Ready for the Final Showdown

The Obama administration and the Democratic Party are readying themselves for the final showdown with the Republican opposition to enact new rules on the financial markets. While an insider trading scandal involving Goldman Sachs weakens the banking lobby, the Democrats believe that this reform will embarrass the right. Democratic Senate Majority Leader Harry Reid says that they’ll have the 60-vote majority in the Senate, and he dares the Republicans running for re-election to rally in support of Wall Street in opposition to this financial reform regulation bill. Chairman of the House Financial Services Committee Barney Frank echoes this sentiment, adding that President Obama will have the law on his desk to sign by the end of May. Barack Obama himself, who had explored the possibility of a bipartisan agreement on health care up to the last minute, seems resolved to face the opposition this time. White House Press Secretary Robert Gibbs says that seeking a broad consensus does not mean that they’re open to lobbyists, favoritism or the financial interests of big corporations.

The bill proposes several market reforms, from limits on derivatives operations in banks to the creation of a special agency for consumer protection in financial services, but the proposal that has drawn the most Republican ire is the $50 billion resolution fund that would pay for liquidating distressed financial firms before they pose a systemic risk. Republican Senate Minority Leader Mitch McConnell denounces it as the rescue of banks at the expense of taxpayers. The right wants to position itself as the champion for the middle class, concerned about the exploding deficit. In this case, however, the accusation doesn’t hold up to the facts. The $50 billion fund would be financed by the banks themselves through a special tax. When pressed on this point, McConnell has avoided explaining why the banking lobby is so hostile to this reform, if it truly is a gift from the taxpayers. That’s why Obama is sure to put the opposition in a corner. Democratic strategists believe that several Republican senators running for re-election in November — including former presidential candidate John McCain — will avoid openly supporting Wall Street, a risky move even more so now that a new scandal threatens a financial giant.

Goldman Sachs finds itself involved in the insider trading investigation of Raj Rajaratnam, founder of the hedge fund Galleon Group. Federal prosecutors and the Securities and Exchange Commission (an independent agency the regulates the stock exchange) are carrying out parallel investigations of several speculative operations held by the Galleon Group thanks to anonymous tips. In some instances, Goldman Sachs Director Rajat Gupta is suspected of sharing insider information with Rajaratnam and is himself a subject of investigation. This matter is complicated by the potential conflict of interests: Goldman Sachs would perform transactions at the stock exchange on behalf of the Galleon Group, and Gupta had a business relationship with Rajaratnam.