On banking reform, a bipartisan sighting


So maybe we're not such a purple nation, after all. Red is red and blue is blue and they're not mixing, especially if you're using bipartisanship in Washington as a gauge. Regulatory reform of banks is a good example. The party in power would if it could resurrect Glass-Steagall, but that's not going to happen unless they rewrite the rules of the Senate and grant simple majority rule.

And they're not going to rewrite the rules, which is why reform has plodded along - if that's not too beneficent an assessment (does it have a heartbeat or is it already a legislative Dodo bird?). The congressional crackdown is in the same foundernig boat as health-insurance reform, in fact, although one proposal for bank regulation has brought bipartisanship, that rarest of beasts, out of hiding. It's the part of reform where they're talking about creating a so-called resolution authority that would step in whenever a big financial institution is about to go belly up.

Resolution authority, as agreed to among Republicans and Democrats alike, would address the too-big-to-fail problem by ensuring that if a firm went bankrupt the government could step in and hammer the doors shut in what everybody says would be an "orderly wind-down." This is a term meant to assure the markets that a Lehman Bros. collapse would never happen again. I guess it would also apply to monstrosities like AIG, since the whole chorus that's singing the resolution-authority song say they're playing along for the sake of keeping taxpayers from footing the sort of bailout bills they've been saddled with over the past year and half.

The Obama administration first proposed this almost 12 months ago, and the Treasury Department even put it in writing. They didn't push it very hard in the ensuing months, but then - just a few weeks ago - President Obama tried funneling populist outrage in that direction again, bringing forth Paul Volcker, who has been pounding the table just out of earshot for months now. Last week, in what has become almost a daily drumbeat of White House-sanctioned noise from Volcker, he explained the resolution-authority stuff: "It is not a financial rescue. It is not too big to fail - it's permission to fail."

Republican luminaires like Hank Paulson, the Bush adminstration's Treasury secretary, are on board. Paulson wrote a widely cited op-ed in the NYTimes on Feb. 15 under the headline "How to Watch the Banks" in which he came out in favor of the resolution authority machinery the White House proposes.

Skeptics argue (astutely), however, that resolution authority isn't going to solve the problems raised by the legacy created by the past decade of loosened regulation. The NY Times over the weekend has a thoughtful editorial that sums it up. "Resolution authority would give regulators the ability to seize and dismantle any financial firm that is deemed systemically dangerous," the Times notes. "JPMorgan Chase and other big banks are confident that such authority would be used only on their rivals and would spare themselves a repeat of their scalding experiences in 2008 when, as they tell it, they were compelled to participate in systemwide bailouts they did not need."

Here's the kicker, and let's hope it's heeded as Democrats in Congress finally make a move to do something this week:  "By itself, (resolution authority) could create a false sense of control and stability. It will not work unless it is coupled with other reforms, like robust regulation of derivatives and enhanced consumer protection."