Financial Reform—With a Giant Hole

When is a bill like a doughnut? When it has a huge hole in the center of it, one that is so critical to the success or failure of the bill that it becomes the legislation's defining characteristic. That appears to be the problem with the financial-reform bill that finally cleared "cloture"—closing off debate as it goes to a final vote—Thursday on a 60 to 40 vote that included three Republicans: Susan Collins and Olympia Snowe from Maine, and Massachusetts's newly minted senator, Scott Brown.

President Obama hailed the vote as "major step forward" that "will hold Wall Street accountable." But perhaps the most telling vote against cloture was that of Maria Cantwell, Democrat of Washington State, who sought desperately to insert some enforcement language into the bill governing the swaps market. The unregulated selling and trading of credit default swaps, of course, was central to the market meltdown in 2007-2009. Cantwell has sought to crack down on derivatives trading ever since Enron imploded within months of her taking office and she found that energy speculators had gouged her constituents in Washington State for $1 billion. Far more than most of her Democratic colleagues, she has seemed to understand the ways in which Wall Street lobbyists seek to water down legislation.

On Thursday, Cantwell was hard at work winning over some senators, including key Republicans Richard Shelby and Saxby Chambliss, to tougher wording that would have made swaps dealers liable if they didn't "clear" trades on a legally recognized clearinghouse. That would have added legally enforceable transparency to what she calls the "dark" market. According to a source close to Cantwell, however, at the last minute the International Swaps Dealer Association protested that the additional language would open the floodgates to litigation. It was dropped. As the bill currently stands, nothing says that a swap that doesn't comply with the statute is illegal; on the contrary, the bill actually says the swap cannot be voided. There is no consequence for counterparties who enter into uncleared swaps even after a finding by the Commodity Futures Trading Commission or SEC that the swaps must be cleared. Spokespeople for Shelby and Chambliss did not immediately respond to a request for comment.

Cantwell was described by a source as "hopping mad," but she realizes that now that the bill has cleared cloture, an up-and-down majority vote for passage is all but inevitable. The bill will change many things on Wall Street, adding leverage and much greater oversight of systemic risk, as well as creating a consumer financial protection entity embedded in the Federal Reserve. But in Cantwell's view "the bill is a joke," says the source. "The clearing of derivatives and exchange trading is the heart of the whole bill."