WASHINGTON (Reuters) - President-elect Barack Obama and congressional Democrats face a tough test proving they want to fix the financial system after taking millions of dollars in campaign donations from banks and Wall Street.
Big decisions loom on reining in the exotic securities markets, shoddy lending practices and regulatory failures behind the worst U.S. economic crisis in decades, with financial industry lobbyists already preparing for battle.
The coming fight raises questions about whether Washington is capable of overhauling an industry more deeply insinuated into the halls of political power than possibly any other.
Politics in the U.S. capital is heavily influenced by money donated to Democrats and Republicans alike by business interests that often play both sides of the partisan fence to win access and influence no matter who is in power.
“We’ve created this situation where ... the only way to get elected or re-elected is to take large sums of money from special interests who want something from government,” said Daniel Newman, executive director of MAPLight.org, a nonpartisan, nonprofit campaign finance watchdog group.
If large donations buy the same clout today that they have in years past, average citizens should be worried about the scope and shape of next year’s reform agenda, said experts in campaign finance and financial market regulation.
“The financial services industry over the last 10 years has been the largest industry that donates to members of Congress ... Both President-elect Obama and (presidential rival) Senator McCain received more than $20 million from this industry,” Newman said.
Obama’s campaign took in more money from donors in the finance, insurance and real estate sector than any other 2008 candidate, according to the Center for Responsive Politics, citing Federal Election Commission records as of mid-October.
Yet, that was a comparatively small proportion — about five percent — of the total $639 million he raised, much of it from small donors, raising the possibility that Obama will not feel beholden to entrenched banks and Wall Street groups.
“A lot of this will depend on how Obama feels,” said James Cox, a professor at Duke University’s law school and an expert on financial oversight. “I think he’s smart enough to realize that he’s got to play a different game. He came in with the five-letter word ‘change’ and he’s got to reflect that.”
No sector of corporate America pours more cash into politics than the nation’s powerful financial houses, said the Center for Responsive Politics, a nonprofit, nonpartisan watchdog group.
Five of the 10 biggest donor groups in the 2008 national election campaigns were executives, and their family members, and political action committees of Goldman Sachs (GS.N), Citigroup (C.N), JPMorgan Chase (JPM.N), Morgan Stanley (MS.N) and Swiss-based UBS AG UBSN.VX, the center said.
In the two-year election cycle just ended, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, took in $5.8 million from finance, insurance and real estate donors, said the center on its Web site, www.opensecrets.org.
House of Representatives Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, collected $854,000 from donors in the sector, almost half his 2008 campaign’s budget, said the center.
Dodd and Frank have been harsh critics of the reckless lending and risk-management practices that have plunged much of the financial system into crisis, as well as related regulatory failures. The two have steered reforms through Congress that are already cleaning up the mortgage brokerage business.
Next year’s job will be much bigger and critics wonder how effective any officials can be at making major changes to a system that pumps so much money into their campaigns.
“My guess is we’ll do something now, but we won’t do enough,” Duke University’s Cox said.
Rep. Rahm Emanuel — recently named chief of staff for Obama — took in more than $1 million in campaign donations from finance, insurance and real estate, the center said.
That made the Illinois Democrat and former investment banker “the top House recipient in the 2008 election cycle of contributions from hedge funds, private equity firms and the larger securities/investment industry,” it said.
Political insiders tend to play down the idea that business campaign donations and lobbying buy votes from lawmakers, who, they say, frequently defy the wishes of corporate interests.
But data shows that campaign money matters when it comes to legislating on financial regulation, according to the center.
For instance, in a 1999 vote on a landmark law known as the Gramm-Leach-Bliley act — which removed 1930s restrictions on the banking business — lawmakers who backed the measure got twice as much money in campaign donations from the financial sector as did those who opposed it, the center said.
Further, the center said, members of the House of Representatives who voted earlier this year in favor of a $700-billion bank bailout package had taken in 51 percent more finance-sector campaign money over their congressional careers, on average, than had opponents of the emergency aid package.
For years, key reforms have eluded lawmakers. Even in trouble spots recognized by both parties — such as credit rating agencies, abusive short selling, credit card fees and derivatives markets — only incremental changes have emerged.
That could be the case again next year on a proposed merger of the Securities and Exchange Commission and the Commodity Futures Trading Commission, which have similar missions, said Columbia University Law School Professor John Coffee.
Although merging the agencies would give them more clout and close cracks between their markets, Coffee said, “I’m not optimistic there can be merger of the CFTC and the SEC.”
The reason? Separate committees of Congress oversee each agency. “A merger of the SEC and the CFTC ... would imply that (members) one of those committees would be cut off from the continued supply of Wall Street funding,” Coffee said.
To get around this problem, Frank and others have talked about possibly appointing a select committee to handle financial regulation restructuring.
Whether Washington summons the will next year to take such novel approaches to overcome old obstacles will depend greatly on Obama. He has spoken forcefully of fixing the financial system and breaking the grip of lobbyists.
On the campaign trail, he often cited as an accomplishment his role in passage of congressional ethics legislation. Last week, Obama prohibited federal lobbyists from doing any lobbying while they are working for his transition team.
He said in a speech earlier this year: “The future cannot be shaped by the best-connected lobbyists with the best record of raising money for campaigns. This thinking is wrong for the financial sector and it’s wrong for our country.”
Reporting by Kevin Drawbaugh; Editing by Tim Dobbyn