Last week, the Obama Administration let a lot of big banks give back their TARP
money, warning the world as it did so that it would stand tough on new industry
malpractice and malfeasance.  Starting this off, it then issued a comprehensive reform
package (see Client Report COMPENSATION14).  This appoints a special master for
firms getting exceptional TARP assistance (Citi and the like), includes a new interim
final rule (IFR) on TARP compensation standards (see forthcoming FSM Report) ,
and outlines  legislation Treasury and the SEC want to govern pay practices more
generally.  In addition, the FRB detailed its plans for new comp guidance before a
House FinServ hearing (see Client Report COMPENSATION15).   All of this is
intended to clear the decks so that the President can push the broad regulatory-
reform package set for release on Wednesday.

Will it? We don’t think so.  The President will have a very tough time marshalling the
support that catapulted the stimulus and other tough bills, in part because the
financial-industry reform package now must compete with the controversial health-
care one for scarce White House political capital.  President Obama walked into the
Oval Office with more of this than the generous amounts given to presidents during
the honeymoon after Inauguration, but he’s also been spending it at a far faster clip
than any predecessor we can remember.  Any call on which issue – financial reform
or health care – counts with constituents would of course come up for health care,
telling us that the President’s team will put its formidable muscle there if choices
must be made.

This isn’t to say that financial-industry reform is over.  Quite the contrary.  There’s
strong pressure for substantive change from a wide array of decision-makers even if
none agrees on which decisions to make.  Chairman Frank (MA) will surely push the
effort as he always does, marking up bills fast and then barreling them through
House passage in an effort to force the more languid Senate to act.  It’s of course
possible that all of this work will go to naught in the Senate, but we don’t think so.  
Even if the universal agreement on the need to do something falters, one can almost
count on a scandal – new $1,000 waste-baskets and the like – to rev them up again.  
Indeed, because of this, it’s as much in the industry’s interest as the Administration’s
to get a bill moving now before something makes it worse.

Will this lead to industry support for the big package?  Of course not.  While united
against a few things – pay caps at the start of the list – consensus quickly falls apart
once debate goes from broad principles to specific proposals.  For a start, community
bankers are at sharp odds with big banks over just about everything, derivatives
dealers don’t cotton to derivatives users and everyone has a favorite regulator to
preserve at the expense of all the others.   

And, that’s without taking in the differences among regulators, who don’t much care
for each other all that much.  As was evident when SEC Chairman Shapiro took on
Treasury Secretary Geithner on a new consumer regulator, independent regulators
have friends in high places that aren’t always allied to the White House.
This week, we’ll review the bidding after the final plan is proposed and hearings
begin.  As the legislation drags on, we expect Treasury and the more powerful
regulators to do what they can to cement their positions by codifying as much of the
plan as they plausibly can.  Thus, even if some speculate on the legislation’s
prospects, substantive reform marches on..