After suffering more than a year of abuse over its role in the financial crisis, the U.S. Federal Reserve on Wednesday was poised to beat back the most aggressive attempt to open its operations to congressional scrutiny.
Lawmakers finalizing a sweeping overhaul of financial regulations have indicated they may back away from a measure that would expose the U.S. central bank's monetary policy to scrutiny, and they could also abandon a plan to make one of its top officials a political appointee.
Fed officials had opposed both measures as intrusions on the central bank's political independence -- something that has always been a hallmark of the Fed's operations.
With congressional elections looming in November, Democrats in charge of negotiating a final Wall Street reform bill say there are relatively few differences they need to resolve between the competing bills passed by the House of Representatives and the Senate. They aim to finish their work by June 24 so President Barack Obama can sign a final package into law by early July.
As they began their second full day of work, negotiators considered measures that would strengthen the powers of the Securities and Exchange Commission and raise the client-care standard for brokers who offer financial advice to the same level now applied to investment advisers.
House negotiators agreed to give shareholders the ability to sue banks and other third parties that are not directly involved in securities fraud cases. The senators on the committee had yet to weigh in. [nWEN5974]
The panel was expected to address the Fed measures later in the afternoon.
The Fed has admitted it was too complacent about its oversight duties before the 2007-2009 financial crisis that prompted the worst recession in generations.
While the Fed has endured tongue-lashings from lawmakers who say it is too close to the banks it regulates, much of that anger may have dissipated since Fed Chairman Ben Bernanke sweated through a tense Senate confirmation vote in January.
BANKS FACE LIMITS
House Democrats on the panel aim to drop a provision included in their version of the bill that would have opened the Fed's interest rate policy to congressional audits.
They also said they would try to defeat an aspect of the Senate bill that would allow the U.S. president to name the head of the New York Fed. Currently, the head of the New York Fed -- the only one of the 12 regional Fed banks with a permanent voting seat on the central bank's policy-setting committee -- is named by the bank's board, which includes private bankers.
The committee must also resolve disputes about how to limit banks' risky trading activities, how to protect consumers and whether to limit fees on debit-card transactions.
Banks are pressing to soften a proposal that would limit their ability to trade on their own accounts and invest in private equity and hedge funds. But their prospects appear to be dimming.
They also look likely to face some limits on their lucrative swaps-trading operations as Democrats near consensus on a proposal by Senator Blanche Lincoln that would require banks to spin off their operations to a separately capitalized affiliate.
New York Mayor Michael Blomberg said that restriction would cause serious economic damage and help foreign competitors in a letter to Representative Carolyn Maloney, a New York Democrat on the conference committee, obtained by Reuters.
The overall bill is likely to crimp financial firms' profits and saddle them with tighter regulations. The proposed reforms will hurt Goldman Sachs Group the most, followed by Morgan Stanley, J.P. Morgan Chase and Bank of America, according to a Citigroup analysis.
FED HAS SOME VICTORIES
The Fed, on its backfoot early in the reform process, has already scored several victories in recent weeks as the reform effort headed into its final stages.
The central bank fought off a Senate push last month that would have stripped it of its oversight of smaller banks and looks set to emerge as the most powerful financial regulator when reforms are complete.
But the Fed is still likely to see its wings clipped.
While congressional investigators would not be able to probe monetary policy decision, lawmakers looked set to agree on a Senate proposal for a one-time look at the Fed's emergency lending during the crisis.
House Democrats want to broaden that audit to cover regular discount window lending and open market transactions, and force the Fed to disclose details on those programs on an ongoing basis, albeit with a three-year lag.
(Additional reporting by Kevin Drawbaugh and Pedro Nicolaci da Costa; Editing by Leslie Adler)