The Obama administration's ambitious plan to overhaul U.S. financial regulation was bogged down in Congress as it returned from a long recess on Tuesday.
With no clear path forward in the Senate, analysts and lobbyists said Democrats would be hard-pressed to enact tighter bank and capital market rules by year-end, a deadline self-imposed months ago by the White House.
Some reform bills may squeeze through the House of Representatives in weeks ahead. But the Senate is a quagmire, with the leadership of a key committee in doubt since the death of Senator Edward Kennedy, and leading lawmakers still far apart on issues such as consumer protection and systemic risk.
Moreover, the sheer logistics on Capitol Hill are daunting, with healthcare, climate change and federal spending bills bearing down on both chambers in the final months of 2009.
A senior White House aide told Reuters last week that President Barack Obama still hopes for results by year-end, while Senator Charles Schumer said he thinks it can be done.
But Democratic Representative Brad Miller, a senior member of the House Financial Services Committee, last week said: I haven't thought about financial services issues for a month.
It's been all health care, all the time ... We have to focus attention back on this issue.
Treasury Secretary Timothy Geithner over the weekend called for greater urgency on regulatory reform. At a meeting of finance ministers from the Group of 20 leading nations, Geithner cautioned that as the financial crisis recedes and the economy improves, momentum for reform may wane.
Lobbyists and analysts said at least three possible outcomes present themselves. One is a new burst of momentum, perhaps triggered by fresh financial scandals, like the ones in 2002 that revived the fading post-Enron Sarbanes-Oxley laws.
Another, more likely scenario would be that the debate simply drags into 2010. That would let Congress follow its usual practice of delaying tough decisions. But it would also mean the administration would fail to meet its own deadline, and it would give opponents more time to dig in.
A final possibility could be the passage of a 'reform lite' package of measures that already enjoy wide support, plus watered-down versions of more controversial proposals.
That might be politically expedient, letting Democrats carry a 'win' of sorts to the polls in November 2010. But even lobbyists opposed to much of Obama's plan said that he probably won't -- and shouldn't -- settle for half-measures, not after the severe damage done by the 2008-2009 financial crisis.
The financial reform package is too big and onerous to be enacted as proposed. But there are a lot of gray areas between passage of the original plan and defeat, said Jaret Seiberg, policy analyst at investment research firm Concept Capital.
With the September 24-25 summit meeting of the G20 in Pittsburgh fast approaching, progress toward reform is crucial to restoring banking and markets stability, analysts said.
The U.S. government has already devoted billions of dollars to rescuing the financial system. The reform plan is aimed at ensuring that such an effort is never again needed.
But parts of it have met stiff resistance from the financial services industry, a powerful, deep-pocketed and extraordinarily well-connected force in Washington.
Amid bank lobbyist attacks and Republican slow-walking, some proposals are fast fading from view.
For instance, the White House and most Democrats have all but abandoned a top-to-bottom reorganization of existing financial regulatory agencies, once seen as a vital task.
Also floundering are proposals to name the Federal Reserve as 'systemic risk' regulator for the economy, and to create a new way to deal with troubled nonbank financial institutions.
It's unfortunate because without balanced, comprehensive reform, there are still dangers to the nascent financial recovery, said Joseph Engelhard, policy analyst at investment research firm Capital Alpha Partners.
The current regulatory structure remains decades behind the markets, he said.
BANKS FIGHT CFPA
An administration proposal to form a new Consumer Financial Protection Agency is bitterly opposed by bank lobbyists. Obama's willingness to expend political capital on financial issues will be tested in the fight over the CFPA.
We believe only a watered-down version of this legislation can pass, said Seiberg.
Some of the administration's proposals have wide support, such as new limits on executive pay -- an idea that gains support with each new headline about big bank bonuses.
The House has already approved a bill to give shareholders more voice in setting managers' compensation. It would also ban pay packages at financial institutions that encourage excessive risk-taking by managers.
The administration's pay proposal resembles the House bill, but lacks the final provision, which is certain to encounter friction in the Senate, where Republicans have more votes.
Still, as one lobbyist who asked not to be named said: Corporate America is making it easier and easier politically every day to pass an executive compensation bill.
Proposals for closer scrutiny of hedge funds, credit rating agencies and the over-the-counter (OTC) derivatives markets also enjoy broad support.
GEITHNER TO FRANK TO DODD
Leadership on financial reform passed in mid-August from Treasury Secretary Timothy Geithner to Representative Barney Frank after the White House sent the last of several draft bills to the House Financial Services Committee chairman.
Frank, a senior House Democrat, has the votes to get much, if not all, of the White House's wide-ranging agenda approved at the committee level and on the House floor this year.
He pushed through an executive pay bill on July 31. He has vowed to take up the CFPA proposal soon after returning from recess, and he is likely to move other provisions speedily, including OTC derivatives regulations.
With Frank's agenda fairly well-defined, all eyes have turned to Senate Banking Committee Chairman Christopher Dodd, whose committee has a central role in any reforms.
Faced with a difficult re-election challenge next year and recovering from prostate cancer surgery, the Connecticut Democrat has yet another major challenge in front of him.
The death of his close friend Senator Kennedy has opened the way for Dodd to become chairman of the Senate Health, Education, Labor and Pensions Committee, if he chooses.
If he were to leave behind the banking chairmanship, a complicated and time-consuming succession process would ensue, likely further delaying financial reform work.
Waiting in the wings to replace Dodd at the head of the banking committee is Senator Tim Johnson. He suffered a brain hemorrhage in 2006 that impaired his speaking ability. Some congressional aides said he might be passed over for the job.
Next in line after Johnson is Senator Jack Reed, also a Democrat. Aides said he would need time to get fully up to speed, although he already chairs a key subcommittee and is well-versed in many of the issues.
Much depends on Dodd's committee decision. An aide said last week the senator had not yet made up his mind. In the meantime, the banking committee has yet to announce any hearings for September on the Obama financial reform plan.