It's been a year and a half since Lehman Bros.' collapse, and you have to wonder how big a financial crisis we have to go through before we get the new regulatory apparatus in place to make sure it doesn't happen again.
There are many parties to thank for this stalemate — liberal Democrats, conservative Republicans, the financial services industry — who all have agendas that they have been unwilling to budge from.
Now, however, there appears to be a good chance for a breakthrough. Early this week, look for a pair of Senate leaders, Democrat Chris Dodd of Connecticut and Republican Bob Corker of Tennessee, to unveil a creative bipartisan proposal that will hit all the right notes in terms of both policy and politics and will have the best shot at Senate passage.
Politically, the big sticking point has been the Obama administration's proposal to create an independent agency to regulate all consumer loan products and prevent the kinds of abuses that led to the subprime mortgage debacle. For consumer groups, the new agency became a litmus test for whether the needs of ordinary Americans would be put on an equal footing with the needs of investors and fat-cat bankers.
For banks and other unregulated lenders, by contrast, the proposed consumer agency came to represent an unwarranted intrusion of government regulators into their business. Lines were drawn in the political sand that both sides vowed never to cross.
The compromise hammered out between Dodd and Corker would establish a single regulator of federally chartered banks with a dual mission and an independent source of funding, based on my conversations with several key players. One division would promulgate and enforce rules to protect consumers; the other would fulfill the traditional role of supervising banks for safety and soundness. Supervisors from both divisions would participate in the periodic reviews of bank operations, and any conflicts between the two would be resolved by the head of the agency.
A more interesting and ultimately important issue concerns bank bailouts and the treatment of financial institutions considered too big or too interconnected to fail. Both the Bush and Obama administrations argued that these institutions should be identified ahead of time and regulated exclusively by the Federal Reserve, with higher capital requirements and an obligation to contribute to a bailout fund.
Although the House adopted that approach, senators are balking. Republican senators in particular are dissatisfied with the Fed and want to strip it of all responsibility for bank supervision. And a number of senators from both parties, unhappy about the recent bailouts, reject the idea that the government should protect any institution from going under, no matter how big or interconnected.
Dodd, Corker and Democratic Sen. Mark Warner of Virginia are putting the finishing touches on a plan reflecting these judgments. They envision the government providing temporary loans to ensure an orderly liquidation process, preventing financial panic, but only to the extent that the loan would be repaid from proceeds of the sale of the bank's assets.
What's likely to emerge from these still-ongoing discussions is a comprehensive regulatory reform bill that not only has the support of key sectors of the financial services industry, but also improves on the legislation passed last year by the House. It's no sure thing, but it's the best shot yet we've had at meaningful change.