WRAPUP 1-Democrats slam putting US consumer watchdog in Fed

* Rep. Frank: thought Fed option for watchdog was "joke"

* Sen. Reed to push for watchdog as independent agency

* Sen. Schumer "very leery" of putting watchdog in Fed

* Sen. Dorgan: Fed option for watchdog "awful idea"

By Kevin Drawbaugh

WASHINGTON, March 2 (Reuters) - Senior Democrats in the U.S. Congress on Tuesday sharply criticized discussions among key senators on possibly making a new government watchdog for financial consumers a division of the Federal Reserve.

Representative Barney Frank, chief architect of financial reform in the House, was blunt in expressing his thoughts when he learned about the talks led by Senate Banking Committee Chairman Christopher Dodd, a fellow Democrat, .

"I thought it was a joke at first, to be honest, with all this denunciation of the Fed," Frank told Reuters.

"If that's the price of a Republican deal, then it's not a good deal and the House wouldn't accept it," he said. "The Federal Reserve has had the major share of consumer powers for all these years and has done a lousy job."

President Barack Obama's proposal to set up an independent Consumer Financial Protection Agency to regulate mortgages and credit cards has been the main obstacle for weeks to a bipartisan Senate compromise on financial reform.

For a Factbox on the key points of a U.S. Senate compromise on financial reform, double-click on [ID:nN02165972]

Dodd has been discussing alternatives in an attempt to bridge disagreements with Republicans, who oppose an independent consumer agency, and discussed with Republican Senator Bob Corker the possibility of making the agency a division of the Fed, the U.S. central bank.

Senator Richard Shelby, the banking committee's top Republican, has proposed making the watchdog a part of the Federal Deposit Insurance Corp. An earlier proposal from Dodd to make it part of the Treasury Department was rejected by Republicans.

In a sign of trouble for alternative approaches, Democratic Senator Jack Reed, a senior committee member, will offer a formal amendment to require that the watchdog be an independent agency, a Democratic committee aide told Reuters.

Reed can be expected to press the amendment forward at the committee level and on the Senate floor, the aide said.

DODD BILL EXPECTED SOON

Dodd has been expected to unveil revised financial reform legislation this week, with a possible vote by the banking panel in mid-March and Senate floor action in April or May.

Another senior committee Democrat, Senator Charles Schumer, of New York, said trying to get the Fed to protect consumers "has been an uphill, and very often unsuccessful, battle. I am very leery of any consumer regulator being placed inside the Fed."

(For a Factbox on the key players in reshaping U.S. financial rules, double-click on [ID:nN02168734])

Other Democrats who voiced skepticism about the Fed option included senators Sherrod Brown, Byron Dorgan and Jeff Merkley, as well as independent Senator Bernard Sanders.

"It's an awful idea," Dorgan told reporters. "The Federal Reserve Board is the one place that has demonstrated an inability to deal with these issues. ... They had responsibility for it and failed miserably over the last decade and a half."

Not all Democrats joined the chorus of criticism. Senator Evan Bayh told reporters that the Fed option "may represent the best hope of actually getting something done." But he said he had learned of the proposal only on Monday evening and had not seen details.

Like other lawmakers, both Democrats and Republicans, Bayh said the key issue was how much power and independence the consumer watchdog would have.

"There may be some slight differences depending on where they're housed, but the real thing is -- are they independent, separate source of funding, rule-making authority," he said.

SHELBY: WATCHDOG NEEDS MASTER

Shelby made clear in remarks to reporters that Republicans want a watchdog that is subservient to a large bank regulator.

"If the consumer protection unit or bureau is put at the Fed or FDIC or anywhere else ... the prudential regulator should have a say in any rule that could affect the safety and soundness of the banking system," he said.

Asked if the parent agency of the watchdog should be able to veto its rules affecting banks, Shelby said: "Absolutely. They should have some power there, otherwise you are just creating something that's going to run amok."

Financial services industry lobbyists have worked for months to kill or weaken the consumer protection proposal, with the help of Republicans, who have said such an agency would unwisely divorce consumer protection from bank supervision.

But the proposed agency is backed by many Democrats who see it as needed to shield Americans from deceptive financial products, such as the subprime mortgages that played such a key role in inflating the real estate bubble behind the crisis.

The U.S. House of Representatives approved a sweeping financial reform bill in December that included Obama's proposed agency. (Additional reporting by Susan Cornwell; Editing by Leslie Adler)