The Senate voted to give state authorities a role in enforcing new bank consumer protection rules as lawmakers sought on Tuesday to complete their financial regulation package before a series of final votes on landmark Wall Street reform.
With a final vote expected on Wednesday or Thursday, the Senate was closing in on the biggest overhaul of financial regulation since the 1930s, which is likely to weigh on the banking industry's future profits.
Political momentum has been running heavily against the financial industry, which has fought for months to kill or weaken the reform bill only to find in a series of votes in recent days that lawmakers have further tightened the crackdown.
The Senate voted 80-18 on Tuesday to give state attorneys general a prominent role in helping a new federal watchdog enforce consumer protection laws, but the measure bars officials from reaching across state lines to bring charges against banks.
That resolved a dispute that had been impeding progress on the Wall Street reform bill, one of President Barack Obama's top domestic policy priorities.
The bill, under development for months, would tighten the rules on a range of financial practices in an effort to avoid a repeat of the 2007-2009 banking crisis that plunged the country into a deep recession.
Other disputes were still unresolved as Democratic Senator Christopher Dodd tried to shepherd the sprawling measure toward a crucial procedural vote on Wednesday morning.
DEMOCRATS MOVE ON TRADING CURBS
With time running short, Democrats moved to modify a proposal that would prevent taxpayer-backed banks from using their own money to engage in speculative trading. Dodd sought to bring the measure up for a vote but he was blocked by Republicans.
The Republican leadership is obviously carrying Wall Street's water, Democratic Senator Carl Levin said.
Another controversial measure was unlikely to be resolved before the vote. The White House and financial regulators oppose a provision that would force banks to separate their swap-trading desks from their core operations. Many analysts expect it will be dropped from the bill.
But a resolution was unlikely on Tuesday since its author, Senator Blanche Lincoln, was campaigning in her home state of Arkansas to fend off a primary election challenge from the left.
The derivatives question is also not addressed in a final, summary version of the bill that Dodd is likely to introduce tomorrow, said Senate Majority Leader Harry Reid.
U.S. bank stocks closed lower on Tuesday, with the KBW Banks index of large bank shares declining 3.7 percent.
Goldman Sachs added to the selloff on Tuesday when it said in a note to clients the financial reform bill's changes could shrink banks' normalized earnings per share by 20 percent.
Although some Republicans are expected to help Democrats reach the 60-vote threshold needed to wrap up debate in the 100-seat chamber, Dodd could face defections from members of his own party.
DORGAN TARGETS NAKED SWAPS
Democratic Senator Byron Dorgan has pressed Dodd to allow a vote on a proposal to ban naked credit default swaps, a type of derivative that led to large losses for some financial firms during the 2008 crisis. Dorgan could withold his support for the broader bill if he is denied, according to other Democrats.
Still, analysts expect the Senate to approve the final bill. Lawmakers from both parties are eager to show they are cracking down on Wall Street, which is deeply unpopular with voters, before November's congressional elections.
Morgan Stanley's chief executive said Wall Street must rebuild trust with Main Street.
Any bill passed by the Senate would have to be reconciled with a bill already passed by the House of Representatives in December before Obama could sign a final package into law.
Credit-card issuers lost a battle last week when the Senate voted to limit the fees they can charge merchants on debit-card transactions. They could face a further setback if lawmakers vote to subject them to interest-rate caps at the state level.
The Senate also has yet to vote on a measure that would exclude auto dealers from new consumer-protection provisions designed to deter lending abuses.
(Additional reporting by Chris Sanders in New York and Steve Eder in Purchase, New York)