Financial overhaul debate to begin this week

By Jim Kuhnhenn
Associated Press Writer

WASHINGTON (AP) — Unwilling to negotiate further, Democratic leaders have said they want to move forward on financial regulation legislation this week even as Republican leaders tried to unify their members against the bill in hopes of winning further concessions.

At the same time, Democrats introduced companion legislation Friday that would bar some of the nation’s biggest banks from engaging in derivatives trades. Derivatives, a growing vehicle for financial speculation, have become a significant source of revenue for large financial institutions. The proposal faces stiff industry opposition.

On the broader regulation bill, Senate GOP leaders were seeking to get all 41 Republicans to sign a letter opposing it. At least one, Sen. Susan Collins of Maine, had not signed on but said she nonetheless opposed the White House-backed legislation.

Thursday evolved into a test of wills, with Democrats ready to dare Republicans to oppose the legislation. Officials said Senate Majority Leader Harry Reid could take steps late this week that would guarantee a test vote on the legislation as early as April 27.

“We have talked about this enough,” Reid said. “We have negotiated this enough.”

The confrontational tone was driving both sides apart and a broad-based compromise between Banking Committee Chairman Chris Dodd, D-Conn., and the top committee Republican, Richard Shelby of Alabama, seemed increasingly unlikely. Instead, Democrats were looking to pick off a handful of Republicans with adjustments to the bill that would not alter it substantially.

One Republican who negotiated aspects of the bill with Dodd, Sen. Bob Corker of Tennessee, said some of the attacks on the bill “have been over the top.” In the kind of unscripted exchange rarely seen on the Senate floor, Corker complimented Dodd on his bill and urged him to restart negotiations. Dodd, standing a few feet away, replied by voicing frustration that the bill was now being cast as a partisan measure by Senate Republican leader Mitch McConnell.

“Why would you bother doing what I went through if, in fact, at the end of it all, the answer is, ‘I’m sorry, we didn’t get our way, so we’re going to stop our debate,’” Dodd said.

Both Corker and Shelby signed the leadership letter opposing Dodd’s bill.

McConnell and other top Republicans have characterized Dodd’s bill as a perpetuation of bailouts for financial firms. They say a proposed $50 billion fund financed by large banks to pay for liquidating a large failing firm would give shareholders and creditors the impression that their investments would be protected, even in failure, and contribute to risky financial behavior. Corker and Republican banking aides also pointed to language inserted by the Treasury Department and the Federal Deposit Insurance Corp. that would give the government more flexibility to cover claims from creditors.

“I would do the same thing if I were them, but there are some things that need to be tightened up,” Corker said.

Diana Farrell, deputy director of the White House’s National Economic Council, said the legislation ensures that taxpayers would not be on the hook to liquidate giant institutions because the $50 billion would           be financed by large financial firms.

The added language by Treasury and the FDIC are “technical issues about how you best unwind a firm,” she said in an interview. “This is not about injecting capital, this is really just a way of how you can best and most efficiently let a firm fail.”

The Obama administration and Senate Democrats were hunting for Republican support. Geithner invited Sen. Scott Brown, R-Mass., for a chat Thursday morning and scheduled more meetings for Friday, including one with Sen. Richard Lugar, R-Ind.

But Democrats themselves are not all happy with Dodd’s bill. Several want to strengthen it and at least one, conservative Sen. Ben Nelson of Nebraska, said he was concerned the bill’s regulations might reach too broadly. He said he had not decided how he would vote.

Democrats on the Senate Agriculture Committee planned to introduce legislation Friday that would regulate derivatives with tougher conditions than are contained in Dodd’s bill. Agriculture Committee Chairwoman Blanche Lincoln, D-Ark., will require banks that trade in complex derivatives, or swaps, to end those operations or lose access to Federal Reserve lending or FDIC insurance of deposit account, aides said Thursday.

One type of derivative blamed for the financial crisis were credit default swaps, a form of insurance against loan defaults. Many were mortgage-backed securities that became toxic during the housing crisis.

The Dodd bill also contains derivatives regulations but focuses more on shifting the instruments to regulated exchanges. Republicans and Democrats, however, are split on whether to give exceptions to certain firms that only use derivatives to hedge against market fluctuations.

Bank lobbyists decried the Lincoln provisions, arguing they would make U.S. banks less competitive globally.

“Derivatives are a proven risk-management tool,” said Scott Talbott, top lobbyist for the Financial Services Roundtable, an industry group. “To require divestment will actually make the financial institution more risky, which is the exact opposite direction we should be moving.”