Business Times - 21 Apr 2010
Republicans put on the defensive by Obama
Goldman fraud case seen as providing Democrats with leverage to press GOP to help approve financial reform bill
By LEON HADAR
ONE of the major turning points in the Congressional debate over the legislation to reform healthcare was the decision on Feb 12 this year by a California-based healthcare insurance company, Anthem Blue Cross, to raise premiums by 39 per cent.
US President Barack Obama and his Democratic allies on Capitol Hill seized on the announcement as proof that healthcare insurance reform was needed and launched a series of devastating attacks on the insurance industry.
The campaign helped produce political momentum in support for the legislation that eventually was approved by Congress, despite strong Republican opposition.
Now Mr Obama and the Democrats are finding themselves once again entangled in another legislative gridlock with Republicans - this time over financial regulatory reform. And pundits are comparing the political impact of last week's fraud charges against financial giant Goldman Sachs Group to the effect that the Anthem Blue Cross' premium hikes had on the Congressional debate over healthcare reform.
Indeed, the conventional wisdom in Washington is that the announcement that the Securities and Exchange Commission (SEC) has filed its first big lawsuit over alleged Wall Street crimes will provide Mr Obama and the Democrats with enormous leverage to press the Republicans to help approve a Senate bill that proposes reform of the Wall Street's regulatory system.
This will make it possible for the White House to win another legislative victory before the midterm Congressional elections in November.
The SEC, an independent government agency, has accused Goldman Sachs of creating and marketing financial products tied to risky sub-prime mortgages, without telling investors that the mortgage bonds for the portfolio had been picked by a client who then bet against them. And that Goldman Sachs profited when the bonds crashed.
The company denies these charges and that one of its vice-presidents, Fabrice Tourre, had given special attention to one client, the hedge fund Paulson & Co, at the expense of hundreds of others.
Mr Tourre, according to the SEC, sold to these clients bonds that were based on pools of sub-prime mortgages or 'synthetic collateralised debt obligations' (CDOs) while fully aware - and not telling these clients - that another client, hedge fund manager John Paulson, was betting against these CDOs.
Mr Paulson, who ended up making billions when the investment he had bet against crashed, was not charged by the government.
While the case in itself does not top the list of the worst frauds in Wall Street history, it does provide an opportunity for those pushing for reinforcing regulations over the financial industry with a dramatic opportunity to demonstrate to the American people that the current system allows shady financial deals while producing huge losses for most investors and consumers - and it puts the entire financial system at risk.
Indeed, the news on cable television and the Internet has been dominated by wide and sensational reporting about Goldman Sachs. It seems to have magnified the public backlash against Wall Street just as the Senate was beginning a debate on the financial overhaul bill proposed by the Democrats this week.
A version of the bill has already been approved by the House of Representatives.
So it's not surprising that Mr Obama and the Democrats seem to be in a good mood this week. That has to do with more than just their hopes to get the financial regulation reform bill approved in the Senate and signed by the president before November.
The public perception that the Obama administration and its allies on Capitol Hill were 'going after Wall Street' could also help counter the populist and anti-government message promoted by the Republicans and the Tea Partyers that the White House is 'bailing out Wall Street'.
In fact, the current White House's strategy is to try to portray the Republicans in the Senate and their leader, Senator Mitch McConnell of Kentucky who has expressed opposition to the financial regulatory reform bill, as the lackeys of the greedy bankers in Wall Street.
Mr McConnell has described part of the legislation - a proposed US$50 billion fund to be financed by the banks to be used by them if and when they go bankrupt - as a government-backed 'bailout fund'.
Mr Obama has criticised this claim as 'deceptive' and charged that Mr McConnell was taking his marching orders to kill the proposed bill from his financial backers on Wall Street.
And Mr Obama is scheduled to take his aggressive message to the entire country in the coming days. He will be delivering remarks on the need to create new rules for Wall Street today during a speech in New York, where he is expected to call for a 'swift Senate action' on financial regulation.
'The crisis has already wiped out trillions of dollars in family wealth and cost over eight million jobs,' the White House said in a statement on Monday. 'The president will also remind Americans what is at stake if we do not move forward with changing the rules of the road as a part of a strong Wall Street reform package,' it noted.
US Treasury Secretary Timothy Geithner said on Meet the Press programme on NBC that he was 'very confident that we're going to have the votes for a strong package of financial reforms that will bring derivative markets out of the dark, help protect the taxpayers from having to fund future bailouts and try to make sure we're getting Americans some basic protection against fraud and abuse'.
Mr Geithner and other officials are hoping that at least three moderate Republican from the New England states will agree to work with the Democrats on a compromise version of the financial regulation reform bill. And they are confident that unlike in the case of healthcare reform, the majority of Americans are going to support the Democrats on the need to tame Wall Street.
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