The agency once viewed as a major stumbling block to the bill's passage is now seen as an inevitability by Republicans and key industry lobbyists alike. Banks will accept consumer agency

Republican Sen. Richard Shelby recently made Democratic Sen. Chris Dodd a tantalizing offer: He'd drop his opposition to an independent consumer financial protection agency as part of a renewed round of negotiations over sweeping financial reform.

It's not clear what the top Republican on the Senate Banking Committee asked his Democratic counterpart for in return for the offer, which Shelby made almost immediately after a regulatory reform bill cleared the committee last month. But Shelby’s willingness to negotiate signals that an agency that would regulate mortgages, credit cards and most loans to consumers — once viewed as a major stumbling block to the bill's final passage — is now viewed as an inevitability by Republicans and key industry lobbyists alike.


Big banks that have been vocal opponents of the agency have decided they have the legal resources to deal with a consumer agency, whether it's independent the way it was originally proposed by President Barack Obama, or as a part of the Federal Reserve, as envisioned in Dodd's bill.

Whatever its ultimate form, they expect they will still be able to influence the critical details of how it's set up. And smaller banks are expected to be exempt from many of the new agency's regulations, according to insiders.

An even larger factor is that big financial institutions now have more important concerns as they scramble to fend off tighter restrictions on lucrative derivatives trades and other provisions of financial regulatory reform legislation that threaten the industry's bottom lines. Obama on Friday threatened to veto any bill that fails to place tight controls on derivatives, the complex financial instruments that played a key role in the 2008 global meltdown.

"While media reports and attention has been focused on the consumer protection piece, most industry believes there is a greater threat in other areas of the bill," a Democratic industry lobbyist said.

Indeed, mammoth financial institutions like Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America and Morgan Stanley are worried about one provision that would force more open dealings in the $450-trillion over-the-counter derivatives market, an unregulated playground largely dominated by the quintet.

Another provision, the so-called Volcker Rule preventing federally insured banks from trading on their assets, essentially threatens to break up financial titans like JPMorgan. And megabanks are worried about new rules governing how companies once deemed too big to fail would close down under the new system should they implode again.

Those five banks spent more than $21 million lobbying Congress last year, according to the Center for Responsive Politics. And they have employed plenty of Washington's brand name lobbyists to work their influence, including: former House Democratic Leader Dick Gephardt; Steve Elmendorf, a former top Gephardt staffer; Chuck Brain, former President Bill Clinton's top lobbyist; Ken Duberstein, a chief of staff in the Reagan White House; and Tony Podesta, a prodigious fundraiser close to the Obama administration and much of the Senate Democratic caucus.

Not every lobbyist is willing to accept the inevitability of a consumer protection agency. Scott Talbott, the chief lobbyist for the Financial Services Roundtable, said his group of top financial services firms is not backing off its opposition to it even as other issues take center stage.

"We're not dividing our time, we're multiplying it," he said. "We're not dividing our priorities, we're multiplying them."

And the U.S. Chamber of Commercer is plowing ahead in its opposition to large swaths of the bill. Its $3 million lobbying, grassroots and advertising campaign has prominently featured the argument that an independent consumer protection agency's new regulations will hurt small business.

It's a message that was chosen, in part, because it resonates with the public, said the Chamber's Tom Quaadman. "Why should Main Street be regulated because of the financial crises?" Quaadman asked.

An example, he said, is that under the plan a local orthodontist who extends credit to help parents pay for their kids braces would fall under the new regulatory regime, he said.

Robert Weissman, president of the consumer group Public Citizen, said it was "preposterous" to suggest that the bill could regulate mom-and-pop orthodontists.

While Weissman does not buy the idea that banks are backing off the consumer protection issue he thinks an independent consumer agency is more likely because banks don't want to be out front opposing an issue that the public understands. Instead banks are choosing to "live reluctantly with the regulation," hoping to "chip away at it legislatively over time."

"The big banks know it's politically counterproductive for them to say they're opposed to consumer protection so they're relying on others to publicly carry the fight for them," Weissman said. "On issues that can be presented as more complicated and technical, but have enormous import for their bottom lines, they're fighting as hard against the public interest as they ever have."

Industry fought the idea of an independent consumer protection agency, first proposed by Harvard Law professor Elizabeth Warren, from the beginning. At one point, the proposal included a mandate that banks offer traditional alternatives to their more exotic products - a 30-year mortgage as well as adjustable rate mortgages, for instance. That provision was scuttled and the agency was made part of the Fed.

The ideological split between big-government-hating Republicans who opposed the agency and activist-government-loving Democrats who supported it, combined with the fight between industry and consumer groups gave the unwieldy and complex bill an understandable, media-friendly storyline. But that was before Shelby offered to strengthen Dodd's bill by endorsing an independent consumer protection watchdog, and the agency has since become less of an issue. Once a prime target of industry, the proposed agency has become "small potatoes," according to one Democratic industry lobbyist.

That's not to say the banking industry does not have concerns about the agency. It's still pushing, for example, to ensure that states could never pass consumer protections tougher than the federal requirements.

Insiders frequently compare the battle over the consumer protection agency to the health care debate's fight over the public option - both were lightening rod provisions that garnered months of debate and obscured other critical components of their respective bills. The difference is that in this case, some version of the provision most popular with the Democratic base is likely to prevail.

"All of the groups on the far left and far right have seized on it as sort of the end-all-be-all and it really doesn't go to the heart of reforming the system," said a Democratic lobbyist, who represents commercial and investment banks. "It's the one thing that everybody can understand so it's all that anybody talks about."

Another Democratic financial services lobbyist with similar clients put it more bluntly: "Big players don't give a [expletive]" about a new consumer protection agency.

Also driving the calculus is the issue's changing politics. Led by Shelby, Republicans universally opposed Dodd's financial reform bill in committee. In particular, Shelby called an independent consumer agency a dangerous folly. But now, as Democrats prepare to bring the bill to the floor, Shelby is again trying to negotiate a deal with Dodd. And Shelby's offer to support an independent consumer advocate gives Republicans cover from Democratic charges that the GOP is in bed with bankers.

For their part, Democrats feel they are negotiating from a position of strength. With voters angry at Wall Street, Republicans that vote against reform hand Democrats a good issue to run against them in November. And Democrats only need to pick off one Republican to pass the bill.

Still, some insiders worry that Democrats could overplay their hand and push a bill with restrictions too onerous to win any Republican support. And despite the scenario's political upside, the Obama administration has signaled it wants a legislative victory more than a political issue.

Some industry insiders chock up the Chamber and Roundtable efforts to the need for trade organizations to stick to the script on an issue where dues-paying members expect representation. Privately, lobbyists say, most big companies are likely to accept an independent consumer protection board.

"Most banks," said a Republican industry lobbyist, "can live with a reasonable new regulator."