Danger, Danger Republicans!

The White House and Congress are moving ahead with their plans to reform the financial system. At issue is the Dodd bill's resolution authority to break down large and complex financial institutions on the verge of insolvency. Mitch McConnell says the authority, which would include a $50 billion fund to pay for the resolution process, would incentivize Too Big to Fail and lead to more bailouts. President Obama says that's baloney. So does Senator Mark Warner:

There's nobody in the financial sector who believes this. They'd laugh at the proposition that $50 billion is enough to get you through the resolution process if a couple of firms go down. What we've heard time and again is that the challenge in a crisis is to buy enough time to keep the lights on for a few days till you get the FDIC in here. You could make it smaller. Corker and I spoke about $25 billion. But this is funded by the industry.

Warner isn't exactly a pitchfork populist. He made a fortune in telecoms and is a business friendly Democrat. He's someone to take seriously.

Memo to Republicans: you are about to step into a political trap! The GOP has focused so much on the downsides of the Dodd proposal, it hasn't made it clear that it supports sensible reforms to correct the imbalances that led to the 2008 financial crisis. Nor have the Senate Repubilcans forcefully outlined detailed proposals of their own. (The House Republican alternative is here. John McCain's proposal to reinstate something like Glass-Steagall is here.)

Now, maybe the Senate Republicans don't support reform at all. Maybe they just want to deny Obama a victory and wait until they have more power in the next Congress. That would be a shame, because tacitly backing Wall Street on this issue erodes the GOP brand as the People's Party. Also, it completely misjudges where the Republicans get their support. Michael Barone:

Republicans owe no political debt to the big Wall Street firms. In the 2008 campaign cycle, according to the Center for Responsive Politics' opensecrets.org website, Goldman Sachs personnel contributed $4.5 million to Democrats and just $1.5 million to Republicans.

Add in three other big Wall Street firms -- Morgan Stanley, JPMorgan Chase and Citigroup -- and the total take was $12.7 million to Democrats and $6.7 million to Republicans. The image of Wall Streeters as solid Republicans is as dead as J. P. Morgan himself.

I'd feel more confident about the GOP's position if I saw McConnell or Kyl cite e21's Chris Papagianis on the Senate floor and on cable talk shows. Papagianis backs a modified version of the Hart-Zingales reform proposal, wherein credit-default swaps on secondary debt act as a market-based trigger for limiting risk. (If you understand that last sentence, you probably make a lot more money than I do.) Something like Hart-Zingales, when combined with an updated bankruptcy code, a Consumer Financial Protection Agency, and a well-regulated and transparent derivatives exchange, would count as "real change." Which is something the big investment banks desperately need.