Wall Street banks face a turning point on Wednesday as U.S. lawmakers are expected to spell out limits on a range of risky but lucrative trading practices in a sweeping rewrite of financial regulations.
Banks like Goldman Sachs and Citigroup could learn the future of their swaps dealing and proprietary trading activities as lawmakers close in on a final version of the overhaul, with billions of dollars hanging in the balance.
Democrats hope to resolve differences between bills passed by the Senate and the House of Representatives by the end of the week, when President Barack Obama heads to Canada to discuss financial reforms with other leaders of the G20 economic powers.
Democrats are eager to crack down on an a deeply unpopular industry after the 2007-2009 financial collapse that touched off a deep global recession and public bailouts of Wall Street banks. But they have backed off from many of their toughest proposals.
The House and Senate must still sign off on the final bill before Obama can sign it into law. Passage would give Democrats a major legislative victory to add to healthcare reform before November's congressional elections.
Bank lobbyists, often working closely with Republicans, have tried to block or water down the bill but have had limited success in the face of widespread voter anger at Wall Street.
After weeks of behind-the-scenes talks, Democrats were expected to release their proposals to curb banks' risky trading and regulate their ties to private equity and hedge funds.
TIGHTER 'VOLCKER RULE'
Democratic Senator Christopher Dodd said on Tuesday he will offer a tightened version of a White House proposal known as the Volcker rule that would limit banks trading for their own profits, unrelated to customer needs.
The tightened proposal would limit regulators' ability to waive the proposed ban, but could allow banks to maintain small investments in private equity and hedge funds, according to aides. Banks have pushed hard for the exemption, arguing that it is key to their asset-management business.
House Democrats were also expected to release their proposal to crack down on the $615 trillion derivatives market, which exacerbated the crisis and forced an expensive bailout of insurance giant AIG.
As it stands, the bill would force banks to spin off their lucrative swaps-dealing operations to ensure that taxpayer-backed deposits are not put at risk.
The sponsor of that provision, Democratic Senator Blanche Lincoln, has since said that banks would be able to house their swaps-dealing operations in a separately capitalized affiliate of their holding company.
Democrats also could tighten Federal Reserve rules to ensure swaps dealing is kept at arms length from taxpayer-backed bank deposits.
Lawmakers also still must spell out which types of end users would be exempt from the tighter derivatives rules.
Members of the House-Senate panel face a laundry list of other outstanding issues before they can complete their work, which they aim to do on Thursday.
Though they have agreed to give regulators new authority to step in and dismantled ailing financial institutions if they threaten the broader economy, they still must resolve whether banks should have to cover the costs of the process up front by paying into a $150 billion fund.
They also must resolve the balance of powers between state and federal regulators, and determine which banks would be required to raise their capital reserves.
Though they have agreed that auto dealers would escape most oversight by a new consumer-protection authority, they still must work out the exact nature of the exemption.
(Additional reporting by Kim Dixon and Rachelle Younglai)