Lawmakers on Tuesday girded for a showdown over a measure that could upend the business model of credit rating agencies like Standard & Poor's and Moody's Corp., in the first real test of the congressional panel crafting a final Wall Street reform bill.
Negotiators from the House of Representatives moved to strip out a measure designed to eliminate perceived conflicts of interest in the industry, setting up a confrontation with their counterparts in the Senate who have backed it.
The two sides planned to work out their differences later in the day. The House-Senate panel aims to send a final bill to President Barack Obama to sign into law by early July.
The credit-rating industry has been widely criticized for assigning overly rosy ratings to dubious debt offerings that imploded and brought Wall Street to its knees during the 2007-2009 financial crisis. Lawmakers said the need to drum up business from the companies whose debt the agencies rate gave them an incentive to sweeten their ratings.
We shouldn't be surprised with what happens when we have the umpire selected by the home team, said Democratic Representative Brad Sherman.
The two sweeping bills House and Senate negotiators are trying to reconcile aim to avoid a repeat of the crisis that plunged the world economy into a deep recession and led to massive taxpayer bailouts of Wall Street firms.
Lawmakers plan to postpone the most contentious issues until the end of the process, which Democrats hope to wrap up on June 24. The lawmakers agreed to subject private equity funds and hedge funds to greater oversight, and to permanently insure banking customers' deposit accounts up to $250,000. That limit, which had been raised during the crisis, was set to revert to $100,000 in 2014.
Even as they worked through relatively noncontroversial aspects of the bill, Democrats were privately approaching consensus on one of the most contentious aspects of the bill, a proposal to curb risky trading by banks.
Action on that measure, however, was still days away as the panel focused on the fate of ratings agencies.
HOLDING RATERS TO ACCOUNT
The Senate's bill, passed last month, would set up a new government panel that would assign new structured debt offerings to ratings agencies on a semi-random basis.
House negotiators unanimously voted to strip that out and replace it with a one-year study by the Securities and Exchange Commission.
Representative Barney Frank, who heads the conference committee, said the House version would hold the industry accountable by making it easier to sue agencies that issue misleading ratings and removing the requirement that government agencies use their ratings as they go about their work.
We did the best we could to put people on notice that they ought to be doing their own diligence, Frank said.
Credit ratings agencies are already likely to see their business costs rise as they deal with higher transparency and reporting standards, said Edward Atorino, analyst at The Benchmark Company in New York.
The move highlighted a surprising dynamic that has emerged over the past year of legislating: House Democrats, usually viewed as more liberal than their Senate counterparts, may in fact be Wall Street's best bet for softening legislation that is sure to crimp industry profits for years to come.
Frank also aims to exempt smaller hedge funds and other private funds from registering with the SEC. The Senate bill, which is being used as a starting point for negotiations, would require firms that manage more than $100 million in assets to register; House Democrats hope to raise that to $150 million.
The Federal Reserve was poised to escape relatively unscathed after enduring more than a year of tough congressional criticism for its actions during the crisis.
House Democrats said they will try to strike a Senate-approved measure that would make the head of the Fed's New York branch a political appointee, rather than one appointed by industry. The U.S. central bank has argued that the Senate measure would compromise its independence.
The Fed also appeared likely to evade the most intrusive congressional oversight as House lawmakers backed off a previous plan that would have set up ongoing congressional audits that could have extended to monetary policy.
House Democrats also said they aim to hold investment brokers to a higher client-care standard roughly the level now followed by investment advisers.
BEHIND-THE-SCENES WORK ON DERIVATIVES
Behind the scenes, Democrats sought to resolve their most divisive issue -- how to regulate the $650 trillion derivatives market that led to the downfall of titans like insurer AIG during the crisis.
Banks looked increasingly likely to face some limits on swap trading after Senate Agriculture Committee Chairman Blanche Lincoln softened a proposal that would require banks to spin off their lucrative swaps dealing desks.
Her new plan would require the Wall Street giants that dominate the swaps market to spin off their dealing operations to a separately capitalized affiliate, but it would let them continue to use swaps to hedge their own lending activities.
Sheila Bair, chairwoman of the Federal Deposit Insurance Corp, who had criticized Lincoln's original plan, told Reuters Insider she was encouraged by the new proposal.
Representative Collin Peterson, the House Agriculture Committee chairman, told Reuters he would probably be comfortable with it and predicted it would become law in some form.
But lawmakers in the business-friendly New Democrat Coalition called for stripping Lincoln's plan, a central target for Wall Street lobbying efforts, from the conference committee's bill. Three members of the 69-member coalition are on the negotiating committee.
(Additional reporting by Kim Dixon, Kevin Drawbaugh and Charles Abbott in Washington and Elinor Comlay in New York; Editing by Andrea Ricci and Leslie Adler)