Senior Senate Democrats clashed on Tuesday over the last disputed pieces of a sweeping Wall Street reform bill headed for final passage within days.
A confrontation between Christopher Dodd and Blanche Lincoln, both Democratic chairmen of powerful Senate committees, signaled the endgame was at hand for the biggest overhaul of U.S. financial regulation since the 1930s.
Dodd, chief author of the sprawling reform bill, offered a compromise to essentially kill a proposal made by Lincoln that would force big banks to separate their lucrative swap-trading desks from their core operations.
Lincoln, who faced a tough primary reelection contest on Tuesday in her home state of Arkansas, said she would fight efforts to weaken her proposal, which Wall Street opposes.
I'm proud of the support my provision has received both inside and outside the Senate and will defend it should there be a debate on the Senate floor, she said in a statement.
A final vote on the Dodd bill was expected on Wednesday or Thursday. Delays could push a final decision into next week, but Senate Democratic leaders want to wrap it up and move on to bills on job creation and funding the war in Afghanistan.
We need to come to closure, Dodd said on the Senate floor as leaders struggled to deal with nearly 300 amendments.
As markets absorbed the likelihood of the bill's approval, financial stocks fell on Tuesday, with the KBW Banks index of large bank shares down 3.7 percent in broadly lower trading.
Goldman Sachs added to the sell-off on Tuesday when it said in a note to clients that the reform bill's changes could shrink banks' normalized earnings per share by 20 percent.
HIGH PRIORITY FOR OBAMA
President Barack Obama and congressional Democrats want to tighten the rules for banks and capital markets to prevent a recurrence of the 2007-2009 financial crisis which tipped the economy into a severe recession and trigged taxpayer bailouts.
Political momentum has been running heavily against Wall Street, 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.
Politicians 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 merged with a bill passed by the House of Representatives in December. Then a final package could go to Obama to be enacted into law. Analyst said that could happen by mid-year.
Seeking to clear away obstacles to passage, the Senate voted on Tuesday to give state authorities a role in enforcing new bank consumer protection rules.
The Senate voted 80-18 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 bill, one of Obama's top domestic policy priorities.
SWAP TRADING A KEY PART
Regulating swap trading, a central part of the unpoliced $600-trillion over-the-counter derivatives market, is a key element in Dodd's bill. Agreement on how to approach it has eluded lawmakers for months as other issues have been settled.
Aside from Lincoln's proposal, the bill would redirect much of the market into more transparent and accountable channels, such as exchanges, electronic trading platforms and central clearinghouses. These provisions were expected to be approved.
By a vote of 57 to 38, the Senate rejected a ban on a type of derivative contract known as a naked credit default swap that figured prominently in the financial crisis. Dodd later proposed a partial ban with delayed implementation. His approach could be tacked onto his bill at the last minute.
The vote came on the same day that Germany announced a ban on some types of naked short-selling, or betting on declines in a securities' price without first borrowing the securities to cover the bet, as is done in a normal short sale.
Naked short sales of euro-denominated government bonds, credit default swaps based on those bonds, and shares in Germany's 10 leading financial institutions will be prohibited, the German Finance Ministry said.
An effort to overhaul financial regulation is under way in the European Union, as well as the United States, in reaction to the crisis that unleashed a global political backlash.
Senate Republicans blocked a vote on Tuesday on an amendment that would toughen the Dodd bill's language on the so-called Volcker rule to bar banks from proprietary trading for their own accounts, get them out of the hedge fund business, and limit their future growth.
'VOLCKER RULE' AMENDMENT BLOCKED
The amendment was offered by Jeff Merkley and Carl Levin, both Democrats. After the vote was blocked, Levin said:
We saw the long arm of Wall Street come into the Capitol and reach right into this chamber. That should not have happened ... It was nothing less than shameful.
Levin and Merkley want to harden language in the Dodd bill on the Volcker rule, first proposed in January by President Barack Obama and White House economic adviser Paul Volcker, the influential former chairman of the Federal Reserve.
Merkley on Tuesday revised the amendment to try to win support, moving to clarify its scope by excluding institutions that do not do traditional banking and taking other steps.
Levin said Republicans were blocking the amendment using procedural tactics. We will continue to try tomorrow morning to see if we can get our amendment considered, he said.
Other amendments still in play as the Senate adjourned included one from Republican Sam Brownback to exclude auto dealers from the new federal consumer protection watchdog.
A crucial procedural vote was set for 2 p.m. ET on Wednesday to limit debate and set up a vote on passage.
(Additional reporting by Charles Abbott, Caren Bohan and Rachelle Younglai, with Chris Sanders in New York; Steve Eder in Purchase, New York; and Gernot Heller, Andreas Rinke, Alexander Ratz and Thorsten Severin in Berlin; Editing by Jan Dahinten)