The most sweeping overhaul of financial regulation since the Great Depression was on track to fail its first procedural test on Monday in the Senate, where Republicans vowed to block the Democratic bill.
As Wall Street reeled from revelations out of a fraud case against Goldman Sachs, both sides in the Senate were locked in negotiations toward a bipartisan compromise, with Republicans holding out for a bill more to their liking.
President Barack Obama and the Democrats want tighter bank and capital market rules to prevent a repeat of the 2007-2009 financial crisis. Some Republicans see a need for reform, but say the Democrats' bill is an overreach by government.
After months of work, the Democrats are seizing political momentum, boosted by the Goldman case, but they need at least one Republican to side with them in a late-afternoon procedural vote to begin formal 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 the deeply unpopular financial 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.
Senate Democratic Leader Harry Reid could bring up the bill again later in the week if Republicans block it on Monday.
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 passage of his landmark healthcare restructuring, he has sharply criticized Wall Street in speeches backing the Democratic bill.
Roughly two-thirds of Americans back stricter financial regulations, according to a Washington Post/ABC News poll released on Monday.
WOULD BAN BANKS FROM SWAPS TRADE
Hundreds of lobbyists for banks and Wall Street, sometimes working closely with Republicans, have been working for months to block or weaken the reform plans, which threaten bank profits, particularly in the lucrative derivatives market.
Large bank stocks were down broadly at midday on Monday in otherwise modestly bullish trading, with the KBW Banks index off less than one percent at 57.18.
The financial crisis hit bank stocks hard, but they are up 30 percent so far this year.
There are a number of things (in the reform) that could curtail some of (the banks') more profitable activities, particularly what relates to derivatives and proprietary trading, said Joseph Battipaglia, market strategist at investment firm Stifel Nicolaus.
Democratic Senator Jeff Merkley told the Reuters Financial Regulation Summit on Monday that hard-hitting language, drafted in the Senate Agriculture Committee, to require that banks spin off swap-trading units will be in the Democrats' bill.
Swaps are a type of financial contract implicated in the downfall of bailed-out insurer AIG and other firms that bet heavily in the unpoliced $450-trillion derivatives market.
The Democrats' bill also would form a consumer protection watchdog, prevent proprietary trading by banks for their own accounts unrelated to customer needs, and devise 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 plans to meet at 2 p.m. with Democratic Senate Banking Committee Chairman Christopher Dodd, but did not expect a deal before the vote set for three hours later.
Republicans have said they oppose the bill as 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.
We're getting closer and closer on the consumer piece and also on the too big to fail and the derivatives. Those are the big titles, Shelby said.
HOUSE CLEARED BILL LAST YEAR
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, a titan of Wall Street with deep political connections.
Goldman released three-year-old emails 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.
(Additional reporting Rachelle Younglai, David Lawder and Tabassum Zakaria)