to Put Steel into Financial Reform

A funny thing happened to financial reform on the way to the circus -- it got better.

Lawmakers on Thursday made two key changes to legislation making its way through the Senate. Under one amendment proposed by Sen. Al Franken, D-Minn., a new government board would decide which credit rating agencies would rate mortgage-backed and other "structured" securities. That would make it harder for credit rating agencies and bond issuers to collude in prettifying risky assets, such as subprime loans. The measure also aims to discourage companies from playing the three main ratings firms -- Fitch, Moody's (MCO) and Standard & Poor's -- off one another in order to elicit a better credit rating.

Moving to halt such practices is, as Franken said in a statement, a no-brainer:

My proposal wasn't conservative, or liberal or even moderate. It was just plain common sense. That's why I had the support of colleagues on both sides of the aisle and why we were able to win today.

What's going on here -- have the cowardly lions of Congress, responding at last to the ooze emanating from Wall Street, finally found their nerve? Yes and no. And to cover our bases, let's not forget maybe.

Franken's proposal is legit, and it could do a lot to clean up the capital markets. As reforms go, however, this one was low-hanging. Even financial industry honchos have expressed support for revamping the credit-rating process. Lawmakers, too, back the idea, as shown by the 64-35 vote in favor of the amendment. And note that the new ratings board would oversee only structured securities, leaving issuers free to carry on rigging ratings for other instruments.

Meanwhile, the interchange limit sponsored by Sen. Richard Durbin, D-Ill., applies only to debit cards -- it leaves credit-card fees alone. That's a major concession to financial firms because the swipe income they derive from credit cards dwarfs what they get from debit cards. Durbin's original measure had targeted both.

Despite all the fiery rhetoric in Washington lately, the reform bill remains fairly tame, at least relative to the scale of the crisis that finally roused lawmakers from their slumber. It will dent bank profits, but it won't overturn their business models. Wall Street's applecart stands.

That could change next week. The Senate is scheduled to vote on three major provisions that, if passed, could significantly alter the financial landscape. One amendment, backed by Sen. Blanche Lincoln, D-Ark., would force banks to unload (or carve out) their derivatives businesses. Another, a variation on the so-called Volcker rule, would forbid banks to engage in proprietary trading, while a third would inhibit U.S. states in protecting consumers from predatory lending and related abuses.

The financial industry strongly opposes the bans on derivative and prop trading, while supporting the federal government's right to "preempt" state-level financial enforcers. We're about to find out if Congress really means business.

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