The politics of financial reform

I'm having a hard time figuring out Congress' motivations regarding financial reform. While Congress worked on health reform my political science colleague and I discussed the infuriating behavior of "moderate" Democrats in light of two competing theories of Congressional behavior. One theory holds that our representatives in Congress are intensely concerned with appealing to the median voter in their districts. They will not act on principle if doing so leaves them even minutely vulnerable to defeat in a primary or general election. Thus Ben Nelson, Blanche Lincoln and the like dug in their heals against the public option and other key parts of the reform package because their constituents opposed these provisions. An alternative theory is that our Congressional representatives seek to retain their seats in a less direct manner. Their goal is to maximize campaign donations, ordinarily from special interests of one kind or another, in order to build up a campaign war chest that will ensure victory and/or discourage viable opponents from running. Thus Max Baucus' goal in negotiating with the Republicans on the Senate Finance committee in the summer of 2009 was not to reach bipartisan agreement on a bill, but to string negotiations along as long as possible in order to squeeze campaign contributions out of the health care lobbies. Ben Nelson was responding to the interests of Mutual of Omaha, not the median Nebraska voter.

Now comes financial reform. At the end of 2009 the House of Representatives, typically, passed a fairly aggressive reform package. The Senate's job, it seems, is to water consequential bills down to the point of being completely toothless. In this case, however, the Senate passed a bill that in some respects (the Volcker rule, treatment of derivatives) was harsher than the bill that passed the House. The conference committee, remarkably, seems to be forgoing opportunities to weaken the bill. And here is the puzzle. Bank lobbies are pouring billions of dollars into this process. According to theory number two, members of the conference committee ought to be weakening provisions right and left. Perhaps they don't because they are concerned about the likely reaction to a weakening of financial reform by the median voter in their districts - that's theory number one. But look at the issues they are debating: how much authority should the Federal Reserve have to regulate interchange rates on debit cards? Should banks be required to spin off their swaps units or can these be operated as separately capitalized subsidiaries within the same bank holding company? Can banks continue to count trust-preferred securities as Tier I capital? It's safe to say that the median voter in any Congressional district has absolutely no understanding of any of these issues, which in theory gives the conference committee members leeway to make concessions to the banking industry while claiming to their constituents that they are putting the screws to them. This seems to be happening to some extent, but by and large the provisions that are most costly to the banking industry continue to be part of the legislation. The article linked to above quotes a banking industry analyst as saying:

“Even if Congress moderates some of these provisions, they are going to be onerous,” said Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital. “We continue to believe on issues like interchange and derivatives that the movement will be toward the banks, even though it will be hard to describe any of this as a real victory. It just won’t be as brutal a defeat.”

So what explains Congressional behavior in this case? It's quite a mystery. It can't be that our Congressmen are acting according to principle, can it?