The Senate was expected to vote by Wednesday afternoon on a new orderly liquidation system for dismantling distressed financial firms that will exclude a proposed $50 billion fund to help pay for it, according to the Senate's chief author of Wall Street reform.
After months of negotiations, Democratic Senator Christopher Dodd said he and Republican Senator Richard Shelby had reached an agreement that instead calls for covering the costs of liquidations after the fact by selling off parts of the troubled firm or assessing a fee on other companies.
The Dodd-Shelby plan is an effort to end the notion that some financial firms have become too big to fail, while avoiding more debacles like the Bush administration's 2008 taxpayer-funded bailout of mega-insurer American International Group and the collapse of former Wall Street giant Lehman Brothers.
Neither of those firms fit into existing procedures used by the Federal Deposit Insurance Corp to dismantle failing banks. The Dodd-Shelby plan would set up a new protocol that tries to find a middle ground between bankruptcy and bailout.
The plan is a major component of a broader Wall Street reform bill being debated by the Senate. Democrats were expected to schedule more votes on smaller amendments on Wednesday amid stubborn Republican resistance to reform.
One that is expected to pass easily, for example, is a bill from Democratic Senator Barbara Boxer specifying that taxpayer funds could not be used to bail out troubled firms.
Votes to approve both the Dodd-Shelby and Boxer amendments would move the Senate closer to final passage of the bill, but numerous additional hurdles loom on issues such as consumer protection and regulating the derivatives market.
Senate Majority Leader Harry Reid complained that Republicans were still delaying action nearly a week after they agreed to move forward with the bill.
The Republicans are having trouble determining how they're going to continue making love to Wall Street, Reid said at a news conference.
TOP GOAL FOR OBAMA
President Barack Obama is pushing for regulatory reform to prevent a recurrence of the 2008-09 financial crisis that paralyzed markets and tipped the economy into a deep recession. Similar efforts are under way in the European Union.
The House of Representatives approved a reform bill in December that embraced many of the proposals unveiled by the president in mid-2009. Whatever the Senate passes would have to be merged with the House bill to produce final legislation.
If Democrats can enact reform into law, they would score an important victory going into November's elections.
Republicans have worked for months to weaken and delay the legislation, along with Wall Street and banking interests whose profits are threatened by reform.
We expect that the Dodd bill will pass some time in the next few weeks, said Brian Gardner, a policy analyst at investment firm Keefe Bruyette & Woods.
Nearly 60 amendments to the bill had been filed as of late Tuesday, risking gridlock on the Senate floor and challenging the Democratic leadership to work out a procedural plan that will allow debate to proceed under tight time constraints.
Senate Democratic Leader Harry Reid wants to finish the bill by the end of next week, but that looked unlikely after scheduled votes failed to take place on Tuesday.
CONSUMER WATCHDOG AT ISSUE
Disagreement continues between Shelby and Dodd on his proposal to set up a new financial consumer protection watchdog inside the Federal Reserve. Republicans say it would be an overreach of government and want to check the watchdog's power, while some Democrats want to make it even stronger.
Heated debate also continues on proposals in the bill to regulate the $450 trillion over-the-counter derivatives market, which include credit default swaps -- the instruments widely blamed for amplifying the crisis.
Swaps are derivative contracts that allow financiers to wager on the direction of interest rates, foreign currencies or -- in the case of a type known as credit default swaps -- the likelihood of a borrower defaulting on its debts.
Senate Agriculture Committee Chairman Blanche Lincoln has proposed that banks be required to spin off their swap-trading desks to get them out of that risky business. But that idea appeared to be losing support.
Wall Street giants, which rake in huge profits from OTC derivatives trading -- such as Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America and Morgan Stanley -- oppose the Lincoln provision.
The Obama administration has declined to endorse the provision and FDIC Chairman Sheila Bair has criticized it.
Republican Senator Saxby Chambliss said on Wednesday that there was general agreement among Senate Republicans to let banks stay involved in the swaps market.