For the average worker who has lost her job since May 31, the cost of COBRA has tripled. (Flickr, Steve Rhodes)

In the first week of July, Andie Davis’ husband, who worked in manufacturing, lost his job, as hundreds of thousands of Michiganders have since the onset of the recession. Soon after, he started collecting unemployment insurance benefits that might last the family of four as long as 99 weeks. Davis hopes that the benefits will keep the family afloat — the mortgage paid, school lunches made, the electricity on — without forcing her to tap into the family’s savings.

[Economy1] But to keep the family financially stable while both she and her husband look for work, she has decided to forgo health insurance. The Davis family looked at how much COBRA would cost them, thinking the government would help pay for it. Had her husband lost his job just six weeks earlier, Washington would have footed about two-thirds of the premium bill. But since Davis’ husband lost his job after May 31, the young couple is on their own.

The change has gone little-noticed, both by the press and by the laid-off persons impacted by it. But a popular stimulus provision, the federal subsidy of COBRA benefits, expired for newly unemployed workers as of the first day of June. That means, for the average worker who has lost her job since May 31, the cost of COBRA has tripled.

COBRA — a provision created in the Consolidated Omnibus Budget Reconciliation Act of 1985 — gives workers the option of buying into their old health-care plan when they lose their job. Before the recession, COBRA let workers who lost their job through no fault of their own pay the entire health-care premium plus a two-percent administrative fee to keep coverage, about $8,800 per year for the average enrollee. (Generally, COBRA lasted 18 months.)  As part of the American Recovery and Reinvestment Act, or the 2009 stimulus, Congress subsidized this coverage, given the massive number and economic hardship of laid-off workers. The subsidy paid for 65 percent of health-care premiums for up to 15 months, meaning an average enrollee paid less than $3,000 a year.

For the Davises, under COBRA, coverage might have been a manageable $400 a month. When Davis looked into enrolling her husband and herself, she found it would cost more than $1,100 a month — leaving the family just a few hundred dollars for the mortgage, utilities, gas and food. She sought information on other private plans, but considered all of them too expensive. For now, the Davises are purchasing barebones coverage that will help pay hospital bills in case they are in an accident.

She rationalizes: “Me and the husband, we’re young enough that we can go without visits to the dentist and the [gynecologist] for a year,” and she argues, “I just do not see how it would be worth paying that much money for coverage, when we’re looking at a lot of other problems.” She argues that if the choice is between routine care and paying the electric bill, she will choose the latter. In the meantime, she is praying that her husband’s asthma does not flare up in the fall and hoping that they find jobs soon.

The Davises are one of hundreds of thousands of families doing the same. According to a study of 200 very large employers by Hewitt Associates, the COBRA provision doubled the proportion of laid-off workers enrolling in the program. In the fall of 2008, before the subsidy, about 19 percent of laid-off employees enrolled in COBRA. During the first six months of the subsidy, 38 percent of laid-off workers chose to. Now, with the subsidy’s end, enrollment rates are plummeting.

“Enrollment rates will likely decline over time as workers can’t, or aren’t willing to, afford the high premiums associated with COBRA coverage,” Hewitt’s Karen Frost said in a statement. “It’s possible these laid off workers are simply seeking coverage with a new employer or through their spouse’s employer. Unfortunately, it’s also likely that some are just foregoing health insurance altogether.” The National Employment Law Project estimates that 144,000 individuals and families per month have lost out on the subsidy.

It wasn’t supposed to be this way, but the extension of the COBRA subsidy became caught up in the tax extenders bill — also known as the jobs bill or H.R. 4213 — a large package of popular stimulus provisions that eventually died at the hands of a Republican filibuster. Senate Democrats managed to move unemployment insurance benefits, but few other portions of the popular bill made it through a Senate allergic to deficit spending.

The COBRA subsidy is highly popular: Hart Research found that 70 percent of Americans support extending it.  And many on the Hill fought to keep it in the tax extenders bill or to push it through other provisions. “Millions of Americans have been hard hit by the recession and lost their jobs through no fault of their own,” Sen. Robert Casey (D-Pa.) argued. “If Congress turns its back on them, they will have an even more difficult time making ends meet. With no premium assistance, COBRA health care benefits would consume 75 percent of the monthly unemployment payment for a Pennsylvania family.”

He offered an amendment to keep the subsidy within the jobs packages, and along with Sen. Sherrod Brown (D-Ohio) has offered it as a standalone bill. The Extend COBRA Premium Assistance Program Act of 2010 provides a six-month subsidy for workers laid off between May 31 and Nov. 30. The provision is entirely deficit-neutral, eliminating a tax break on annuity trusts as a pay-for. (The bill is one of many that would extend COBRA. On the House side, Rep. Susan Davis (D-Calif.), for instance, introduced a bill doing so until relevant portions of Obama’s health care bill come into effect in 2014.)

Casey and Brown’s bill is popular — cosigned by Democratic Senators John Kerry (Mass.), Carl Levin (Mich.),  Sheldon Whitehouse (R.I.), Debbie Stabenow (Mich.), Patrick Leahy (Vt.), Christopher Dodd (Ct.), Al Franken (Minn.), Roland Burris (Il.) and Daniel Akaka (Hi.) and supported by a slew of others. But it is caught in committee, and its likelihood of passage any time soon is small.

That means that the popular provision is likely dead, and for families like the Davises, health care coverage will remain an unaffordable luxury.

Yesterday — at which point everyone on the Hill knew the resolution authority fund was already kaput — Treasury Secretary Timothy Geithner took to the Hill to argue again for the Financial Crisis Responsibility Fee, a 10-year, $90 billion tax on financial firms bigger than $50 billion. The tax would have been related to financial regulatory reform, but not technically part of the Dodd bill. Because of procedural rules, and, more importantly, a lack of political will, the Crisis Responsibility Fee also has been declared dead in the water.

That means that the biggest financial crisis since the Great Depression will likely pass without the federal government imposing bigger taxes on banks — as galling a failure of the reform process as any. For taxes on banks would not only seem just to taxpayers forced to pony up $700 billion to support a cratering financial system; they would aslo help to diminish “too big to fail.” Now, the government subtly rewards bigger financial firms: The bigger the bank, the more other financial institutions believe that the government will step in to save them if they start to falter. (Essentially, the bigger the bank, the less risky the markets perceive it to be.) One easy corrective would have been to tax big firms. Now, it will be in the hands of regulators to ensure they have enough capital on hand, and possibly to require bigger firms to hold a higher percentage of capital. But those provisions will not be written into law either.

Earlier this afternoon, Senate Minority Leader Mitch McConnell (R-Ky.) said Republicans would no longer stand in opposition to the bill reaching the floor. Republicans Olympia Snowe (Maine), Susan Collins (Maine) and Lamar Alexander (Tenn.) indicated they would vote for the cloture motion. But Senate Majority Leader Harry Reid (D-Nev.) just asked for unanimous consent — a parliamentary procedure that does not require a vote, as long as no senator objects.

Senators are currently speaking and anyone interested can watch all of the hot Hill action here.

Sen. Blanche Lincoln (D-Ark.) has written an aggressive proposal to regulate the derivatives market. (WDCpix)

This week, Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill moved to the floor of the Senate. And with that bill close to passage, Wall Street and lobbyists turned their attention to Sen. Blanche Lincoln (D-Ark.) and the Senate Agriculture Committee’s proposal to regulate derivatives, a $450 trillion market and a major source of investment-banking profits.

[Economy1]Derivatives are essentially a type of financial insurance. They let two parties trade a contract derived from the price of some underlying security, currency or commodity. For instance, say you were a major airline. You might go to your bank to purchase a derivative locking in the price of gas, just in case a summertime oil shortage pushed up prices at the pump. In this case, you would be an “end user,” meaning you actually take delivery of the good. About 90 percent of the derivatives market involves financial firms trading derivatives like credit-default swaps back and forth for profit — and just 10 percent involves end users, non-financial firms using derivatives to mitigate risk.

Still, end users have become the unlikely center of the fight on derivatives legislation. With the reputation and credibility of big financial firms weak, companies in industries from agriculture to aviation came forward to say that this legislation might not only dampen big business’ profits but also hurt them. On Tuesday, the U.S. Chamber of Commerce and other business lobbies — via a group called the Coalition for Derivatives End-Users — took to the Hill for a flurry of meetings between corporate representatives of those worried end users and members of Congress.

“The legislation has the potential to take hundreds of billions of dollars out of the economy through margin and capital requirements,” says Cady North, a lobbyist at Financial Executives International and a member of the Coalition for Derivatives End-Users’ steering committee. “We estimate that the bill could require up to $900 billion in capital expenditures.” Moreover, the Coalition argues, the bill will increase the cost of derivatives for end users. (The Coalition declined to provide a list of participating executives or their companies, or a list of the legislators or assistants with whom they met, and the Chamber of Commerce did not respond to repeated requests for comment.)

But there’s just one problem. The Lincoln bill forces financial firms to put up collateral and use clearinghouses when they trade derivatives, but specifically exempts end users from those requirements. Banks are using their end-using clients as proxies to help kill off the legislation, lawyers and lobbyists contend. And for most end users, the opposition to the bill makes little sense.

Other lobbying organizations representing end-using white-collar companies said they had no issues with the legislation. For instance, Michael Griffith, a legislative analyst at the Association for Financial Professionals, which represents 16,000 of “the folks that manage your average companies’ money,” says he has no issues with it. “We’re pretty happy with what the Agriculture Committee approved,” he says. “It has a broad end user exemption on it, and we haven’t had many complaints from our members.”

“I know the banks are screaming about it,” says Brian Kalish, the director of AFP’s finance practice. “[My members are] getting panicky emails from their bankers. But [of] my members, no one’s panicking.”

But this week, some end users got more than panicky emails from their banks. Lawyers and lobbyists say that banks clearly misled companies about how the legislation might impact their business costs. In one case, a derivatives broker told a company that the legislation would force it to pay the same fees and put up the same collateral as financial firms, even where it explicitly would not.

“I’ve heard of a few folks who use derivatives [as end users who] called up their banks to talk about the legislation,” another lobbyist said. “Of course, their bankers told them to expect the whole market getting disrupted, price increases, collateral calls. Now, for most of them, they’re buying swaps to hedge. The legislation specifically exempts them.”

Legislators this week repeated the concern. Senate Banking Committee Chairman Dodd said he sees evidence of the bankers’ influence when end users lobby him. “The end users have been basically used by the major investment banks,” he told the Huffington Post’s Ryan Grim on Tuesday.

Indeed, Lincoln took pains to ensure most end users are not impacted by the legislation. Some firms with “captive finance entities” — financial-products divisions within big, diversified companies, like Cargill — might not qualify as end users on some transactions, and might have to post collateral when they use derivatives to speculate rather than hedge. But they represent a small proportion of end users, who represent a small portion of derivatives users.

Furthermore, the legislation might eventually drive end-users’ costs down. Many derivatives experts — off of Wall Street, at least — believe that Lincoln’s reforms will increase competition and transparency, reducing prices. Robert Litan, a derivatives expert at the Brookings Institution, explains, “In a world of nontransparency, the world the derivatives market is in right now, the way I understand it, if you try to call four or five dealers, to shop around, none give you a real price. They might quote you an indicative price. If you commit, then they give you pricing information.”
The White House concurs. Jen Psaki, the deputy communications director, recently argued, “The unregulated OTC derivatives markets were at the center of the recent financial crisis. The Wall Street banks that dominate this market want to keep it unregulated so they can make money off regular firms.”

Elizabeth Warren, chair of the Congressional Oversight Panel (EPA/ZUMAPRESS.com)

The White House wants it. Senate leaders support it. The House has already passed it. And, in the wake of the worst financial upheaval since the Great Depression, many consumer groups and state regulators say it’s vital if the country is to avoid another economic collapse. Yet the proposal to create a new consumer financial protection agency is, for all practical purposes, dead on arrival in the Senate.

Just call it the public option of the finance reform debate.

[Congress1]Indeed, Republicans are already treating the protection agency like poison. Senate Banking Committee Chairman Christopher Dodd (D-Conn.) may have abandoned his finance-reform talks with Sen. Richard Shelby (R-Ala.), an outspoken foe of a separate agency to protect consumers. But Shelby’s replacement at the negotiating table is Sen. Bob Corker (R-Tenn.), who said recently that, just as Republicans were unanimous in opposing the public plan in the health care debate, so too are they united against an independent consumer financial protection agency, or CFPA — a proposal championed by Elizabeth Warren, head of the TARP oversight panel.

“For Republicans, including me, a free-standing agency is a nonstarter,” Corker told The Hill last week. Instead, Corker wants to carve out a consumer protection unit within a much larger bank regulator being proposed by Dodd.

Yet that idea worries many consumer advocates, who argue that the agency charged with ensuring the soundness of the nation’s financial institutions shouldn’t also be responsible for protecting consumers. It’s not difficult to imagine, for instance, situations in which firms profit from unfair or abusive practices. In those cases, the strategies that bolster the firms’ financial health might do so by taking advantage of the same confused consumers the agency is supposed to safeguard.

“These two missions can conflict,” Travis Plunkett, legislative director of the Consumer Federation of America, said Tuesday at a finance reform discussion hosted by the New America Foundation in Washington. “It would be like putting the Department of Commerce in charge of the EPA. … It would mean that we haven’t learned the lessons of the crisis.”

No matter. Despite the recent Wall Street collapse — a crash that required trillions of dollars in federal help and has left nearly a fifth of the country underemployed — the powerful financial services industry has retained remarkable sway on Capitol Hill. Not only have the nation’s largest firms rebounded to a point where seven- and eight-figure bonuses are again the norm, but they’ve also pumped tens of millions of dollars into K Street to lobby against the Democrats’ reform plans in general and the CFPA in particular.

The industry warns that too much government oversight would stifle innovation and ultimately limit access to the same credit that’s the lifeblood of the economy — not unlike the health insurance industry warning that the public option would ultimately harm the same consumers it’s designed to help. And lawmakers are listening. Not only are Republicans united against the CFPA, but a handful of Democrats — including Sens. Tim Johnson (S.D.), Ben Nelson (Neb.) and Mark Warner (Va.) — are wary as well. That opposition means that the Democrats would have had trouble creating the CFPA even before the surprise victory last month of Sen. Scott Brown (R-Mass.), which has forced the Democrats’ health care reforms to the back burner.

The saga highlights the dilemma facing Democrats in Congress and the White House in the run-up to November’s mid-term elections. On one hand, party leaders want to bolster their populist image; on the other, they’ll have to rally the support of at least a few business-friendly senators to get anything at all through the upper chamber, where 60 votes are required to pass everything. Meanwhile, Democrats also don’t want to alienate the same Wall Street firms that gave heavily to the party in 2008. If the enactment of strict new financial regulations was a foregone conclusion in February of 2009, a year later it’s looking like the Democrats will have to settle for weaker tea.

Another hurdle facing the CFPA, according to some observers, has been the failure of Democratic supporters to sell the importance of their proposal. Tim Fernholz?, writer at The American Prospect, pointed out that most voters have experience with mortgage loans, or car loans, or credit card rates or overdraft fees. The question is: why haven’t CFPA supporters been able to convince those same folks that a consumer protection agency would work to their benefit? “It really should be something that’s politically popular,” Fernholz said.

Jonathan Mintz, commissioner of New York City’s Department of Consumer Affairs, agreed that, despite all the evidence that the industry needs a shorter leash, the Democrats’ messaging has failed to resonate with the public at large. “You can be very specific about the harm that’s being done,” he said. “Suddenly what you’re talking about is a literal problem with a literal solution.”

Not that all Democrats are done fighting for the CFPA. “There needs to be a new agency with new powers for whom this will be a primary mission,” Lawrence Summers, White House National Economic Council director, said last month. More recently, White House Press Secretary Robert Gibbs echoed that sentiment, telling reporters Friday that an independent consumer protection authority remains “a great priority” of President Obama.

Congress is half way there. In December, House Democrats passed a financial reform package that included a stand-alone CFPA. Sponsored by Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, the bill would prohibit certain complex financial products, require greater transparency surrounding terms and rein in misleading marketing campaigns. It received exactly zero Republican votes.

Some state financial regulators warned Tuesday that the industry has evolved quickly, with more and more companies dabbling in the complicated products that few seem to understand. “The fringe sector really isn’t so fringe anymore,” said Sarah Bloom Raskin?, Maryland’s commissioner of financial regulation.

Plunkett agreed, noting that the recent turmoil was caused by a series of regulatory failures that allowed the nation’s financial institutions to make a habit of abusive practices — a “parade of horribles,” Plunkett said, that extended well beyond sub-prime mortgage lending into the realm of credit cards, overdraft fees and payday loans. Because no one agency concentrates exclusively on protecting consumers, he said, they were able to focus elsewhere without much consequence — until it was too late.

“It’s a failure of will,” Plunkett said. “No one had consumer protection as a priority.”

And if Corker and the others have their way, that trend will continue.

At issue is whether brokers should be required to put their clients’ interest first — what is known as fiduciary duty. The professionals known as investment advisers already hold to that standard. But brokers at firms like Merrill Lynch and Morgan Stanley Smith Barney, or those who sell variable annuities, are often held to a lesser standard, one that requires them only to steer their clients to investments that are considered “suitable.” Those investments may be lucrative for the broker at the clients’ expense.

Their lobbyists are spending money to kill a requirement that brokers steer their own clients to transactions in the best interests of the clients rather than the broker — because, apparently, that’s not what they are actually doing. It’s like those cartoon Charles Schwab commercials were telling you the truth!

The financial reform bill promoted by Sen. Chris Dodd (D-Conn.) would eliminate a decades-old exemption that allows brokers to claim that they aren’t financial advisers — and thus required to provide advice in the clients’ best interests — as long as they aren’t getting paid for the advice. So, if your broker gives you advice of what to buy, but he’s only paid for the act of buying it, your interests never have to come first. Brokers, naturally, prefer the House legislation which allows them to continue to sell you bad investments as long as they tell you first that you ought to make better ones.

Insurance companies, by the way, want to be left out of that regulation all together, because they’re not even interested in steering their clients to “suitable” insurance products. As far as they’re concerned, “Buyer Beware” is a good enough standard.

An ambitious plan to update the Carter-era Community Reinvestment Act that supporters hope to see signed into law in 2010 comes amid charges that this legislation was responsible for nothing less than the subprime crisis and the resulting collapse of the residential real estate market.

The plan, sponsored by Rep. Eddie Johnson (D-Tex.), would close some loopholes in the original act that let non-bank financial firms operate with relative impunity. It would levy negative ratings on a much wider array of institutions that practiced predatory or discriminatory lending, and it would require that non-bank entities like mortgage providers and insurance companies comply with all CRA tenets.

[Economy1] Why this piece of legislation is still such a lightning rod more than 30 years after its introduction is something both its supporters and detractors struggle to explain from their respective camps. “The idea that this was just some sort of carrot-stick regulation that didn’t work is a perception that goes very much in hand with a right-wing agenda,” said Jose Garcia, associate director for research and policy at advocacy group Demos. Demos is one of several progressive groups seeking to have the bill, the Community Reinvestment Modernization Act of 2009, made into law.

On the other hand, Mark Calabria, director of financial regulation studies at the Cato Institute, asserts that political pressure drives CRA support. “It fundamentally gets to some very emotional issues. [Supporters] see this as an issue of racism and social justice,” he said. The Cato Institute held a forum in November that was broadly critical of the CRA, asserting that the financial models at its core are faulty.

Federal Reserve chairman Benjamin Bernanke called the CRA a “catalyst” in 2007, although he touched on the trouble already brewing in the subprime mortgage sector as an imperative to revisit the Act in the wake of significant changes in the banking industry since its implementation.

At its heart, the CRA was created to try and legislate out some of the institutional discrimination in the financial services industry. It was conceived in a very different era from today’s world of global banking behemoths. In the wake of the civil rights movement, most banks were still small, often single-branch operations. Many would operate selectively in low-income and minority neighborhoods, accepting the deposits of local residents but only writing home or business loans in more affluent communities.

Regulatory changes in banking plus an agenda embraced by Fannie Mae and Freddie Mac to boost homeownership cracked the mortgage market wide open beginning in the 1990s, and the CRA was initially credited with higher rates of homeownership among low-income and minority Americans. According to Kathleen Day, spokesperson for the Center for Responsible Lending, “The purpose of the CRA is to go into underserved areas and look for credit-worthy borrowers you overlooked because of red-lining,” she said, referring to the bank practice of categorically refusing to lend in certain neighborhoods.

The result of reckless lending practices is by now apparent to everyone, although concerns were swept under the rug in the go-go years of the mid 2000s. CRA supporters say brokers and non-bank mortgage outfits wrote nearly 95 percent of the bad loans, while the Act took the fall when these loans turned out to be unsustainable.

“Nine out of 10 of the people who got bad loans already had homes,” said the Center’s Day. “Six out of the 10 were refinances and three were selling one home and buying another.”

Often, Day adds, the unscrupulous vendors that preyed on subprime mortgage candidates cloaked their malfeasance in the language of the CRA’s mission, a sleight of hand that muddied the waters and assigned undue blame on the regulation when mortgages — and the huge numbers of securities backed by them — began to sour.

Even Lawrence White, a New York University who wants to see the CRA scrapped, says it’s not to blame for the financial meltdown. “The CRA has very little to do with the subprime lending debacle,” he said.

Aside from mortgage lending, the other goal of the CRA is to provide basic banking services to low-income and minority citizens. In these locations, “Pawnshops and the like literally became the banking services,” said John Taylor, president and CEO of the National Community Reinvestment Coalition, the organization spearheading the modernization of the CRA.

“In some communities there are no financial institutions,” asserted Demos’s Jose Garcia. Geographic impediments and language barriers create a two-tier system that leaves low-income Americans, minorities and immigrants without access to the banking and lending services the middle class takes for granted.

If the legislation were better-enforced — something the NCRC’s Taylor believes the modernization bill would facilitate — banks wouldn’t be able to do things like close branches in these communities without repercussions. But preventing closures would just be the beginning.

In a 12-page statement, the NCRC spelled out major features of modernization. Key among them are inclusion of non-bank financial firms under the umbrella of CRA oversight, and a greater emphasis on the neighborhoods in which institutions write loans, not just the locations where their branches or offices are located. This is partially due to the rise of online and branchless financial institutions, but Taylor says the switch will also prevent companies like subprime mortgage-peddlers from operating under the radar.

Advocates also want to see enforcement of the CRA transferred to the not-yet-created Consumer Financial Protection Agency. The CFPA, as its supporters envision it, would consolidate regulatory oversight and enforcement of banking and lending activities in a single agency, rather than the patchwork of regulators some say let ruinous business practices slip through the cracks.

The modernization effort isn’t without roadblocks, though. The current House bill has yet to progress to the Senate, although Taylor says the NCRC’s goal is to have the modernization signed into law sometime this year. The CFPA doesn’t even exist yet, and might never come to fruition. Last week, Senate Banking Committee Chair Christopher Dodd (D-Conn.), the lawmaker who has championed the idea, indicated he may be willing to abandon the idea of a consumer protection agency.

In the end, it’s not clear what is ahead for the CRA. Some, like the Cato Institute’s Mark Calabria, think the need has run its course. “There was a logical raison d’être for the creation of the CRA at the time but that justification is no longer there,” he said. He admits that an outright repeal of the Act is unlikely, though. NYU’s Lawrence White also wants to get rid of the CRA, although he wants to replace it with a cap-and-trade system of credits similar to the protocol used to eliminate acid rain-causing sulfur dioxide in the 1980s.

Progressive and social-justice groups say that the CRA, while not perfect, needs to be improved, not thrown out. “We’re talking about trillions of dollars of private resources that could be available to low- and moderate-income neighborhoods,” said the NCRC’s Taylor. “We believe in banks. If we don’t have them active in these neighborhoods, it’s very unlikely they’re going to prosper. We want banks to see these neighborhoods as an important part of the economic future of this country and of their business plans.”

In the end, it might come down to that. If the notoriously profit-hungry banking industry sees economic potential in lower-income areas, this would go a long way towards keeping the predatory players out of the arena.

Though his father was a prominent U.S. senator, Dodd packaged himself as a friend of the underdog. He spent two years in the Peace Corps, where he became fluent in Spanish. And he stormed to Congress in 1974 on the wings of the backlash against Watergate — a movement that brought a number of liberal lawmakers to Washington bearing the message that the city had grown corrupt, that lawmakers were too distant from the people. For Dodd, the wave of that populist image would carry him for more than three decades: He never received less than 56 percent of the vote in his five Senate races. He won the last contest in 2004 with more than 66 percent.

And if he had remained content as the senior senator from Connecticut, those approval numbers might have continued into this year. But he didn’t, instead announcing his candidacy for president three years ago this month.

“I know how to do this,” he said at the time. “I know what has to be done.”

Later in 2007, he moved his family to Iowa in hopes that the strategy would lend an advantage in the state’s important caucus — a tactic indicative of just how badly he wanted the White House, but one that also distanced him from the people of Connecticut. Then the money started pouring in from Wall Street — and it didn’t help that, as chairman of the Senate Banking Committee, Dodd was on the campaign trail through much of 2008 as the economy was toppling under the weight of Wall Street’s collapse.

Then came more revelations of Dodd’s connections to the banking industry. In summer of 2008, Portfolio magazine reported that Dodd had been given preferential rates when he refinanced two mortgages through Countrywide Financial. In February of last year, the Hartford Courant uncovered that another industry connection had yielded Dodd a sweetheart deal on a vacation cottage in Ireland. One month later, he was embroiled in the AIG bonus scandal — and it didn’t matter that it was the White House, not Dodd, that was culpable for allowing those bonuses to be paid. The populist champion was morphing into a baron of industry. The pendulum shift was tangible, and the press (and Republicans) pounced.

The cumulative effect of the last three years has been this: Dodd’s Republican challengers have pummeled him in recent polls. And although Dodd claimed today that those figures had noting to do with his decision not to run for reelection, they certainly didn’t encourage him either.

“I’m proud of the job I’ve done and the results delivered,” Dodd said today. “But none of us are irreplaceable. None of us are indispensable. Those who think otherwise are dangerous.”

The populist came back, a little too late.

House Financial Services Committee Chairman Barney Frank (D-Mass.) (WDCpix)

As a House committee begins tackling major financial regulatory reform, consumer advocates find themselves shaking their heads over why something that should have been a slam dunk — reining in the financial industry in the wake of the subprime crisis — has turned into a hard-fought battle instead.

Proposals for a Consumer Financial Protection Agency, a new federal authority to regulate mortgages and other financial products, and for oversight of the private and unregulated market for derivatives, risky financial instruments cited in the subprime collapse, are under debate by the House Financial Services Committee this week. In the immediate aftermath of the financial crisis, it seemed to many consumer advocates that those proposals, and other efforts at financial regulatory reform, would have been already been in place by now.

Illustration by: Matt Mahurin

But what seemed back in 2007 like a clear path ahead was upstaged by the health care battle, which stalled momentum on the biggest overhaul of financial regulations since the Great Depression. Yet there’s even more to the reform slowdown, noted Kathleen Engel, a Suffolk University law professor who specializes in predatory lending and subprime securitization.

A weakening economy has left homeowners worried about paying their mortgages and keeping their jobs, leaving less time and attention for larger problems in the banking system. Regulating mortgages and securitization are complex issues that are difficult to translate, making it hard to get the public engaged in the debate.  And banks are in a better position to fend off regulation, now that their bottom lines are stronger and the government needs them to modify as many mortgages as possible to bolster the economy, she said. “They really have the federal government over a barrel right now,” Engel said.

She added that people feel “relieved” that banks are stable these days, which contrasts with their emotions when the subprime collapse first hit. “I was really hopeful at the beginning that the rage that people felt about the banks getting us into this mess would lead to needed regulation,” she said. “But people are so strapped right now, they’re stressed out how to get a loan mod, or how to get a job, that they’re not able to focus on what the government should be doing.”

Banks, for their part, continue to argue that new regulations aren’t needed, and will only choke off financial innovation. The American Bankers Association, the Financial Services Roundtable, and even small and community bankers are opposing the agency, saying it presents a new and unnecessary layer of regulation. Those arguments have gained a foothold because of a long-held distrust of any new rules coming from Washington, noted Cathy Lesser Mansfield, a Drake University law professor and consumer law expert.

“For the last 20 or 30 years, we’ve kind of bought this notion that all regulation is bad regulation,” said Mansfield, who also chairs Americans for Fairness in Lending, a nonprofit consumer advocacy coalition that supports reforms. “The reason the banks are getting away with this is they’re saying, ‘We’re already regulated. We already have a regulator.’”

Lax regulation, however, is often cited as one of the contributors to the financial crisis. And the nation’s top banking regulator, John Dugan, the Comptroller of the Currency, recently gave a speech arguing that banks weren’t responsible for the financial crisis.

As overhaul begins to move forward, the financial industry remains an enormous influence on Capitol Hill, causing committee chairman Barney Frank (D-Mass.), to dilute his proposal to get industry defenders on board.

In order to win wider support from conservative Democrats and others for the consumer agency, Frank already has dropped from the proposal a “vanilla” option which would have required mortgage brokers and banks to offer consumers a plain, 30-year fixed mortgage, along with more exotic mortgage products. Frank also eliminated a reasonableness standard, which would have required bankers to ensure consumers understood their products, and could afford them. He proposed that an oversight panel for the agency be staffed by top bank regulators, and said he would exempt most non-financial businesses, including retailers, merchants, and real estate agents and brokers, from oversight.

The committee is likely to end up approving some sort of consumer financial agency, “but we’re worried about how watered down it will be,” said Lauren Saunders, a lobbyist with the National Consumer Law Center. She also said it’s hard to believe that the banking and financial industry has any credibility regarding its arguments against regulation, given its role in the financial crisis. But the sector has managed to mount an aggressive opposition effort, with the U.S. Chamber of Commerce in particular putting its clout into fighting the proposal with a multi-million dollar ad campaign.

“The banking industry is highly profitable,” Saunders said. “They’ve put a lot of money into this, both through lobbying and campaigning. We can’t even come close to them.” For the 2010 election cycle alone, commercial banks already have contributed $3.7 million to members of Congress, according to the Center for Responsive Politics.

Said Alan White, a Valparaiso University law professor who studies subprime loan modifications: “What saddens me the most is the extent to which Congress still allows the bank lobby to veto legislation it doesn’t like, and this includes the Democrats. You would think banks would have lost some credibility on Capitol Hill, but money still talks.”

For White and others, the ability of the finance industry to benefit from loopholes in the current regulatory system adds to the frustration. Goldman Sachs managed to refinance some of the toxic mortgages it controlled into Federal Housing Administration-backed loans, shifting the risk to the government. Former top executives of failed subprime lender Countrywide Financial, whose toxic loans were a major contributor to the subprime collapse, stand to earn millions of dollars by buying delinquent home mortgages that the U.S. government took over from other failed banks, sometimes for pennies on the dollar, and reselling them. Bailed-out insurance giant AIG is once again under fire, after a government report on Wednesday found that controversial retention bonuses intended to retain key employees went instead to workers in the firm’s troubled financial products unit, with even a kitchen assistant receiving a $7,700 bonus. “They’re totally taking advantage of the system,” Saunders said.

Advocates aren’t giving up. They noted that both the Federal Reserve and the Federal Trade Commission have been more aggressive regarding consumer protection lately, although they pointed out their actions may be due to fear of giving up power to a new agency. Congress also approved credit card reform, and some Democrats want to move up the timetable for putting new rules in place.

Frank has vowed to bring a reform package to a floor vote in the House by November. In the Senate, Banking Committee Chairman Christopher Dodd (D-Conn.), also strongly supports the creation of consumer agency, but there is significant Republican opposition to the idea. Dodd also has proposed merging four bank agencies into one super-regulator, an idea that goes beyond the scope of the Obama administration’s proposals. Dodd has said he hopes the Senate will act on some kind of financial reform before the end of the year.

Unless there is substantial financial regulatory overhaul, however, the opportunity for reform presented by the financial crisis will have been lost for good. “We would never have gotten into this financial crisis if the financial industry and these products had been regulated in the first place,” Engel said. “If we don’t manage to get reform done now, then we haven’t learned any lessons here.”

We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.  Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), who chairs the House Financial Services Committee, have vowed to pass sweeping reforms of the finance industry later this year, including the creation of a new federal watchdog designed to protect consumers from the more abusive practices of the banks. But those proposals — yet to be unveiled — face a tough road ahead considering the other controversial items left for Democrats to tackle this year, namely health reform and climate change legislation.

Dodd, for his part, shot out a statement this afternoon saying that Obama “got it right.”

Failure to act leaves our economy at risk.  We will not allow our efforts to be stalled by well financed special interests intent on keeping the status quo.

Meanwhile, the finance industry is spending upwards of $250,000 per day on lobbying and advertising to kill the Democrats’ reform plans even before they’re even unveiled, according to Common Cause, an advocate for campaign finance reform.

“Great speeches are no match for the bottomless pockets of big corporations looking to kill reform legislation,” said Common Cause President Bob Edgar. “[I]t seems corporate industries can fight back almost any public desire for change by spending enough money on lobbying and campaign contributions.”