Reform, sue, repeat

Goldman/regulation: The woes of Goldman Sachs make congressional passage of the current US financial reform bill more likely. But there could be sequels, too. Calls persist for new taxes and restraints on banks - even break-ups. And the Securities and Exchange Commission charges against Goldman help keep it all on the front burner. Big banks had two political goals at the start of 2010. The first was to make sure financial reform happens this year. Delay in 2009 worked to the banks’ advantage by avoiding knee-jerk laws fashioned in the crucible of crisis — but now they want certainty. The second goal was to make regulatory changes palatable. The banks wanted, for example, to defeat or defang a proposed consumer finance regulator, and to block much in the way of restrictions on their size or activities.

Just weeks ago, they seemed to be on track. But now, neither goal seems likely to be achieved. The controversial consumer agency now looks inevitable, as banks refocus lobbying efforts on preventing harsh new derivatives regulation. And the so-called Volcker Rule, which would limit bank size and activities, is re-emerging as something a new systemic risk council could impose. And all this was happening before the SEC dropped its Goldman bombshell on Friday.

So the bill that passes Congress may mark a milestone rather than journey's end. It is unlikely to include either a tax on bank liabilities or a levy to prefund any future liquidations, both of which have been proposed. But banks are booking profits again and Uncle Sam needs money, so there may well be calls in Congress for new taxes on income or pay. There will be outside pressure as well. The International Monetary Fund, for instance, appears to be pushing G20 bank taxes. And some ambitious US politicians are watching the rise of bank-basher Nick Clegg in Britain and taking notes.

Even the drive to break up big banks is slowly accelerating. Several regional Federal Reserve Bank presidents now back the idea. It is also gaining traction among mainstream Republicans. Senator John Cornyn, an influential Texan, now says banks “need to be smaller.”

SEC action against Goldman, and perhaps other firms, will only reinvigorate the anti-Wall Street fervor in Washington. Passing the existing financial reform package will be a big step - but it may only be the first installment.