Art of the possible tempers Obama financial reforms

President Barack Obama makes remarks about payments to the government of $68 billion in bank bailout funds in the East Room at the White House in Washington, June 9, 2009.

WASHINGTON (Reuters) - By the time the Obama administration has finished reforming financial regulation, probably next year, the chances are good that the United States will have new rules on the books for banks, hedge funds and derivatives markets.

A new government process will likely be established for seizing and unwinding troubled financial institutions that are not banks and whose failure could endanger the economy.

And there may be a new government monitor of "systemic risk" in the economy and a financial products watchdog. Maybe.

But it looks unlikely, after six months of debate, that there will be a top-to-bottom restructuring of government regulatory agencies, or that the Federal Reserve will emerge as a super-regulator overseeing broad swaths of the economy.

That was the thinking among lawmakers and lobbyists on Wednesday as the administration prepared to release a long-awaited comprehensive regulation reform proposal on June 17, with many more months of argument over it still to unfold.

As the package has evolved to date, the administration and congressional Democrats have forged a remarkable level of agreement on some dramatic changes, but they have had to pare back other objectives in the face of political reality.

"At this point, the administration has realized that politics is the art of the possible," Michael Oxley, former chairman of the U.S. House of Representatives Financial Services Committee, said in an interview with Reuters.

Oxley co-authored the landmark 2002 Sarbanes-Oxley law that reformed corporate governance and auditing after the Enron scandal. Looking back on that experience, Oxley said the outcome of today's debate will hinge on several variables.

One is the trajectory of public outrage about the worst financial crisis in generations which peaked in March over executive bonuses at bailed-out insurer American International Group (AIG.N). The fury level has eased lately though with banks stabilizing and signs of recovery in the economy and the stockmarket.

"As things continue to improve, the push for an immediate change right away lessens, which is all good ... because it gives us the time to try to maybe get it right," Representative Scott Garrett, top Republican on the House capital markets subcommittee, said in an interview.

ANOTHER AIG-SIZED SHOCK?

Still, unemployment and home foreclosures remain high. The problem of toxic assets on the books of major banks has not been resolved. And there is always the possibility of another AIG-sized outrage rekindling the anger of voters.

With mid-term congressional elections ahead in November 2010, lawmakers will be keenly attuned for months ahead to public attitudes toward banks, the markets and the recession.

"We're certainly not going to go to voters in 2010 without having passed bills with big titles. Whether they do big things or not depends," Democratic Representative Brad Sherman, a Financial Services Committee member, said in an interview.

Another variable in determining the impact of the reforms will be how long they take to complete, with time being on the side of the status quo, as always, said Oxley.

The administration wants new laws on the books by the end of 2009. So does Representative Barney Frank, chairman of the Financial Services Committee, and a reform architect.

But Senate Banking Committee Chairman Christopher Dodd said this week he is focused now on healthcare reform and will not take up financial reforms until after Congress' August recess. That schedule may well push final decisions into 2010.

Between now and then, many large banks that were bailed out by taxpayers through the Treasury Department's Troubled Asset Relief Program will pay back the government, reducing the administration's ability to lean on them to make changes.

That loss of policy leverage could undercut the reform agenda, lobbyists said, as could the inevitable give-and-take of politics in Congress, where Republicans were expected on Thursday to reveal a counter-proposal to the Obama plan.

The end product on financial reforms may or may not look very different from the slimmed-down proposal expected next week, but it will certainly be more modest than some of the ambitious proposals that were put forward six months ago.

"The administration is putting forward what is politically possible and the minimum necessary to check the box they have done something," said one lobbyist who asked not to be named.

(Additional reporting by Kristin Roberts Mandel)