Senior Senate Democrats clashed late on Tuesday as they tried to wrap up loose ends in a sweeping Wall Street reform bill headed for final passage within days.
A confrontation between Christopher Dodd and Blanche Lincoln, both chairmen of powerful Senate committees, signaled that the endgame is at hand for what promises to be the biggest overhaul of financial regulation since the 1930s.
Dodd, chief author of the sprawling reform legislation, offered a compromise that would essentially kill a proposal from Lincoln that would force big banks to separate their lucrative swap-trading desks from 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.
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.
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.
BANK STOCKS SLUMP
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 selloff 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.
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.
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.
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 an outright ban on a certain type of derivative known as a naked credit default swap that figured prominently in the financial crisis.
The other major unresolved topic in the Dodd bill concerns the so-called Volcker rule that would bar banks from proprietary trading for their own accounts, get them out of the hedge fund business, and limit their future growth.
Some Democrats want to harden language in the Dodd bill on the rule, first proposed in January by President Barack Obama and White House economic adviser Paul Volcker, the influential former chairman of the Federal Reserve.
Senators Jeff Merkley on Tuesday revised his amendment to toughen Dodd's language on the Volcker rule, moving to clarify its scope by specifically excluding institutions that do not do traditional banking and taking other steps. But Republicans blocked a vote, incurring the wrath of Merkley and other Democrats.
The Republican leadership is obviously carrying Wall Street's water, said Democratic Senator Carl Levin.
(Additional reporting by Charles Abbott and Rachelle Younglai, with Chris Sanders in New York City and Steve Eder in Purchase, New York; Editing by Bernard Orr)