Financial Reform Hits First Hurdle in U.S. Senate

By and | April 26, 2010

The most sweeping overhaul of U.S. financial regulation since the Great Depression appeared unlikely to clear its first hurdle in the U.S. Senate Monday as Republicans held out for a bipartisan deal.

Even as Wall Street reeled from more revelations out of the U.S. government fraud case against Goldman Sachs, Republicans said they would block action on the bill until it was more to their liking.

President Barack Obama and his Democratic allies have seized the political initiative to advance the overhaul after months of work, but they need at least one Republican to side with them in a late-afternoon procedural vote in order to begin debate in the Senate.

Senator Richard Shelby, the lead Republican negotiator on the issue, predicted his party would stand firm in blocking debate to seek greater leverage in talks with Democrats.

“If we hang together on the floor, we can create critical mass,” he told a banking group on Monday.

If Democrats fall short, the setback would be temporary. Neither side wants to be seen as siding with a deeply unpopular industry ahead of congressional elections in November. Republicans have struck a conciliatory tone and said they expect a final bill to pass by a wide margin.

The future shape and profitability of the banking industry hangs in the balance, more than two years since the worst financial crisis in generations unleashed reforms worldwide.

The stakes are high for Obama. Since the recent passage of his landmark healthcare restructuring, he has sharply criticized Wall Street in speeches backing the Democratic financial regulation bill.

Would Ban Banks from Swap Trade

The Senate bill would require banks to spin off business units involved with trading swaps, a type of financial contract implicated in the fall of bailed-out insurer AIG, sources said.

That would reflect the hard-hitting approach to the unpoliced $450 trillion derivatives market taken by the Democratic chairwoman of the Senate Agriculture Committee, Blanche Lincoln.

Other controversial parts of the Democrats’ bill include forming a new consumer protection watchdog and devising a new government process for dismantling troubled financial firms.

With an eye to ending bailouts of “too big to fail” firms like Goldman Sachs, Democrats want a new “orderly liquidation” process. As proposed, it aims to protect taxpayers from costly bailouts, like that of AIG, while shielding the economy from shock bankruptcies like Lehman Brothers’ 2008 collapse.

Shelby said he would meet at 2 p.m. with Senate Banking Committee Chairman Christopher Dodd, a Democrat, but did not expect a deal before the vote, scheduled three hours later.

Republicans have said they oppose the bill on various grounds, and have called it a costly overreach of government that could reduce credit flows. Shelby said it does not sufficiently ensure that taxpayers won’t be on the hook for future bailouts.

Hundreds of lobbyists for banks and Wall Street, sometimes working closely with Republicans, have been working for months to block the reform plans, which threaten profits, particularly in the lucrative derivatives market.

Senate Democratic leader Harry Reid could bring up the bill again later in the week if Republicans succeed in blocking it on Monday.

The U.S. House of Representatives approved a financial reform bill in December. Whatever the Senate produces would have to be merged with the House bill before a final measure could be sent to Obama to be signed into law.

Analysts expect it could happen by mid-year.

Intensified efforts in Congress and from Obama on reform have come amid a high-profile fraud case brought by the U.S. Securities and Exchange Commission against Goldman Sachs, a titan of Wall Street with deep political connections.

Goldman released three-year-old e-mails over the weekend that showed bond trader Fabrice Tourre wrote of the impending collapse of the subprime mortgage market and how he was masterminding ways at Goldman to make money from it.

Tourre is the only individual charged by the SEC in its case. Goldman released the e-mails as it readies for its appearance before a Senate panel on Tuesday.

Goldman Chief Executive Lloyd Blankfein and Tourre are slated to testify, with other former and current executives.

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