- The Washington Times - Thursday, April 22, 2010

Senate Democrats on Wednesday resumed their drive to enact sweeping changes in the nation’s financial system even as they met behind the scenes with Republicans to try to forge a bipartisan bill.

The Senate banking committee’s chairman, Christopher J. Dodd, promised to start Senate floor debate on the legislation “within hours” after the Senate Agriculture Committee approved for the first time an effective ban on bank trading in derivatives, the risky and complex securities that helped ignite the 2008 global financial crisis.

“This is no time for small fixes or tweaking around the edges,” said Agricultural Committee Chairman Blanche Lincoln, Arkansas Democrat, who faces a tough re-election fight with challenges from both the left and the right. “This is the time for bold change and big decisions about the future of our country and the global financial system.”

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One Republican - Sen. Charles E. Grassley of Iowa - voted for the derivative reforms in a 13-8 committee vote, arguably the most radical change yet to be added to the legislation, although he said he still has reservations about the overall bill.

Many other Republicans - like the White House - objected that the provision could spawn unforeseen problems and pleaded for more time for negotiations over the 1,300-page bill to bear fruit.

All sides expressed optimism that a compromise was within reach despite many areas in dispute.

“We’re working at this thing. I think we’re getting closer to the possibility of having a bill that will attract bipartisan support,” Mr. Dodd said. The Connecticut Democrat is searching for votes from among a dozen or so moderate Republicans with whom he sees “common ground.”

It was not clear whether his threat to bring the bill to debate this week could force a confrontation with Republicans that would derail the possibility of an agreement. Democrats are likely to need at least one of the Senate’s 41 Republican votes to proceed with debate on the bill.

“We want a good bill, a bipartisan bill. The consequences of having a bad bill are great for our country” said Sen. Kay Bailey Hutchison.

The Texas Republican said she “came away from” meetings with Treasury Secretary Timothy F. Geithner and White House economic adviser Lawrence H. Summers “believing we are pretty close” to an agreement. But she said “41 senators are against bringing a bill to the floor unless it’s a good bill.”

President Obama predicted the Senate would approve a bill “within weeks” and said the first-time regulation of the shadowy but gargantuan derivatives markets - which are estimated at up to $600 trillion in size - is essential to prevent the kinds of abuses and excesses on Wall Street that led to the financial crisis. Mr. Obama will give another speech on financial reform in New York on Thursday.

The administration has pushed to require that nearly all derivatives such as credit default swaps and collateralized debt obligations be traded in public in central clearinghouses or exchanges to prevent a repeat of the risky private deals that blindsided investors in 2008. But the Senate legislation would go well beyond that.

The Senate bill would prevent swaps dealers who trade in derivatives from getting any federal financial assistance available to banks, such as cheap loans from the Federal Reserve. That would force major banks and Wall Street firms such as Goldman Sachs and Citigroup to either restructure or spin off their lucrative derivatives operations.

Jeffrey Goldfarb, analyst at Breakingviews.com, said the Goldman Sachs fraud case announced on Friday, which targeted for the first time complicated transactions derived from subprime mortgages, fueled sentiment in Congress for punishing Goldman and other banks whose derivatives activities have been a major source of profits and revenue.

If Congress adopts the prohibition, he estimated that Goldman could miss out on about $2.1 billion of revenue a year, and the other top nine global banks could lose a similar amount. That would collectively lower the value of their stocks by about $40 billion, Mr. Goldfarb said. The stock market already has shaved about $30 billion from the stocks’ values since the provision was announced.

Also ratcheting up the stakes on the legislation, liberal Democrats pushed an amendment that would keep banks and Wall Street firms from getting “too big to fail” by requiring regulators to break them up if they gain too much economic power. The bill would impose strict limits on the banks’ liabilities and leveraging activities.

“Though it is clearly the safest way to avoid another financial crisis, this idea must overcome tremendous resistance from Wall Street banks and their politically powerful campaigns against structural financial reform,” said Sen. Ted Kaufman, Delaware Democrat.

“Inertia and caution” have led Congress until now to avoid such wholesale restructuring of the banking system, in favor of an elaborate regulatory scheme in the bill that “may work,” but still represent a “gamble” with the economy, he said.

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