WASHINGTON — As he often does, President Obama took the opportunity in a bill-signing ceremony last month to remind Congress “to do what we were actually sent here to do — and that is to stand up to the special interests, and stand up for the American people.”
But Mr. Obama did not mention that the measure he was signing, the Helping Families Save Their Homes Act, was missing its centerpiece: a change in bankruptcy law he once championed that would have given judges the power to lower the amount owed on a home loan.
It had been stripped out three weeks earlier in a showdown between Senate Democrats and the nation’s banks, including many that are getting big government bailouts.
As Congressional Democrats and the White House crow about multiple victories over the financial industry, including new rules for credit card issuers, banks are quietly savoring an even bigger victory of their own.
The defeat of the bankruptcy proposal is a testament to the enduring influence of banks, even as the industry struggles financially and suffers from its role in the economic crisis.
It also shows that in the coming legislative battles that will shape the future of the economy, the financial industry — through a powerful and well-financed lobbying force — may have a far stronger hand to play than might seem evident.
Documents and interviews with lawmakers, lobbyists and administration officials show that the banks defeated the bankruptcy change — the industry picturesquely calls it the “cramdown” provision — by claiming that it would push up interest rates and slow the housing market’s recovery, even though academic studies have countered such claims.
The industry also steadfastly refused offers to negotiate over a weaker version. And it poured millions of dollars into lobbying: four of the industry’s top trade groups spent nearly as much on lobbying in the first three months of this year as they did in all of 2001.
But an industry strategy of dividing the Democrats had the most success.
One target was Senator Mary Landrieu, the moderate Democrat from Louisiana. On April 1, about 30 bankers from Louisiana crowded into a room off the Senate floor to press their view that the bankruptcy measure would force them to raise mortgage rates and hurt the very homeowners Congress was seeking to help.
Donnie Landry, a senior executive vice president at MidSouth Bank of Lafayette, La., recalled that last year Ms. Landrieu had “not been very receptive to some of our concerns. But this time she could not have been more cordial,” even helping them get to see Senator Christopher J. Dodd, the Connecticut Democrat who is the chairman of the Senate banking committee, while they were at the Capitol.
Ms. Landrieu was among 12 Democrats joining 39 Republicans to vote against the measure, while Mr. Dodd was one of the 45 Democrats and independents who supported it — still 15 votes shy of the 60 needed to shut off a filibuster.
Aaron Saunders, a spokesman for Ms. Landrieu, told reporters at the time that the senator had voted against the measure because of the concerns raised by Louisiana bankers that the provision could cause mortgage rates to rise.
Throughout it all, the banks took advantage of the Obama administration’s seeming ambivalence. Despite its occasional populist rhetoric, the White House was conspicuously absent from weeks of pivotal negotiations this spring.
“This would have been a much different deal if Obama had pressed it,” said Camden R. Fine, head of the Independent Community Bankers of America and one of the chief lobbyists opposing the bankruptcy change. “The fact that Obama effectively sat it out helped us a great deal.”
Surprising Ease
In the end, the banks’ startling success in defeating the provision, which was pushed hardest by Senator Richard J. Durbin, Democrat of Illinois, caught even their lobbyists by surprise. Not only did they defeat the cramdown provision, but the banks walked away with billions in new bailout money.
The housing bill Mr. Obama signed on May 20 saves banks and credit unions at least $13 billion in special fees that they would have had to pay to replenish dwindling deposit insurance funds.
The outcome left some Democrats frustrated and fuming. “This is one of the most extreme examples I have seen,” said Senator Sheldon Whitehouse, Democrat of Rhode Island, shortly before the vote, “of a special interest wielding its power for the special interest of a few against the general benefit of millions of homeowners and thousands of communities now being devastated by foreclosure.”
The lament was a far cry from the outlook in January, when banking lobbyists believed their situation was hopeless. Some 10,000 homes were being foreclosed on every day. A new president who had campaigned in favor of the proposal — and who co-sponsored similar legislation as a senator — was about to take office.
While Republicans had defeated the measure in 2008, Congress was now more solidly in Democratic hands.
The industry’s worst fears began to come true in early January when Senator Charles E. Schumer announced that he had persuaded Citigroup to endorse the idea. Mr. Schumer had held discussions with Vikram S. Pandit, Citigroup’s chief executive, and Lewis B. Kaden, a vice chairman. Mr. Schumer then spoke to other top executives, including Jamie Dimon, chief executive of JPMorgan Chase, hoping to peel more big banks away from the opposition.
Housing advocacy groups argued that it was unfair that bankruptcy judges have had the authority since 1978 to modify mortgages on vacation homes, farms and even luxury yachts, but not on primary residences. They also argued that a string of federal programs to help reduce foreclosures had been ineffective because of resistance by lenders and investors who own pools of loans, all of whom stand to lose money when a mortgage is modified.
Those arguments won the day in the House, which adopted the legislation on March 5 by a 234-191 vote.
In the Senate, where Republicans were looking for a chance to recoup after narrowly failing to block Mr. Obama’s huge stimulus package, the banks argued that the proposal interfered with their contractual rights.
But the real threat was to their profits. The proposal would have shifted negotiating power to the millions of troubled homeowners who could use the threat of bankruptcy to wrest lower monthly payments from lenders. The banks claimed that that would force them to raise rates.
That claim is in dispute. For one thing, the legislation would not have applied to new mortgages.
Moreover, until a Supreme Court decision in 1993, some bankruptcy judges had modified mortgages on primary residences, and recent studies by Adam J. Levitin, an associate law professor at Georgetown University Law Center, concluded that those modified mortgages did not result in increases in lending rates.
Still, Mr. Durbin knew he had a fight on his hands. Within his own party, moderates were badly split. Some, like Senator Tim Johnson of South Dakota and Senator Thomas R. Carper of Delaware, represent states that are the corporate home to major banks. The industry has showered both lawmakers with campaign cash.
Senator Carper’s three largest contributors this election cycle have been executives and political action committees at Citigroup, Bank of America and JPMorgan Chase, according to the Center for Responsive Politics, which tracks money and politics. Out of the $4.6 million he has raised, some $375,000, or 8 percent, has been from banks, credit unions and related trade groups.
Senator Johnson has raised about $6.2 million, of which at least $280,000, or 4.5 percent, has come from groups opposed to the legislation.
Compromise Falls Flat
To win industry support in enlisting more of his colleagues, Mr. Durbin approached the trade associations.
Shortly after negotiations began, the American Bankers Association abandoned the talks, saying there was no compromise they could ever support. Soon after, Mr. Fine’s community bankers also left the talks, having refused a demand by Mr. Durbin to publicly announce support for the principle of allowing bankruptcy judges to reduce mortgage payments.
Mr. Durbin next sought a compromise with credit unions and three large banks — Bank of America, JPMorgan Chase and Wells Fargo. In April, at a delicate stage in the talks, Mr. Durbin gave the banks a proposed compromise that was marked not to be circulated, a senior Congressional aide involved in the talks recalled.
Within six minutes, the memo was distributed to the entire Republican caucus — along with a warning from Senator Mitch McConnell of Kentucky, the minority leader, to stay away from it. The compromise went nowhere.
While Mr. Obama reaffirmed his support for the proposal shortly after becoming president, administration officials barely participated in the negotiations, a factor that lobbyists said significantly strengthened their hand. Lawmakers who have discussed the issue with the administration said that the president’s senior aides had concluded that a searing fight with the industry was simply not worth the cost.
Moreover, Timothy F. Geithner, the Treasury secretary, did not seem to share Mr. Obama’s enthusiasm for the bankruptcy change.
Mr. Geithner was lobbied by the industry early. Two days after he was sworn in, he invited Mr. Fine from the community bankers to his office for a private meeting. The association, with influential members in every Congressional district, is one of Washington’s most powerful trade groups.
A senior adviser to Mr. Geithner said the administration supported the cramdown proposal, but it preferred that distressed homeowners seek to modify their loans through the Treasury’s new $75 billion program, which rewarded banks if they modified home loans, rather than through bankruptcy court.
Mr. Durbin acknowledges that it was a mistake not to call on the administration for help.
“If I would have known how it would unfold, I would have called on the White House earlier to get involved,” he said.
Deal Now, Pay Later
While Mr. Durbin had trouble rounding up Democratic votes, Republican leaders kept their members — and potential renegade banks — in line.
Senator Jon Kyl, the Arizona Republican leading the charge against the bankruptcy change, told bankers there would be consequences if they dealt with the Democrats. According to an April 20 e-mail message between industry officials in touch with Mr. Kyl, he told them “not to make a deal with Durbin and then come looking to Republicans when they need help on something like regulatory restructuring.”
In an interview, Mr. Kyl, the Senate’s No. 2 Republican, did not recall whether he had made the statement, although he remembered telling bankers that he could not defend them if they did not first defend themselves. “I very pointedly said, ‘Don’t make a deal with Durbin on this. You don’t need to. If he has the votes he wouldn’t be dealing,’ ” Mr. Kyl recalled.
There was no counterweight to that legislative muscle. Bankrupt homeowners do not have a political action committee or lobbyists.
Mr. Fine reports that the political action committees run by his association alone have built a war chest of nearly $2 million, a 40 percent jump over the last year, even though members have had to cut other expenses in the recession.
“The banks get it,” Mr. Fine said. “They understand you need a strong political action committee to get access to the fund-raisers. That’s where the lawmakers are.”
Carl Hulse contributed reporting, and Kitty Bennett contributed research.
