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GORDON L. WEIL: Success of financial reform undercut by partisan differences

Gordon L. Weil, a weekly columnist for this newspa

After the financial crisis that bought on the recession, almost everybody agreed that financial reform and better government supervision of banks was urgently needed.

More than two years after the crisis began, the president finally got a bill to sign.

The financial reform bill prevents banks from making many of the risky investments that led to the crisis, and it gives government the power to protect consumers and to see what banks are doing. This "transparency" is designed to allow government time to stop a financial wreck before it happens.

But it does not do many other things. Most importantly, it does not deal with the over-extended mortgage lenders, Fannie Mae and Freddie Mac, which benefit from informal government backing.

To be sure, banks will not be able to be quite so "creative" in developing high-risk financial products. That should protect consumers and borrowers.

Instead of ending the debate, the new law revealed the depth of the partisan split in Washington. Four positions emerged.

Senate Democrats say it embodies significant reforms that would prevent another crisis and would eliminate the need for bailouts. Senate Majority Leader Harry Reid, D-Nev., argued: "We want to make sure this disaster never happens again. The solution has to start here."

But some say it is not a good law and does not control the banks. Bill Gross, a major bond fund manager, complained that "Wall Street still owns Washington." Sen. Russ Feingold, D-Wisc., the only Democrat to vote against the bill, echoed the remark, saying that "Washington once again caved to Wall Street."

At the other extreme are those, like Sen. Richard Shelby, R-Ala., who called the bill "a legislative monster ... that expands the scope and powers of ineffective bureaucracies." In his view, more government regulation is worse than banking excesses.

Other Senate Republicans who probably shared Shelby's views, but did not want to seem opposed to reform, especially in an election year. G.O.P. Senate leader Mitch McConnell, R-Ky, wanted reform, just not this reform. "Everyone recognizes the need to rein in Wall Street to prevent another crisis," he said. "And there are reforms we agree on that will benefit taxpayers." Despite some Democratic concessions, he voted against the bill.

If you look at the websites of some Republican senators, you find claims about how they got modifications to the bill that were real reforms or protected small banks and businesses from burdensome regulation. But compromise on the entire bill was out of the question for them.

In the end, only three Republicans voted for the bill. Sen. Scott Brown, R-Mass., who is completing the term of the late Sen. Ted Kennedy, will face reelection in 2012 in a normally Democratic state.

Maine Republican Sens. Olympia Snowe and Susan Collins provided the other two GOP votes. They both have shown a degree of independence from Republican Senate leadership.

The New York Times reported that "even lawmakers known for working across the aisle said they were perplexed - and discouraged - that the financial regulation bill ultimately did not generate wider bipartisan support."

Commenting on the lack of this support, Sen. Snowe said: "It's disconcerting. It doesn't engender the kind of public confidence in an initiative of this scope without having broad support because it raises questions."

This statement can only be read as a complaint about her fellow Senate Republicans, who consistently prefer to oppose President Obama's programs no matter what they contain.

Sen. Snowe's comment may be the most important verdict anybody has rendered about the financial reform law. The law is supposed to respond to public concerns about the banks and the bailouts. Initially, it looked like there could be broad Senate support leading to broad public support. That would have helped promote compliance.

Having obtained modifications to the bill, Sen. Snowe voted for it. That is exactly how a member of the minority party should work to produce bi-partisan legislation that can "engender ... public confidence."

Unfortunately, many Republicans believe that the Democrats are vulnerable in November's elections, mainly due to the economy, and that they should miss no opportunity to attack them. That approach places politics above governing. It also helps explain the public's lack of confidence in almost anything coming out of Washington.

The Democrats are not blameless. Fannie and Freddie should have been dealt with, but the majority needlessly blocked any such reforms.

Though the financial reform law is a good start, more work is needed. It would be a refreshing change to see reforms considered cooperatively and not merely as a partisan exercise.

Gordon L. Weil, a weekly columnist for this newspaper, is an author, publisher, consultant and former international organization, U.S. and Maine government official.