The Congress put the last pieces in place on Wednesday to begin hammering out a historic financial regulation overhaul, a day after primary elections vindicated get-tough-on-Wall Street politics.
With banks deeply unpopular among voters, and politicians keenly focused on November's congressional elections, the House of Representatives named its members to a conference committee that will draft the biggest regulatory revamp since the 1930s.
White House economic adviser Paul Volcker voiced optimism that sweeping legislation would be passed in reasonable form and provide a basis for global coordination that would prevent banks from shopping for the least strict national rulebook.
The joint Senate-House of Representatives conference committee will hold its first meeting on Thursday. It must merge competing bills already passed by the two chambers.
Electoral results from Tuesday highlighted the banks' political challenges as they fight to protect their profits and business models from a government crackdown, analysts said, citing the primary victory of Democratic Senator Blanche Lincoln.
Each election so far shows that loving Wall Street isn't conducive to political success, to say the least, said Karen Shaw-Petrou, managing partner at Federal Financial Analytics, a firm that advises on regulatory policy.
Lincoln is the author of a hard-hitting proposal that would force banks to spin off their lucrative swap-trading desks. That alone does not explain her win in a close-fought Democratic primary, but it played a role, analysts said.
It probably was a positive factor in her winning, but it wasn't the overwhelming factor, said Ed Mills, a policy analyst at investment firm FBR Capital Markets.
In this climate, it's not bad to be seen as the person taking on Wall Street, whether you're a Republican or a Democrat, he said.
DODD: LINCOLN'S HAND STRENGTHENED
Analysts still widely expect the Lincoln provision to be dropped. The Obama administration has made clear that her plan is not high on its priority list for financial reform.
But Senator Christopher Dodd, chairman of the Senate Banking Committee and a conference committee member, said that following Lincoln's victory, her hand is strengthened.
Dodd just three weeks ago tried to soften Lincoln's proposal. On Wednesday, he called it a strong provision.
Dodd told reporters: She's on the right track. I will certainly listen to ideas that people have on matters that can deal with this in some way. Obviously it's an area that we're going to have to talk to Blanche about.
Senator Tom Harkin, another Democratic member of the conference committee along with Dodd and Lincoln, said he supported Lincoln's proposal, which is known as Section 716.
Some of us are very strong for Section 716 and we don't want it tinkered with, Harkin told reporters.
The House named 31 members to the conference committee. As expected, Democratic Representative Barney Frank was named as the chairman. The Senate's 12 conferees were named last month.
In a series of meetings that will be broadcast live on television, the conferees must agree on a single measure that can win approval once more in each chamber. Then it would go to President Barack Obama to be signed into law.
Although the Senate bill is generally seen as tougher on Wall Street than the House bill, some of the financial industry's fiercest congressional critics will be among those who represent the House in negotiations.
TOUGH CRITICS ON PANEL
Democratic Representative Paul Kanjorski has proposed breaking up large financial firms. Democratic Representative Luis Gutierrez wants to raise quarterly deposit-insurance fees levied on the industry by hundreds of millions of dollars.
Other Democrats, like House Agriculture Committee Chairman Collin Peterson, will likely try to loosen rules that restrict derivatives trading.
Many of the Republicans named to the panel oppose tighter regulations, but their influence is likely to be limited as Democrats easily have enough votes to overrule them.
Volcker, speaking at a conference in Montreal, said the Senate bill included the substance of his proposed Volcker rule to curb risky trading by banks, but cautioned against changes that could limit its effectiveness.
This is a battle. Make no mistake about it, said the former Federal Reserve chairman. But I do think that if we can get this bill passed in a reasonable form ... we'll provide a basis for the other major countries to get together.
The Volcker rule would ban proprietary trading unrelated to customers' needs at banks that get government backing; bar banks from sponsoring hedge funds and private equity funds, and limit big banks' future growth through a new market share cap.
Nobel Prize-winning economist Joseph Stiglitz said on Wednesday that Lincoln's proposal would reduce risk in the over-the-counter derivatives market. He also urged approval of the Volcker rule, which some Democrats want to toughen.
Both are needed and that is even true if the Volcker rule is strengthened, Stiglitz said on a call with reporters.
(Additional reporting by Charles Abbott, David Lawder and Roberta Rampton, with Karen Brettell in New York, and Jonathan Spicer, Jennifer Kwan and Rachelle Younglai in Montreal; Editing by Peter Cooney)