The characters were prepped and suited, the props—thick binders holding embarrassing insider E-mails—were set prominently in place, and the cameras went live as what MSNBC proclaimed to be the "hearing of the century" played out on Capitol Hill. Last Tuesday's 11-hour showdown between senators and top officials of Wall Street icon Goldman Sachs may not have quite lived up to that billing, but it was dramatic political theater (with a certain expletive bleeped out for TV viewers). And it did produce some quick political fallout: Senate Republicans dropped their opposition to opening debate on the Democrats' proposed financial regulatory reform legislation.
Coming less than two weeks after the Securities and Exchange Commission filed a civil fraud lawsuit against Goldman Sachs, the hearing afforded senators from both parties a chance to express shock and outrage over the kinds of Wall Street activities blamed for tripping the nation into the Great Recession—the same Wall Street whose employees' political contributions have helped many on both sides of the congressional aisle. And it was Congress that did Wall Street some big favors when it eased banking restrictions in 1999 and subsequently failed to regulate risky derivatives trading.
Both Republicans and Democrats, like most of their constituents, now want regulatory reform. That's clear. Even Goldman Sachs Chairman Lloyd Blankfein professed support for more constraints on his industry. Yet, what will eventually constitute reform is the question.
Last week, with an eye toward midterm elections, the GOP had to decide on its priorities. Would it risk being cast as the "party of Wall Street," an image the Democrats were only too eager to promote, as polling shows that a majority of Americans blame the big banks for the economy's collapse? Or would Republicans step back from their baseline opposition to expanding government regulation? Last Wednesday evening, after GOP Sen. Richard Shelby of Alabama halted compromise talks with the bill's originator, Democratic Sen. Chris Dodd of Connecticut, the Republican leadership bowed to political reality and let the legislation move to the Senate floor after a three-day filibuster.
Dodd and Shelby seemed to have cleared at least one major dispute. Dodd agreed to drop provisions for an industry-financed $50 billion fund that Republicans had wrongly labeled a bailout fund. Still, with votes on amendments to the bill expected in the next week, what happens on the Senate floor will depend on how each party decides to address questions concerning a couple of key provisions: the regulation of derivatives and the plans for a federal consumer financial protection agency.
Republicans argue that while they share the Democrats' desire to curb Wall Street's high-risk gambles, Main Street, for example the agricultural industry, would be hurt by strict rules affecting derivatives trading. Also, the GOP worries about adding another federal regulatory agency on top of those that already have oversight of financial institutions.
The fate of the Senate legislation will be decided in the glare of publicity. "The question is, on the Senate floor, whether the Republicans can craft either direct ways of getting at these things, or try to water down some of these provisions," says John Fortier, research fellow at the American Enterprise Institute. After the Goldman Sachs show on Capitol Hill, wagering against a financial reform bill could be a sucker's bet.