US senators set for reform fight

The tactics Republicans deploy as the Senate Banking Committee begins hashing out new rules for financial products, banks and derivatives on Monday could signal whether a bipartisan bill will emerge.

Republicans are expected to offer hundreds of amendments to a bill being offered by the panel's Democratic chairman, Senator Christopher Dodd, Senate aides said.

If Republicans insist on debating all of them, it will show a desire to kill the Dodd bill by delay, pressuring Democrats to move forward on a party-line vote.

But an agreement by Republicans to debate a reasonable number of substantive amendments during what is likely to be a week-long series of bill-drafting meetings could be a sign that a bipartisan bill may yet emerge from the committee. The panel is scheduled to begin its effort tonight.

If a bill emerges without any Republican support, it is unlikely Democrats will be able to muster the 60 votes that are likely to be required to move the legislation on the Senate floor. They control only 59 votes.

That could doom hopes for a broad rewrite of financial rules meant to ward off future crises like the one that punished the economy with its deepest recession since the Great Depression. It would be a big blow to the Obama administration, which had made a regulatory revamp a top legislative priority.

Some of the most contentious issues up for debate include a new watchdog for financial products and how to squash a market perception that the government will always rescue large, troubled financial firms.

Democrats and Republicans generally agree that regulations should be reformed in order to strengthen the financial system and plug regulatory gaps, but they have clashed over the breadth of the rules and the role of government.

There is still no agreement on who should have to comply with rules aimed at reducing risk in the US$450 trillion ($635 trillion) over-the-counter derivatives market. Likewise, lawmakers are at odds over how to make corporate boards more accountable and how to prevent firms from becoming too big to fail.

Dodd's bill would create a US$50 billion fund in case regulators need money to help liquidate a firm. The largest financial company such as Bank of America would be required to pay into such a fund.

This measure is opposed by Senator Richard Shelby, the panel's top Republican, and Bob Corker, a first-term senator who tried to negotiate a bipartisan bill with Democrats.

Financial services companies do not want to pre-fund a resolution war chest. They favor paying into a fund after regulators have had to liquidate a troubled financial company.

Lawmakers are adamant that firms should be allowed to fail after the government used billions of dollars in taxpayer money to rescue companies like insurer AIG and mortgage finance businesses Fannie Mae and Freddie Mac.

The banking committee already plans to remove a provision in Dodd's bill that would allow the Federal Reserve to rescue Wall Street firms if their functions were critical to the markets, according to a spokeswoman for Dodd.

Under the Dodd bill, higher capital and liquidity standards would be imposed on large financial firms. The Fed would be given the authority to break them up if they threatened the financial system and banks could be prohibited from proprietary trades and owning a hedge fund or private equity fund.

Senators are considering changes to the so-called Volcker rule that clamps down on banks' risky activities. Senators including Dodd have expressed doubts over the proposal.

Already Dodd has watered down one of the White House's key reforms - an independent watchdog for consumer financial products such as mortgages and credit cards.

In an attempt to win Republican support, Dodd has placed the consumer watchdog in the Fed and given the watchdog the authority to examine and enforce consumer rules for banks and credit unions with assets more than US$10 billion.

Fearing onerous new rules that will weigh on profitability, banks are lobbying senators to water it down even more. Republicans are expected to try to give bank and market regulators powers to enforce the consumer rules.

- Reuters