Democrats Garner More Votes in U.S. Senate for Financial Reform Bill

By and | May 5, 2010

Democrats fought to push their Wall Street reform forward in the U.S. Senate on Wednesday, slating more votes despite Republican resistance on a bill that is expected to pass within weeks.

The chief negotiators for both parties agreed on Tuesday on a new government protocol for dismantling large financial firms in distress. The plan is an effort to avoid more crises like the 2008 bailout of mega-insurer AIG and the collapse of former Wall Street giant Lehman Brothers .

The Senate could vote on the agreement around midday, according to the Twitter feed for Senator Christopher Dodd, the Democratic chairman of the Senate Banking Committee and the 1,600-page reform bill’s chief author.

That vote would come after a vote, expected to pass easily, on a bill from Democratic Senator Barbara Boxer specifying that taxpayer funds could not be used to bail out troubled firms.

Both votes would move the Senate closer to final passage, but numerous additional hurdles loom ahead on issues such as consumer protection and regulating the derivatives market.

President Barack Obama is pushing for regulatory reform to prevent a recurrence of the 2008-2009 financial crisis that paralyzed markets and tipped the economy into a deep recession. Similar efforts are under way in the European Union.

The U.S. House of Representatives approved a reform bill in December that embraced many of the proposals unveiled by the president in mid-2009. Whatever the Senate passes would have to be merged with the House bill to produce final legislation.

ELECTION VICTORY AT STAKE

If Democrats can enact reform into law, they would score an important victory going into November’s elections.

Republicans have worked for months to weaken and delay the legislation, along with Wall Street and banking interests whose profits are threatened by reform.

“We expect that the Dodd bill will pass some time in the next few weeks,” said policy analyst Brian Gardner at investment firm Keefe Bruyette & Woods.

Nearly 60 amendments to the bill had been filed as of late Tuesday, risking gridlock on the Senate floor and challenging the Democratic leadership to work out a procedural plan that will allow debate to proceed under tight time constraints.

Senate Democratic Leader Harry Reid wants to finish the bill by the end of next week, but that looked increasingly unlikely after scheduled votes failed to occur on Tuesday.

Dodd’s agreement with Senator Richard Shelby, the banking committee’s top Republican, includes killing a Democratic proposal to create a $50-billion “orderly liquidation” fund that would have been paid into by large financial firms.

The Federal Deposit Insurance Corp, under the plan being scrapped, would have been able to tap the fund to help cover the cost of seizing and liquidating large firms in trouble, ending the notion that some firms are “too big to fail.”

Instead of creating the fund and holding it in reserve, the Dodd-Shelby deal calls for covering the costs of liquidation after-the-fact through fees on financial firms. A Republican aide said final language was still being finalized.

SWAPS BATTLE

Disagreement continues between Shelby and Dodd on his proposal to set up a new financial consumer protection watchdog inside the Federal Reserve. Republicans say it would be an overreach of government and want to check the watchdog’s power, while some Democrats want to make it even stronger.

Heated debate also continues on proposals in the bill to regulate the $450-trillion over-the-counter derivatives market, which include credit default swaps — the instruments widely blamed for amplifying the crisis.

Swaps are derivative contracts that allow financiers to wager on the direction of interest rates, foreign currencies or — in the case of a type known as credit default swaps — the likelihood of a borrower defaulting on its debts.

Senate Agriculture Committee Chairman Blanche Lincoln has proposed that banks be required to spin off their swap-trading desks to get them out of that risky business. But that idea appeared to be losing support.

Wall Street giants that rake in huge profits from OTC derivatives trading — such as Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America and Morgan Stanley — oppose the Lincoln provision.

The Obama administration has declined to endorse the provision. FDIC Chairman Sheila Bair has criticized it.

Republican Senator Saxby Chambliss said on Wednesday that there was general agreement among Senate Republicans to let banks stay involved in the swaps market.

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