A Senate panel on Wednesday voted to ban banks from the lucrative swaps market, one of the strictest measures in a planned financial reform that is heading into the home stretch.
One Republican joined Democrats on the Senate Agriculture Committee to advance a measure that would introduce oversight to the unregulated $450 trillion derivatives market, the source of the worst financial turmoil in 70 years.
If banks want to be banks, they can remain banks, but they're going to need to spin off that activity, committee chair Blanche Lincoln said after the vote.
The bill will likely become a part of a sweeping overhaul of financial regulation that is expected to reach the Senate floor soon, though the swaps ban may be stripped out.
Democratic Senator Christopher Dodd, heading up the reform effort, said the wider bill could be sent to the Senate floor within hours.
Democrats see the Wall Street reform as a chance to harness voter anger at big banks ahead of the November congressional elections, while Republicans have switched to a conciliatory tone even though they have the power to block legislation.
Dodd has been in talks with his Republican counterpart on the Banking Committee, Richard Shelby, to reach a compromise that would avoid a replay of the divisive healthcare battle that consumed Washington for more than a year.
Shelby told reporters that the deal is not there yet but we're closer than we've ever been.
Republican Charles Grassley voted for derivatives restrictions along with the Democrats who control both chambers of Congress, though he said he might still vote against the wider bill on the floor.
Democrats need at least one Republican vote to advance the broader reform, but key Republican moderates like Susan Collins have said they will withhold their support until a bipartisan deal has been reached -- an effort that could take weeks.
Dodd and Shelby need to resolve how to protect consumers and head off future bailouts -- something the Republicans have focused on their criticism so far.
Any proposal that clears the Senate would have to be reconciled with an overhaul passed by the House of Representatives last December.
Lincoln shocked markets last week by proposing banks participating in the swaps market should give up protections like access to the Federal Reserve discount window -- a potentially devastating blow which could force them to sell off their lucrative swaps trading desks.
The bill would also require most derivatives to trade on exchanges and pass through clearinghouses.
The proposals are being closely watched by firms that dominate the market, like Goldman, JPMorgan Chase, Morgan Stanley, Citigroup and Bank of America. It is also important for smaller firms that count on derivatives to hedge their risk.
The head of the Securities and Exchange Commission criticized the bill for removing certain securities options, exchange-traded funds and securities forwards from the agency's oversight.
In an interview with Bloomberg Television, Dodd signaled concerns about the plan to bar banks from the swaps market.
Lincoln's bill is the latest salvo in a barrage of tough measures meant to crack down on Wall Street for the excessive risk-taking that precipitated the recession.
A congressional panel investigating the origins of the crisis said it has issued a subpoena to Moody's Corp, a major credit rating agency, because it has not complied with voluntary requests for information.
Industry leader Goldman Sachs on Friday was charged with fraud by the Securities and Exchange Commission for misrepresenting a subprime debt produce. French and British regulators are also investigating, and the company could also face a probe from the European Union.
The embattled Wall Street firm has nearly doubled its lobbying budget over the past year and shifted its political contributions from Democrats to Republicans, according to newly released documents.
The International Monetary Fund on Tuesday also proposed two new taxes on banks worldwide as a way to deter risky behavior. Dodd said the United States should act first on regulation to maintain its global competitive edge.
President Barack Obama will seek to drum up support for reform with a visit to the U.S. financial capital New York City on Thursday. He will mention derivatives but they will not be the focus of his speech, a White House spokesman said.
(Additional reporting by Christopher Doering, Kevin Drawbaugh and David Lawder; editing by Patrick Graham)