Eyes Open: Financial Reform Still Has a Big Legislative Hurdle Left

Fine, the Senate passed a historical financial reform bill. Now let's think about how to ensure that it doesn't get watered down as the House and Senate versions are reconciled.

My colleague Alain Sherter lamented that President Obama was not more fully engaged in the reform legislation. Maybe. But his statement after the bill -- note the use of the first person -- left little doubt that Obama will loom large over the conference committee that will reconcile the differences between the House and Senate legislation:

Now, we've still got some work to do. Soon we're going to have a final vote in the Senate, and then the House and the Senate will have to iron out the differences between the two bills. And there's no doubt that during that time, the financial industry and their lobbyists will keep on fighting. But I will ensure that we arrive at a final product that is both effective and responsible -- one that holds Wall Street to high standards of accountability and secures financial stability, while preserving the strength and crucial functions of a financial industry that is central to our prosperity and our ability to innovate and compete in a global economy.

The reporter-bloggers over at Talking Points Memo have started sussing out whether key senators are interested in televising the conference committee, something Rep. Barney Frank, the chairman of the House Financial Services Committee, once suggested as a way to keep Republican feet to the fire. This is a hard call, since we all know that transparency in one spot often drives decision-making into darker corners. Still, a public conference would allow Democrats to put potential Wall Street apologists on the spot. Hint: choose the ones who are up for re-election this year or in 2012.

Some important things to watch:

The consumer financial protection agency. The Senate bill nestled it into the Federal Reserve for the sake of a Republic senator who voted no anyway, while the House left it a freestanding agency. So the House is poised for a victory here. Rather than ponder this obvious point, pay attention to the agency's mandate in the final legislation. All sorts of room for trickery there.

Derivatives. The Senate bill ended up with the tough language sponsored by Sen. Blanche Lincoln, the Democrat of Arkansas. It would force banks to spin off their derivatives trading into new companies. Rumor has it that the Treasury was never so keen on this, and it is stronger than the House bill. So if this provision is dear to your heart, don't let up now.

The Volcker Rule. The new rule that would ban banks from proprietary trading has had more lives than a cat, and was gone before it came back in the Senate. Goldman Sachs says its profits come from client-driven transactions, not prop trading. If so, they don't care if it gets prohibited, right? Don't fall for this line. Goldman got where it is by protecting all profit sources, not some of them.

In case you are getting optimistic, I want to add a reality check. After legislation gets Obama's signature, and it will, federal regulators will turn toward implementing the bill. Public attention will fade. And the staffed-up Washington offices of Wall Street lobbyists will keep watching. So the real challenge, if the legislation is to prevent another financial crisis, will be to build regulatory institutions that do not slip under Wall Street's thumb.

Making this legislation work will not be a challenge for the year. It will be a challenge for a generation.

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