Financial Services Regulatory Reform Update - May 20, 2011

With the House of Representatives in recess this past week, and a relatively quiet week in the Senate, the biggest stories were a couple of sensational items -- most prominently – and splashed across front pages worldwide - the arrest of Dominique Strauss-Kahn, the (now) former head of the International Monetary Fund (IMF), for his alleged sexual assault of a hotel maid in New York City. Strauss-Kahn resigned on Thursday, and his resignation created a pitched battle behind the scenes about who will be his successor. Traditionally, European (and, more often than not, French) leaders have taken on this post, but there has been a strong push from some developing countries (including China) to select an Asian director. Notwithstanding the delightful irony of a communist country running the IMF, we anticipate that a European, with the odds on favorite being, French Finance Minister Christine Lagarde, will remain at the helm of the IMF when it’s all said and done.

Also in rather dramatic fashion, this past week witnessed the possible dissolution of the Gang of Six, when its most conservative member – Sen. Tom Coburn (R-OK) – removed himself (at least temporarily) from the group on Thursday morning. The Gang of Six, made up of three Democratic and three Republic senators, had been seen as one of the most promising efforts to find a compromise on the federal budget, though its failure to produce a plan was starting to raise concerns about its relevance. According to reports, the genesis of Coburn’s departure was related to a heated argument with Sen. Dick Durbin (D-IL) on Wednesday evening over Coburn’s demands to cut domestic spending, including $130 billion more out of Medicare. Unquestionably, the two senators have diametrically opposed political views, but also may be the two with the most clout in the Gang of Six, since any decisions they agree to would likely bring many in their respective bases along. With Coburn absent from the group, it is difficult to imagine compromise being reached by an increasingly polarized Congress, though there is an effort underway to “sub” in Senator Rob Portman, who while respected, does not have the same gravitas amongst conservatives as Coburn. Of course, the Biden lead group continues to plug along, and as we’ve indicated previously, should serve as a fall back for an agreement on “mutually agreeable” items, but is unlikely to produce the more substantive fix that the Gang of Six was working on.

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