This is not quite a picture of a healthy industry. In a competitive marketplace, prices and fees at Wall Street firms should fall and margins should become thinner. On the one hand, Wall Street firms like J.P. Morgan and Goldman Sachs have seen a number of their competitors die in the past two years, and have absorbed business from the failed Lehmans and Bear Sterns of the world. But on the other hand, Wall Street profit margins have remained sky high except for a short blip during the worst of the credit crunch. And, an economist would tell you, such sustained levels of high profitability point to anti-competitive behavior.

Consider another high-profit company in a competitive industry — say, Exxon Mobil. Last year, it made about $19 billion in profit on $300 billion in turnover, giving it a margin of six percent. WalMart? It is in the low-margin grocery and retail business, and managed a profit margin of around 3.5 percent. In the first quarter, Goldman’s margin was just two percentage points below Google’s — and consider how dominant Google is in its industry.

In short, the profits point to a lack of competition. That is one thing the Dodd bill — via derivatives regulation — attempts to fix. Right now, Wall Street firms do not bid for big derivatives contracts — they simply quote a price and work over-the-counter. For that reason, derivatives are wildly profitable for the companies. The Dodd bill will force derivatives pricing to become public to the market, driving down margins as companies compete.

Recently, J.P. Morgan’s chairman, Jamie Dimon, put a number on how much that might cost his firm — $700 million to a “couple” billion dollars — less than a quarter or a tenth of his company’s annual profits.

iStockphoto

Senate banking leaders have wrangled a bipartisan deal over controversial legislation reining in the credit card industry, setting the stage this week for likely passage of new consumer protections in the midst of a tough economy where card companies are hiking rates to bolster profits.

The Senate compromise — worked out over the weekend by bill sponsor Sen. Chris Dodd (D-Conn.) and Sen. Richard Shelby (R-Ala.), the senior members of the Senate Banking Committee — would force card companies to disclose looming rate increases, eliminate surprise fees and prohibit rate hikes on existing balances.

Illustration by: Matt Mahurin

House lawmakers passed a similar bill easily last month, but the threat of a GOP filibuster — not to mention the tremendous lobbying clout of the finance industry — has threatened to derail the legislation in the Senate, which has been a black hole for Democratic leaders trying to push bank reforms in recent years. Indeed, Dodd struggled to get his credit card bill out of the Banking Committee, with Democratic Sen. Tim Johnson, representing the banking hub of South Dakota, voting with all panel Republicans against the bill.

The Senate compromise dilutes the consumer protections slightly from Dodd’s original proposal, but it goes further than both the House bill and new Federal Reserve rules to help consumers manage their cards. As a result, the Dodd-Shelby bill has the distinction — rare among finance reforms opposed by Wall Street — of gaining approval from both Senate Republicans and the vocal community of consumer and lending-reform advocates.

“It’s not everything we wanted, but it takes strong steps to help consumers,” said Lauren Saunders, managing attorney at the National Consumer Law Center. “It’s a reasonable compromise.”

Central to that compromise, the Dodd-Shelby bill allows banks to hike rates on existing balances in cases when cardholders are 60 days late on a payment. The original bill banned all such retroactive rate hikes. The House proposal, sponsored by Rep. Carolyn Maloney (D-N.Y.), permits retroactive rate hikes if customers are 30 days late. In another break from the Maloney bill, Dodd’s proposal would allow customers to earn back lower rates by paying on time for six months straight following a retroactive rate hike.

Many of the Dodd reforms mirror those in the House bill. Under both chambers’ bills, for example, card issuers would have to provide 45 days notice before hiking rates; they must mail statements at least 21 days before the bill is due; and they would be prohibited from charging customers a fee to pay their bills. (Some companies, for example, currently charge extra to pay over the phone or online.)

Both proposals also take steps to prevent college students from racking up tabs they have no means to pay back. The Dodd bill prohibits companies from issuing cards to anyone under the age of 21 unless there is a co-signer, for example, while the Maloney bill sets strict upper credit limits on students between the ages of 18 and 21.

The Fed unveiled similar consumer-friendly reforms in December, but those changes aren’t effective until July 2010 — too far away, advocates argue, to help many consumers survive the downturn. The congressional reforms would arrive little sooner. The Dodd bill would take hold nine months after passage, while the window under the Maloney proposal is 12 months.

President Obama has been pushing hard to enact new credit card reforms this spring, urging Congress over the weekend to get a bill to his desk by the Memorial Day recess.

“You shouldn’t have to fear that any new credit card is going to come with strings attached, nor should you need a magnifying glass and a reference book to read a credit card application,” Obama said Saturday during his weekly radio address. “And the abuses in our credit card industry have only multiplied in the midst of this recession, when Americans can least afford to bear an extra burden.”

The Senate began debate on the Dodd bill Monday, with observers expecting a final vote on the measure before the week’s end. On the chamber floor Monday, Senate Majority Leader Harry Reid (D-Nev.) said the compromise puts “fairness and common sense” into the lender-borrower contract.

“In short,” Reid said, “this bill cleans up the fine print so consumers can’t get blind-sided by their credit card companies.”

The debate arrives just a few days after the Senate killed another consumer-friendly proposal allowing homeowners to declare bankruptcy to save their homes from foreclosure. Complicating that vote, lawmakers have doled out hundreds of billions of dollars to prop up Wall Street in recent months, leaving many members of Congress reluctant to harm industry bottom lines at a time when the economy’s rebound hinges largely on the health of the banks.

That the Democrats appear poised to have greater success passing credit card reforms is some indication of just how unpopular credit card companies have become, particularly as more and more banks are raising rates and fees on even their most reliable borrowers. If bankruptcy reform is tough to grasp, few voters are unfamiliar with credit cards, and Democratic leaders smell a political victory as well as a win for consumers. Indeed, observers on and off Capitol Hill say the Obama administration surveyed the political landscape, and put all its energies in passing credit card reforms in lieu of mortgage bankrupt changes. Republicans like Shelby seem ready to jump onto that populist bandwagon.

Not that this debate is over yet. The finance industry is fighting tooth and nail to water down the congressional proposals, and conservative lawmakers are likely to offer a number of industry-friendly amendments during this week’s debate on the Senate floor.

Dodd, for his part, has promised to deflect any proposals that would further dilute his bill. “While I expect some battles in the coming days from credit card companies and their allies in an effort to diminish these strict new rules,” Dodd said in a statement Monday, “I stand ready to fight against any attempt to weaken the strong consumer protections in this bill.”

Sen. Chris Dodd (WDCpix)

Voluntary mortgage-reduction programs are insufficient to curb the spreading blight of national foreclosures, the head of the FDIC said Thursday, and the federal government should step in to help folks keep their homes.

The Bush administration and the finance industry have long resisted proposals forcing lenders to modify the terms of mortgage loans. But appearing before a Senate panel, Shiela C. Bair, chairwoman of the Federal Deposit Insurance Corp., said that leaving those renegotiation decisions to the banks has failed to solve the foreclosure crisis.

“Some of the voluntary efforts have helped,” she said during testimony before the Senate Banking Committee, “but they have clearly not helped enough.”

Illustration by: Matt Mahurin

Asked by Sen. Charles Schumer (D-N.Y.) if there is “any hope for a voluntary model” of mortgage write-downs, Bair responded without hesitation. “No,” she said. “There needs to be a package of carrot-and-stick incentives.”

Supported by housing advocates, congressional Democrats have long pushed for new rules allowing bankruptcy judges to force lenders to renegotiate the terms of primary mortgages — a power those judges currently have to alter loans for second residences, like vacation homes, and virtually all other types of debt. Bair said the FDIC has not taken a position on the bankruptcy proposal, but Washington must do something to protect homeowners and bring stability to the sinking housing market.

Sen. Christopher Dodd (D-Conn.), chairman of the Banking Committee, said during the hearing that he will take another shot at passing such reforms, perhaps as early as next month.

Under the $700-billion financial bailout bill enacted Oct. 3, the Treasury Dept. must craft a plan to prevent foreclosures. The legislation also authorizes — but does not require — the agency to encourage mortgage modifications through federal loan guarantees and credit enhancements.

FDIC Chairwoman Sheila Bair (FDIC.gov)

Bair recommended that the Treasury take advantage of that optional authority. “The government could establish standards for loan modifications and provide guarantees for loans meeting those standards,” she said. “By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.” She said the FDIC is working closely with the Treasury Dept. to craft such a plan.

Neel Kashkari, the Treasury Dept.’s Interim Assistant Secretary for Financial Stability, would not immediately endorse the strategy, saying only that the agency is exploring those options. The administration’s plan, Kashkari added, will be unveiled within “a few weeks.”

The comments arrive as the focus of Washington’s financial rescue strategy shifts from a massive bailout of the finance industry to the rising tide of struggling homeowners. Lawmakers and Bush administration officials have, in recent months, committed $30 billion to catalyze the takeover of Bear Stearns; fronted more than $120 billion to take over American International Group; pledged $200 billion to prop up Fannie Mae and Freddie Mac; and enacted a $700-billion bailout of Wall Street designed to thaw out frozen credit markets. But they have as yet done little to help homeowners facing foreclosures.

Those industry-focused actions, many experts agree, were necessary to buoy the sinking financial system. But without addressing the underlying issue of foreclosures, many contend, the troubles will only fester. Dodd said that Washington’s efforts up to now “have largely addressed the symptoms of the credit crisis rather than its cause.”

“The longer we allow foreclosures to erode family wealth, neighborhood stability and financial market liquidity,” Dodd said, “the longer our economy will take to recover from this crisis.”

In that diagnosis Dodd has significant support from across the aisle. Sen. Richard Shelby (Ala.), the highest-ranking Republican on the Banking Committee, agreed that lawmakers need to turn their attention to the housing crisis.

“Unless we do something, or can do something, to address the underlying fundamentals of dealing with the mortgage foreclosures in real estate,” Shelby said, “we’re going to be wasting, perhaps, a lot of money.”

Dodd said he hopes to push mortgage-modification reforms as early as mid-November, when the Senate is slated to return to Washington for a lame-duck session. “We’ve come to the point, once again, where I think legislatively, we have to try this,” he said.

The Democrats will likely have a tough road ahead. Many Republicans, already frustrated after being forced to swallow the Wall Street bailout, have a long history of opposing direct federal intervention in mortgage negotiations. They argue that such efforts — aside from encroaching on free markets — would hike mortgage rates for everyone.

Then there’s the financial-services industry. Though Democrats are widely expected to pick up seats in both the House and the Senate in November, the powerful finance lobby has, historically, held remarkable sway over legislative decisions. Indeed, no other business sector donates more to Congress. In the current election cycle alone, the finance, real estate and insurance industries have given $373 million to federal candidates and political parties, according to the Center for Responsive Politics, a campaign-finance watchdog group.

Congressional inaction, however, might not be an option. Foreclosure filings for the third quarter of 2008 totaled nearly 766,000 — a 3-percent increase over the quarter before, and a 71-percent jump over the 2007 figure, according to Realty Trac, an online foreclosure database.

Some lawmakers maintained that banks are doing too little to keep those numbers down, and in some cases are exacerbating the problem. Sen. Robert Menendez (D-N.J.) relayed the tale of a New Jersey homeowner facing foreclosure on a $175,000 home. With the help of a community group, the homeowner offered $160,000 to the lender, who turned down the offer. When the community group went to the foreclosure sale to pay the full $175,000, Menendez said, the bank bid the price up $5,000 higher.

“We can no longer sit back and hope that lenders do the right thing,” Menendez said.

The foreclosure mess has rippled through the rest of the economy. Lack of investor confidence has sent stock markets fluctuating wildly. Consumers, without access to home equity, are spending much less on retail goods. On Wednesday, Wachovia announced a $23.9 billion third-quarter loss — the largest bank loss since the financial meltdown began. And Thursday, as Kashkari, a former Goldman Sachs vice president, was testifying before the Senate panel, Goldman announced that it will slash 10 percent of its workforce.

Foreclosures were not the only topic of contention during Thursday’s hearing. Many lawmakers are also concerned about how the Treasury Dept. plans to ensure that those banks getting help under the bailout package actually lend the cash, rather than just hoarding it.

“Why,” Shelby asked, “did Treasury not attach a requirement to increase lending as a price for receiving the government money?”

Kashkari, charged with implementing the rescue plan, replied that the department “didn’t want to be in a position of micromanaging our banks.” He argued that certain contractual prohibitions — like one preventing participating banks from hiking dividend payments to shareholders — would nudge the institutions in the direction of lending.

There were other suggestions. Schumer urged Kashkari to adopt non-binding guidelines to steer the process. Among these guidelines, Schumer said, the agency should set lending goals for participating banks to prevent hoarding; push for stricter limits on executive compensation; adopt a streamlined approach for loan modifications to prevent foreclosures, and discourage banks from making the same risky investments that led to the crisis.

“We aren’t investing in these institutions,” Schumer said, “just to see the financial wizards go back to playing their high-stakes game.”

Without committing to guidelines, Kashkari said the administration hopes to have $250 billion “out the door” and to the banks by year’s end. Only time will tell how effectively the 35-year-old manages that spending — which represents a high-stakes game all its own.

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

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, looks like a giant these days. As the financial markets have plummeted and President George W. Bush is proposing sweeping legislation to bail out Wall Street, Frank is a key point man, attempting to strike a delicate balance between the concerns of his congressional colleagues and the administration. He is trying to play the role of the legislative broker — a role that seemed to have vanished in the modern Congress.

His partner in this effort, Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, is also emerging from this crisis looking like a strong leader. Dodd, who performed horribly in the Democratic primaries, offered up a concrete outline for how the administration can revise the legislation so that it can pass Congress.

Illustration by: Matt Mahurin

Frank and Dodd are reminding Americans that Congress can exert tremendous amount of power. It has not always been seen as the “broken branch” of government, as Thomas Mann and Norman Ornstein now describe the current state of the institution.

Frank and Dodd are tapping into a legislative tradition that existed in the committee-era of Congress from the 1920s to 1970s, when senior committee leaders — mostly Southern Democrats and Midwestern Republicans — formed an alliance to shape public policy from the House and Senate.

This was a remarkable period in the history of Congress. Most of the legislative process took place behind closed doors. Bipartisanship was typical, and committee chairmen relied on orderly rules and norms that provided them with autonomy from the party leadership. Rank-and-file members were seen but had little influence.

The Senate had its share of warriors. One giant from the committee era was Sen. Arthur Vandenberg, Republican of Michigan, who chaired the Senate Foreign Relations Committee from 1947 to 1949. Vandenberg was a former isolationist who turned internationalist as a result of World War II.

Sen. Christopher Dodd (D-Conn.), Chairman of the Senate Banking Committee (WDCpix)

Much of the GOP remained firmly opposed to President Harry S. Truman’s multilateral, European-based strategy in the Cold War. They wanted to emphasize anti-communism at home and fighting Communist Asia abroad. But Vandenberg, who developed a close partnership with the Truman administration, was critical in rounding up votes for landmark measures like the Truman Doctrine, the Marshall Plan and the establishment of NATO.

Sen. Lyndon B. Johnson of Texas was another baron of the Senate. As majority leader from 1954 to 1960, Johnson worked in an institution where majority leaders had traditionally been weak. He discovered and manipulated mechanisms like unanimous consent agreements — where individual members essentially agreed to relinquish their right to filibuster — to centralize authority in an institution that was notoriously individualistic.

Johnson used “The Treatment” — he confronted colleagues, hovered over them, and questioned them relentlessly in the hallway until they agreed to support him. Johnson displayed his skills in 1957, as Robert Caro has vividly recounted, when he brokered deals and formed odd voting coalitions to pass the first civil-rights bill since Reconstruction.

Senators have also been able to focus public attention on the failures of administration policy. During the 1960s, Arkansas Sen. William Fulbright, a liberal internationalist who had become disillusioned with Johnson, became a strong opponent of the war in Vietnam — after he pushed the Gulf of Tonkin Resolution on the Senate floor in 1964.

Fulbright chaired Senate Foreign Relations Committee hearings in 1966 that stung the Johnson administration. He dragged administration officials before TV cameras and grilled them about the conduct of the war and the broader strategy of containment. Fulbright biographer Randall Bennett Woods explained “the February hearings, in short, opened a psychological door for the great American middle class . . . if the administration intended to wage the war in Vietnam from the political center in America, the 1966 hearings were indeed a blow to that effort.”

Former Speaker of the House Sam Rayburn (National Archives)

The House has had its barons as well. Speaker of the House Sam Rayburn of Texas, who ran the House for most of the 1940s and 1950s, was a master at persuasion. He served as speaker in an era when committee chairs held enormous independent power, so he depended on negotiation and deliberation to get things done.

One of Rayburn’s central tactics was the “Board of Education,” a former committee room tucked away under the speaker’s lobby , where Rayburn met with his inner circle of Democrats to discuss the main issues of the day. Though he was physically small and unassuming, Rayburn commanded enormous respect by relying on informal relationships to influence decisions. While drinking bourbon and playing cards on the long leather couch and eight chairs that filled the room, Democrats debated the nation’s biggest issues.

Before his famous dip with a stripper in the Tidal Basin in 1974, Rep. Wilbur D. Mills of Arkansas, chairman of the House Ways and Means Committee, was one of the most influential figures in Washington. Mills commanded enormous power through his mastery of the tax code and Social Security system. He also made institutional changes, like blocking the creation of Ways and Means subcommittees, to retain his power.

In 1965, Mills seized the initiative from Johnson’s administration by taking the Medicare proposal, combining it with Republican and AMA-backed alternatives, and creating a program often called “the Mills bill.” When he combined the legislation, one committee member recalled that “it was fantastic. It was Wilbur Mills at his best. His maneuvering was beautiful, and I don’t mean maneuvering in a bad sense. He just said, ‘Why we don’t take it all?’”

Since the 1970s, becoming a baron became far difficult. Reforms to the legislative process made Congress unstable by weakening autonomous committee leaders, empowering the party leaders and simultaneously fragmenting power to subcommittee chairs and to the rank-and file. Ethics and sunshine rules, combined with the introduction of TV into the chambers, created an environment where it was far easier for members or even the media to bring down senior barons.

Polarization in Congress, which has steadily increased since the 1970s, combined with narrow majorities and divided government, has made it far more difficult for any individual legislator to achieve huge changes in policy.

But the barons have not entirely disappeared from Congress. This week, we have seen how some individuals have found ways to work within the more polarized and unstable process to achieve significant power.

President Lyndon B. Johnson and Richard Russell (National Archives)

Frank, a Harvard-educated, openly gay, New Jersey-native who represents one of the most liberal districts in the nation, has relied on a number of new and old-fashioned methods to reach this point. This new-style baron has proven himself a master of the modern Congress by using TV to create a bully pulpit and relying on the power of subcommittees to shape the agenda, as well as investigation.

Usually, Frank has rejected the notion that “bipartisanship will work,” and instead insisted that Democrats, like Republicans, use partisan tools aggressively. This is what he has done to maintain party discipline and threaten opponents. Frank has also been skillful in using party fund-raising committees to win the support and loyalty of colleagues.

At other times in recent months, Frank has turned to old-fashioned deal-making, using his power as chairman of the financial services committee — with jurisdiction over the most important domestic issue in recent months — to form unexpected alliances with Republicans over bills involving home owners and financial markets.

During the next few weeks, we’ll see just how powerful the new barons of Congress are. It is unclear, given the environment they face, whether they can break through and achieve the same kind of landmark compromises as their committee-era predecessors — the Congress that brought America the New Deal and the Great Society.

Julian E. Zelizer is a professor of history and public affairs at Princeton University’s Woodrow Wilson School. He is the author of “On Capitol Hill: The Struggle to Reform Congress and its Consequences, 1948-2000″ and the editor of “The American Congress: The Building of Democracy.” He is finishing a book on the history of national-security politics since World War II.