Yesterday, industry representatives held a conference call with reporters boasting about just how effective they’re fight against the proposed reforms has been. Washington Post columnist Dan Milbank today captures the essence of the industry’s reasoning:

[T]he argument most likely to prevail for the financial firms on Capitol Hill was offered by Chris Stinebert, [head of the American Financial Services Association]. “Especially now, when we’re in a very, very sensitive time, when the capital markets are just starting to recover,” he said, “introducing a high level of uncertainty in the marketplace could be very detrimental.”

Most of America, though, will have a tough time sympathizing with the alleged misfortunes of Wall Street firms, some of which are posting record profits at the same time that unemployment continues to leap.

With that in mind, Milbank offers his translation of Stineberts argument:

[T]o put it another way: Don’t regulate us now because the economy is still suffering from the mess we made because we weren’t regulated the last time. Chutzpah, it appears, is recession-proof.

“Things were a lot better for the average person in this country when we had usury caps,” Rep. Louise Slaughter (D-N.Y.), head of the House Rules Committee, said in a statement announcing her bill. “Watching how credit card companies have exploited people by increasing rates up to 30 percent and more is criminal and this bill will allow us to put an end to this practice.”

Massachusetts Democratic Reps. John Tierney  and Michael Capuano will co-sponsor the bill.

They have a tough road ahead, for several reasons. (1) Even though it was the finance industry that was primarily responsible for the recent global economic meltdown, there’s a growing reluctance on Capitol Hill to apply strict new regulations just as the banks are re-stabilizing — a circumstance the banks are already celebrating. (2) Although Congress was successful in passing sweeping credit card reforms in May, an amendment to cap interest rates at 15 percent was killed in the Senate. And (3) the banks aren’t going to allow Congress to squeeze a profit source without coming up with creative ways to make up the difference elsewhere. This, The New York Times reported yesterday, is what’s happening in Australia, where card issuers have responded to new regulations by attaching new fees to airline tickets, among other purchases.

“[I]f regulators limit one fee or rate, banks are likely to find another way to keep revenue flowing,” The Times wrote.

The idea roused the interest of Majority Whip Richard Durbin (D-Ill.), who continued the improvised sketch before the empty chamber.

“I think it’s been a full two weeks since we’ve had an ACORN amendment on the floor,” Durbin said. “So clearly it’s time for us to move to one of the highest priorities many Republicans see in the nation. I wonder if we ought to consider more ACORN amendments in hopes of moving legislation.”

To be fair to Republicans, they insisted on an ACORN amendment as part of the unemployment bill for only a few weeks, dropping that demand more recently in favor of provisions to end the Wall Street bailout and fund the unemployment insurance extension using unspent stimulus money.

A cloture vote on the extension bill is scheduled for 12:15 p.m. today.

Cantwell ripped into the financial reforms put forth by Geithner and the Obama administration as “appalling” for including alleged loopholes and exemptions for large financial institutions in legislation overhauling the regulatory framework for the nation’s top firms.

“I’m not sure,” Cantwell said during an appearance on MSNBC this morning when asked by host Dylan Ratigan why Geithner still has a job.

And yesterday on NBC’s “Meet the Press:”

“What the Treasury secretary basically said was that, yes, banks should take more risks and we should continue the loopholes,” she said. “And that’s really appalling because right now, we know that lack of transparency has caused this problem with the U.S. economy, and Wall Street is continuing, one year later, with the same loopholes.”

It won’t be easy for the Obama administration to push through legislation if it can’t even convince its own party to support it.

The first, sponsored by Sen. Mike Johanns (R-Neb.), would fund the extension using unspent stimulus money, rather than extending a small surtax on employers, as Democrats have proposed. The second, sponsored by Sens. John Thune (R-S.D.) and Robert Bennett (R-Utah), would eliminate the authority of the White House to extend the Wall Street bailout past its expiration date. (Under current law, TARP is scheduled to expire at the end of 2009, but the Treasury Department has the authority to extend it to Oct. 10, 2010.)

Party leaders have already reached agreement on the third, which seeks to end the federal ownership of bailed-out firms by assigning non-partisan trustees to manage them — a provision sponsored by Sen. Bob Corker (R-Tenn.) and Mark Warner (D-Va.).

House Democrats introduced legislation Tuesday granting the White House broad new authority to bail out investment houses and other non-banks when their potential collapse is a threat to the larger financial system. But while the bill goes far beyond a similar White House proposal in terms of protecting taxpayers, Rep. Brad Sherman isn’t impressed. The California Democrat, who said the White House proposal represents “TARP on steroids,” issued a statement last night claiming that the House bill is little better.

“The new resolution authority,” Sherman said, “provides permanent, unlimited bailout authority” granting “unprecedented powers for the executive to decide spending and taxes, without congressional approval.”

Under the House bill, sponsored by Financial Services Committee Chairman Barney Frank (D-Mass.), the White House would have the power to swoop in and dismantle failing Wall Street institutions in order to mitigate the negative effects on the finance system as a whole — a model designed after the authority of the Federal Deposit Insurance Corporation to intervene when commercial banks are poised to topple. To protect taxpayers, Frank’s bill attempts to force the tab ultimately on failed-company shareholders, as well as on other large Wall Street institutions that would presumably benefit from the general stability created by the government intervention.

Frank said his proposal would “ensure that the industry and shareholders absorb the risk and cost of failure, not taxpayers.”

But Sherman doesn’t see it playing out that way.

The taxpayer losses are supposed to be recovered from a new tax imposed on large and medium-large financial institutions.  The statute requires the Executive Branch to recoup taxpayer funds within 60 months, but then, allows them to extend this period for as long as they want. (§1609(o)(1)).  Further, it is difficult to see how any tax on financial institutions would provide hundreds of Billions of revenue, which might be needed to repay a large bailout.

And it’s not only trouble companies that could receive help under the House bill. Indeed, it would allow the president to loan solvent institutions unlimited funds “if necessary to prevent financial instability.”

When bailout funds are lent to a solvent financial institution under §1109, the executives and shareholders lose nothing.  Executives keep their jobs and their compensation packages; shareholders retain all their rights.  In contrast, when a troubled institution receives a bailout under §1604, some executives lose their jobs, and shareholders have to stand behind taxpayers.

That creates a moral hazard problem, Sherman argues, “allow[ing] those institutions which are clearly systematically important (the top 10 to 25) to borrow at a lower cost. This will help the largest institutions get bigger, so they can pose a greater systemic risk.”

The Financial Services Committee is holding a hearing on the bill this morning, with Treasury Secretary Tim Geithner testifying. There’s been no love lost between Sherman and Geithner in the past. Should be a good show.

Rep. Brad Sherman (D-Calif.) (house.gov)

In the wake of the recent financial meltdown, it sounds like a reasonable idea: A proposal granting the White House broad new authority to take over when a failing institution threatens to drag others — perhaps the whole economy — down with it.

Yet that proposal, included as a part of wide-ranging finance reform legislation moving through the House this month, is also sparking bouts of indignation on Capitol Hill, where at least one vocal Democrat says the provision represents an executive-branch power grab that would prop up too-big-to-fail institutions at the expense of smaller banks.

Image by: Matt Mahurin

“The key thing is that the executive branch have the power to commit, not just $700 billion, but $1 trillion or more without having to have Congress be involved at the time of the crisis,” Sherman charged last month during a hearing on finance reform.

The criticisms highlight the pickle facing Democratic leaders as they take steps to regulate the powerful financial services industry in the wake of the worst economic turmoil since the Great Depression — a downturn caused largely by the failure of Wall Street firms to leverage their exposure to risk. On one hand, the Democrats want to rein in the most complex and abusive industry practices in order to protect consumers from companies teetering beneath the weight of their own bad decisions. On the other, they don’t want their safeguards to prop up monster institutions that might require bailing out because they’ve become too big to fail. How to balance those goals will be no easy task — particularly with conservatives in one ear urging less government intervention and liberals in the other pushing for stricter consumer protections.

The Democrats’ proposals — one was introduced by the White House earlier in the year, and another was unveiled Tuesday by House Financial Services Committee Chairman Barney Frank (D-Mass.) — would grant the president new “resolution authority” allowing the government to swoop in and overtake investment houses and other non-bank institutions when their potential failure would put the larger financial system at risk – much like the current authority of the Federal Deposit Insurance Corporation to take over commercial banks when similar risks exist. The idea is to have the government escort the failed company into oblivion in ways that soften the blow on the larger marketplace.

The push to expand the president’s bailout authority gained steam last year, after Bush administration officials found themselves with few tools to manage the near failure of American International Groups and the actual collapse of Lehman Bros. — two firms falling outside of the FDIC’s regulatory umbrella.

After the fall of Lehman Bros., the perception that some institutions couldn’t be allowed to fail for fear of simultaneously pulling down the financial system led lawmakers to jump in with hundreds of billions of taxpayer dollars to prop up those companies.

The House bill is designed to remove the burden from taxpayers, proposing instead that shareholders — as well as financial institutions with assets exceeding $10 billion — ultimately pick up the tab when the government is forced to bail out a company for the sake of stabilizing the financial system on the whole. Still, that taxpayer safeguard does nothing to tackle the issue of moral hazard. That is, the nation’s largest financial institutions would still be insulated from certain risks, critics say, leaving them with distinct business advantages over smaller competitors.

David Min, financial markets expert at the Center for American Progress, said the resolution authority, by definition, has to be unlimited in order to maintain the government’s credibility as an effective backstop. But such a system, he added, will lower the capital costs for the largest institutions, making it more difficult for smaller banks to compete.

“The whole scheme of systemic stability really favors larger institutions and encourages them to become too big to fail,” Min said.

Sherman agrees. “That is a huge gravy train to the top 20 [financial institutions] because it allows them to borrow money at a lower rate,” Sherman said by phone last week. “Think of what this does to moral hazard.”

No stranger to taking on the finance industry, Sherman was a lonely voice in the push earlier in the year to apply more stringent executive compensation limits to bailed out Wall Street firms — a push that went precisely nowhere in the face of White House opposition.

Some economists, notably Paul Volcker, former chairman of the Federal Reserve and now head of the White House Economic Recovery Advisory Board, have an alternative solution to the too-big-to-fail problem. They want to put back the firewalls between commercial and investment banking — firewalls dismantled in 1999 with the repeal of the Glass-Steagle Act. But that proposal has gained little traction on Capitol Hill, where the finance industry remains a hugely influential player despite its role igniting the recent recession. Min said the Obama administration took a look through its “political lens” and decided to tackle finance reforms without reinstalling Glass-Steagle.

Frank’s panel will hold a hearing on the House legislation Thursday, with Treasury Secretary Tim Geithner testifying.

Expect some fireworks. At a Financial Services hearing last month, Sherman pressed Geithner to apply some limits to his request for new bailout powers. “Would great harm be done to this statute,” Sherman asked, “if we limited the executive branch’s authority to a mere $1 trillion?”

An annoyed Geithner eluded the question before reaching the conclusion that Sherman was “fundamentally mischaracterizing” the provision. The Treasury Department did not respond to requests for comment.

Sherman said he intends to offer a series of amendments addressing the issue during the Financial Services panel’s markup of the bill, which has yet to be scheduled. Included will be a provision to cap the president’s bailout authority at $1 trillion, and another to strip out the resolution authority language entirely. A potential third proposal — to create an oversight panel like that monitoring TARP funds — is one he’s leaning against.

“I’m not looking for a TARP on steroids with oversight,” Sherman said. “I’m looking for an end of TARP.”

When government is trying to take over health care, buying car companies, bailing out banks, and giving half the White House staff the title of czar – we have every good reason to be alarmed and to speak our mind!

Romney at the Conservative Political Action Conference in February:

I know we didn’t all agree on TARP. I believe that it was necessary to prevent a cascade of bank collapses. For free markets to work, there has to be a currency and a functioning financial system.

To be fair, in that speech Romney said that TARP should not have been used to rescue car companies. But the opposition to bank bailouts is new. Opposition to TARP has been a motivating force in the Tea Party movement, a possible reason for the softening here.

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Even as Congress moves to put more curbs on Wall Street excesses, the nation’s top banks are writing fewer of the campaign checks that once won them lawmakers’ attention – a sign of uncertainty in the financial industry over how large a role it should play in politics in the near future.

The top 15 beneficiaries of the TARP bailout gave $813,540 from their political action committees (PACs) to congressional candidates and party committees during the first half of 2009, according to a Washington Independent analysis of campaign finance reports filed with the Federal Election Commission (FEC). During the same period in 2007, those 15 bank PACs donated $2.1 million.

Image by: Matt Mahurin

And despite the “stress tests” that began gauging banks’ health in the winter, those that won freedom from government control did not resume their formerly torrid pace of PAC activity in the second quarter of the year. Bank PACs still tied to TARP have given 54 percent less this year than in than in the last election cycle, while bank PACs freed from the bailout have seen a 67 percent drop.

Goldman Sachs provides a dramatic example of the trend. Just two days before giving taxpayers a 23 percent profit as it repaid government bailout aid, Goldman quietly reported its political contributions for the first half of the year: $23,000, a 90 percent drop from the same period in the last election cycle.

“The erratic pattern we’re seeing suggests that the financial industry isn’t sure what’s happening to itself,” said Craig Holman, legislative representative for Public Citizen’s Congress Watch. “Different banks and different bankers just see uncertain futures, and so they’re not sure if things are improving, not sure if they should be playing a big role in politics right now.”

That uncertainty marks a stark departure from the halcyon days of early 2007, when JP Morgan Chase was staking a claim to record revenues and pouring $361,000 in PAC donations into Capitol coffers. So far this year, the bank has repaid $25 billion to the Treasury – and given just $26,000 from its PAC.

Morgan Stanley experienced the harshest drought of all. After dishing out $250,000 in early 2007, including large checks to House Financial Services Committee Chairman Barney Frank (D-Mass.) and the pro-business Blue Dog Democrats, the bank’s only PAC activity this year has been three voided checks, totaling negative $3,000.

Citigroup and Comerica, by contrast, have increased their PAC giving in the first half of 2009 even while holding onto their bailout money. Such unpredictable campaign finance decision-making, a de facto ‘every bank for itself’ approach, made sense to Center for Responsive Politics (CRP) spokesman Dave Levinthal.

“Every entity has to make its own decisions and balance them between what it perceives to be the need to lobby and what it sees as the probable consequences,” Levinthal said.

He pointed to CRP’s top 10 PAC spenders for this year, which includes four unions – a constituency most Democrats have no qualms about courting – but also the American Bankers Association (ABA), the trade group that often speaks for many of the same bailout recipients whose PACs are presently running dry.

In fact, several Democratic lawmakers who have forsworn donations from bailed-out bank PACs, such as Frank, Rep. Ed Perlmutter (D-Colo.), and Rep. John Campbell (R-Calif.) appear to make an exception for the PAC of the ABA. Its donations have risen 19 percent between early 2007 and early 2009.

“It may be that [Democrats] don’t want [banks’] money,” said Robert Stern, president of the nonpartisan Center for Governmental Studies. “It may be that most congressmen are saying, ‘not now, guys’.”

Exhibit A in Stern’s theory may well be Senate Banking Committee Chairman Chris Dodd (D-Conn.), whose struggles to dissociate himself from the industry he regulates were renewed last week after testimony suggested that he knew benefits were in the offing from Countrywide’s “VIP” mortgage program.

Dodd’s PAC received $2,000 from Goldman Sachs in January, before the senator vowed to stop taking donations from the PACs of bailed-out banks.

And lawmakers are not alone in fearing a public and media backlash from Wall Street campaign contributions. Individual bank employees donated 97 percent less in the first quarter of this year than in the same period in the 2008 election cycle, as the Independent reported in April.

“The last thing I want to do is wake up one morning and see our PAC check being burned on C-SPAN,” one wary bank lobbyist told Newsweek in the spring.

The sharpest declines in PAC giving, however, did not occur at banks with the gravest public relations problems. Citigroup gave more in donations even as its CEO was facing accusations of lying to Congress, while JP Morgan was giving less despite its CEO’s cozy relationships with senior Democrats.

The 15 banks examined by the Independent for its analysis come from the Treasury Department’s monthly lending survey of the top 20 TARP recipients. Six banks were excluded due to lack of PAC participation or sufficient FEC data.

If these banks are retreating to their political corners, then – becoming “fiefdoms” instead of one “monolithic” industry, in the words of Campaign Legal Center policy director Meredith McGehee – what happens when the economy recovers? Will the capital once again see spendthrift banks shower lawmakers with cash?

“Come September, I think we’ll be in a more traditional pattern,” McGehee said. “If you want anything done by next year, and you don’t start working on it now, you’re behind the eight ball.”

Stern also predicted resurgence in bank PAC activity by the end of this year, while Columbia Law School professor Richard Briffault suggested that donations could remain low for the rest of the 2010 election season thanks to Democrats’ broad advantage in national polling.

“In 2006 and 2008,” Briffault said, contributions rose because “those were very dramatic years. There was a lot of fighting for control of Congress.”

Three factors likely to push bailed-out banks back into PAC giving this fall come in the form of existing legislation. Frank plans to take up the Obama administration’s proposal for a consumer financial products safety commission in September, a bill beefing up shareholders’ role in executive compensation is on track for Senate action in the fall, and overall financial regulatory changes could come to a final vote before 2010.

Indeed, McGehee observed a climate of brewing interest among Washington interest groups of all sizes. “This conversation is happening in every room around town: ‘How do we get our thing done between now and Memorial Day?’” she said.

“That’s not necessarily a good thing for the American people.”

Yet a recent report from the congressional panel charged with overseeing the bailout program reveals that, at least in the program’s initial stages, the returns are nothing to write home about. Indeed, the July 10 assessment found that the 11 small banks that have thus far repurchased their warrants from the Treasury paid just 66 percent of the warrants’ value. (Treasury received the warrants from bailout recipients as collateral to protect taxpayers.)

If similar underpayments were made for all outstanding warrants, the oversight panel warned, taxpayers could lose out on $2.7 billion.

Those figures weren’t lost on some congressional lawmakers, who introduced legislation last week designed to maximize taxpayer profits under the Troubled Asset Relief Program. Sponsored by Rep. Mary Jo Kilroy (D-Ohio), the bill would force the Treasury to sell back all of its warrants through a public auction, rather than through the secret negotiation process currently in place.

“The banks and Treasury are negotiating the repayment of this debt behind closed doors instead of allowing trading in the open market,” Kilroy said in a statement announcing her bill. “We do not know if the current process is producing the benefits we are owed and a market-based approach would remove the secrecy and special interests and maximize the return on the taxpayers’ investment.”

The question that remains, of course, is why isn’t Treasury already doing this?