The financial reform test

Comprehensive regulatory reform of the nation's financial system remains among the highest priorities. Yet the road to reform -- always opposed by the powerful banking lobby -- has trailed off into partisan troubles in the Senate as the after-shocks of the nation's financial meltdown nearly 18 months ago have waned. The latest sign of those troubles came in the surprising announcement Thursday by Sen. Chris Dodd, chairman of the Senate Banking Committee, that he was terminating his intensive, month-long negotiations with Sen. Bob Corker and would introduce his own reform bill on Monday without the declared support of a single Republican.

That came as an admitted disappointment to Sen. Corker, who had essentially assumed the role of Sen. Richard Shelby -- an opponent of reform and the ranking Republican on the committee -- in the hope of crafting a worthy bipartisan bill.

Sen. Corker's marathon

Sen. Shelby's raw obstructionism had prompted Sen. Corker to step up in the interest of reasonable reform, and we commend him for that difficult effort. He said Thursday he had believed that he and Sen. Dodd had worked through every issue they had confronted and were "down to the five-yard line" when Sen. Dodd pulled the plug on their unique marathon labors to produce bipartisan legislation.

Sen. Corker attributed the abrupt shift to the "pressure of the clock" that he believes weighed on Sen. Dodd to move the financial regulatory bill forward before the Senate takes up a reconciliation bill to adopt health care reform.

The latter is expected to come before the Senate before the Easter recess two weeks from now. Sen. Dodd denied the health care bill had anything to do with his schedule. He said that the clock was running on accomplishing anything in the Senate before campaigning for the 2010 elections becomes a barrier to any significant legislative vote.

Chasing the clock

In any case, Sen. Corker, speaking in a conference telephone call Thursday to a group of Tennessee media representatives, deplored the notion of bringing a complex, 1,200-page regulatory overhaul of the nation's financial systems to the full Senate Banking Committee without bipartisan support, and before the bill was "ready."

Sen. Corker also discounted the negative attention he received in a front-page New York Times story Wednesday -- he said unjustifiably -- for reportedly pressing Sen. Dodd to exclude the pay-day lending industry from regulation by the new consumer protection agency that Sen. Dodd had proposed to police consumer financial services that are not handled by banks. The story suggested his action was a favor to the Tennessee pay-day lending businesses for large campaign contributions.

Sen. Corker condemned the story as "the most major cheap shot I've ever seen." He said he had sought to put every consumer financial service "from a to z" under regulation which would be enforced by its regulatory authority.

It's not clear, and won't be clear until Monday, however, whether the Dodd bill will contain the consumer protection agency that Republicans have opposed, and which most Democrats believe is essential to effectively protect citizens who are thrown into the financial markets. Sen. Corker suggested a consumer protection office would be placed under the Federal Reserve.

The pay-day lending industry, though egregious in its extraordinary interest rates on roll-over loans that many strapped borrowers get drawn into, is just one of many sensitive financial issues in the proposed legislation. Though it adversely affects many millions of lower-income Americans, its fiscal significance pales in relation to the vastly larger national and global financial practices that the reform legislation should seek to address.

Among the widely acknowledged needs of reform are to:

* Strengthen the Securities and Exchange Commission in its ability to regulate market trading by both commercial banks and investment houses.

* Regulate use of derivatives and credit-default swaps -- the investment instruments that precipitated and aggravated the financial meltdown -- by making both fully transparent and subject to financial regulation, limits and institutional reserve funds.

* Strengthen regulation of banks by raising their reserve requirements to reduce their leverage and debt risks, and by restricting their ability to funnel banking clients' money into holding companies for use in market trading. This is crucial. Many banks wrongly gambled banking funds in the Wall Street derivatives casino that threatened their solvency in the meltdown and required bailouts. They since have continued to plow bank funds into equity trading, and earned significant profits, while wrongly restricting use of their banking money in the nation's vital credit and lending markets. That has inhibited the economic recovery.

* Create an independent consumer financial protection agency, which would police the risk, transparency and viability of various financial offerings and services to American consumers. This should also include the pay-day lending industry, which should be required to put reasonable caps on its exorbitant annualized interest rates of 300 percent and more.

* Create an inter-agency task council (including the Federal Reserve, the Treasury, and other offices that oversee the various sizes and types of banks and savings and loans institutions) to monitor and defuse systemic risk in the banking industry, and to prevent institutions from becoming too big to be allowed to fail.

Heavy lift to clear foes

The banking industry --and hence many of its Republican advocates -- opposes virtually every piece of the reform agenda, and the Obama administration and some Democrats have wavered on tackling such far-reaching reform.

That makes Sen. Corker's critical help in working with Sen. Dodd on a comprehensive reform bill all the more significant. Mr. Corker has aptly explained, moreover, why settling the financial reform bill is so crucial. The banking and credit industries now have wads of cash, he says, but they won't begin lubricating the credit markets until they know "the new rules of the road."

Those rules should be robust. The nation, and global financial markets, nearly fell down the slippery slope of recession into a full-blown depression last year. That shouldn't be allowed to happen again -- and certainly not to satisfy greedy banks acting irrationally.