By David Cho and Scott Wilson
Washington Post Staff Writers
Saturday, April 17, 2010; A08
President Obama accused Republicans on Friday of trying to carve out "special loopholes" for the financial sector in regulatory reform legislation and warned they would soon face a choice: whether to side with an unpopular industry or with ordinary Americans.
His pointed comments came as all 41 Senate Republicans signed a letter criticizing a bill before the chamber to overhaul financial oversight. They said the measure would stifle the economy by giving the government "unlimited regulatory powers" and called on the administration to start a new round of negotiations. Republicans added that they have the votes to prevent Democrats from bringing the bill to the floor.
At the same time, the administration responded to an initiative from its left flank. Treasury Secretary Timothy F. Geithner sent a letter to Capitol Hill signaling his skepticism about a far-reaching measure unveiled Friday by Senate Agriculture Committee Chairman Blanche Lincoln (D-Ark.). Lincoln proposed banning big Wall Street banks from trading lightly regulated financial instruments known as derivatives. Geithner said he wants tough new rules as well, but he stopped short of supporting an outright ban, which has gained traction among some liberal Democrats.
The efforts to steer the legislation along a centrist course are not only driven by necessity -- the White House needs at least one Republican and all Democrats in the Senate to overcome a filibuster -- but also reflect the moderate views of many of Obama's senior economic advisers.
The bill headed to the Senate floor largely reflects their proposals, which would keep the structure of the financial system largely in tact, with only a few wholesale changes, but would impose clearer and tougher rules on business activities. Big banks, for instance, would have to set aside more capital to cover unexpected losses, money they otherwise could use to earn profits.
With landmark health-care legislation passed, the rewrite of financial regulations is at the top of Obama's agenda, White House aides say. Increasingly, the president is bringing a sharp political edge to the accelerating debate. Speaking before a meeting with his Economic Recovery Advisory Board, Obama said he would like the bill to have bipartisan support. But he warned that "bipartisanship cannot mean allowing lobbyist-driven loopholes that put Americans at risk." He added that he would veto legislation that did not include controls on the U.S. derivatives market.
The White House continued its outreach to Republicans who it hoped would break ranks and vote for the bill. On Friday, however, the GOP presented a unified front. Republican senators wrote in a letter to Senate Majority Leader Harry M. Reid (Nev.): "We are united in our opposition to the partisan legislation."
"As currently constructed," the letter continued, "this bill allows for endless taxpayer bailouts of Wall Street and establishes new and unlimited regulatory powers that will stifle small businesses and community banks."
Administration officials countered that the Senate bill, as written, would preclude the need for the type of taxpayer-funded bailouts that rescued the financial system from collapse. The legislation would also establish a mechanism to wind down large firms whose failure could cause reverberations across the entire financial system. In addition, hedge funds, derivatives -- contracts that bet on which way commodities, stocks and other asset prices will move -- and other previously unregulated parts of the financial system would be brought into the daylight.
The legislation stops short of reinventing the country's multilayered bank regulations. Rather than revamping entire regulatory agencies, supervisors would gain broader powers in many cases. Only one out of the nation's five banking supervisors would be merged into another agency.
Democrats are considering changes to address the political concerns raised about the bill. Republican leaders have focused their criticisms this week on a $50 billion fund, paid for by the financial industry, that would be used to cover the cost of taking over failing companies that pose a wider risk to the financial system. Senate Minority Leader Mitch McConnell (Ky.) said this fund could lead to establishing a "permanent bailout" for big banks, an assertion the White House and other Democrats deny.
Administration officials said they would not oppose dropping the $50 billion fund provision, which they say was originally suggested by Republicans on the Senate banking committee. In addition, Democrats are considering a tax on big banks to cover the cost of the bailout initiative.