Volcker rule gets lift in Senate amid reform talks

Chairman of the President's Economic Recovery Advisory Board Paul Volcker testifies before the Senate Banking, Housing, and Urban Affairs Committee on Capitol Hill in Washington in this February 2, 2010 file photo.

WASHINGTON (Reuters) - The controversial "Volcker rule" to curb risky trading by banks got a boost in the Senate on Wednesday, as two Democrats introduced a bill that would enact and expand the rule.

Senators Jeff Merkley and Carl Levin introduced their bill on the rule, which was first proposed in January by President Barack Obama and White House economic adviser Paul Volcker, a former Federal Reserve chairman, in a move that stunned financial markets.

The move came as senators labored on toward a compromise financial reform package.

"I welcome their support," Volcker told Reuters in an interview on the bill. Three other lawmakers, all Democrats, also backed the bill.

"I think it reinforces what the administration is doing and proposing," Volcker said, adding that he "has no sense at all" that White House support for the rule has changed.

"The president has expressed it as a priority and I believe that is the case," Volcker said.

His comments came as the Senate Banking Committee remained locked in intense negotiations over a comprehensive package of financial reforms. Committee Chairman Christopher Dodd has been expected to unveil legislation soon, possibly this week.

Lobbyists close to the discussions said a bill might not emerge until next week, but Dodd has been working hard and aides were on alert for an announcement any day.

Republican Senator Bob Corker, a central player in the negotiations, said on Wednesday that the committee's bill will not exempt payday lenders from oversight by a proposed consumer protection watchdog that has been a sticking point in talks.

News reports said earlier that Corker has pushed for a payday lender exemption.

The White House said on Wednesday it was opposed to exempting payday lenders from new financial rules it is championing to protect consumers.

"We have been clear from the beginning that everyone should have to play by the same clear rules with no loopholes so that there is a level playing field," a senior administration official said.

GEITHNER TEES UP FANNIE, FREDDIE

Separately, Treasury Secretary Timothy Geithner said on Wednesday that he will set out principles within a few weeks to guide reform of mortgage finance giants Fannie Mae and Freddie Mac, a politically explosive issue.

"We're going to put out a set of broad questions on strategy for public comment," Geithner said at a U.S. House of Representatives appropriations subcommittee hearing.

"It doesn't just involve Fannie and Freddie, we want to take a careful look at the entire set of government agencies that act in the housing market now," he said.

Almost a year and a half since the peak of a financial crisis that tipped the U.S. economy into a deep recession, U.S. financial regulation has changed little.

The House approved a bill in December that called for the most sweeping regulatory reform since the 1930s, but the Senate has yet to act. A set of draft reform proposals unveiled by Dodd in November was immediately rejected by Republicans, and Dodd's initial proposal has steadily been watered down in recent weeks.

RULE WOULD BAN 'PROP TRADING'

As proposed in January, the Volcker rule would ban proprietary trading by banks, order them out of the hedge fund business and limit their growth with a new market share cap.

The rule came under immediate attack from lobbyists for banks and Wall Street when it was unveiled. Since then, the rule has generated little enthusiasm on Capitol Hill.

Aides and lawmakers have said they doubt it will be included in Dodd's package, instead expecting the package to include language that would allow regulators to order changes at large, distressed financial firms that could include halting proprietary trading and hedge fund operations.

Merkley and Levin said they want to widen the Volcker rule to include large nonbank financial institutions, as well as banks. They said they were joined in backing their bill by Democratic senators Ted Kaufman, Sherrod Brown and Jeanne Shaheen.

As for wider support for the rule, Volcker said, "There are certainly others that I would expect would support it."

(Additional reporting by Rachelle Younglai, Alister Bull, Glenn Somerville and Caren Bohan; Editing by Leslie Adler)