Scenarios: How U.S. financial regulation fight might play out

(Reuters) - The debate over financial regulation overhaul has a long way to go in the U.S. Congress, with the action now centered in a Senate committee, where analysts, aides and lawmakers see several possible scenarios ahead.

Here is a look at what could be coming for Democrats and Republicans as they thrash out possibly the biggest regulatory changes for banks and capital markets since the 1930s.

BANKING COMMITTEE COMPROMISE

Senate Banking Committee Chairman Christopher Dodd has broken off talks with Republicans on a bipartisan bill and announced he will unveil a Democratic bill next week and bring it before the committee for debate and a vote.

Three major issues prompted the breakdown in talks -- consumer protection, shareholder rights, and derivatives regulation. They will be key to deciding the outcome, along with the actions of a handful of moderate Democrats.

Dodd is now likely to include proposals in his bill that Republicans flatly oppose, namely a powerful new watchdog for financial consumers, and new clout for investors on setting executive pay and nominating corporate directors.

Disagreement persists on regulating over-the-counter derivatives, including credit default swaps, as well.

But on other topics -- such as regulating systemic risk, streamlining bank supervision, and resolving distressed financial firms -- progress has been made toward bipartisan agreement and Dodd will likely include those compromises.

If he does, the committee could still reach a deal by thrashing out differences in open debate, resulting in a bipartisan bill passing and going to the full Senate.

Given the failure of weeks of closed-door talks, however, such an outcome seems unlikely.

BANKING COMMITTEE CONFRONTATION

A more probable committee scenario is a close vote, with Republicans in opposition to Dodd's bill, most Democrats in favor of it, and a handful of moderates tipping the balance.

Committee Republicans may simply say 'no' to Dodd's bill. That would require them to decide that they can afford politically to block financial reform, despite polls showing that most Americans want tighter Wall Street regulation.

Banks oppose the consumer watchdog. Corporate CEOs oppose greater shareholder rights. Giant Wall Street firms that dominate the OTC derivatives market oppose new rules for it.

Blocking reform over these issues would put Republicans squarely on the side of an industry that is deeply unpopular just ahead of congressional elections in November.

Blocking reform would also leave an unsettling cloud of regulatory uncertainty over the financial sector, which craves stability in Washington after a year and a half of debate.

However, if Republicans opt to disregard these hazards, and if they can win over a few moderate Democrats to oppose Dodd, they could block reform at the committee level.

That would kill financial reform and hand Dodd and President Barack Obama a defeat headed into November, leaving Democrats with few achievements to campaign on.

If Dodd, however, can hold onto moderate committee Democrats, he should be able to move a bill out of committee.

Analysts expect a committee decision in March or early April. The bill could be on the Senate floor in April or May.

SENATE FLOOR PROSPECTS

If a bill, either Democratic or bipartisan, arrives on the floor, a flood of amendments will follow from both sides.

Some Democrats have already vowed to try to harden the bill on issues such as consumer protection and derivatives rules.

Republicans determined to kill it will try to block the bill with procedural obstacles and amendments that could "load the tree" until it collapses from its own weight.

A fresh wave of lobbying against the measure by big banks and Wall Street interests would also ensue.

To navigate through this, Dodd would have to retain substantial Democratic support and win over just a few Republicans to get past procedural roadblocks.

If he can do this, analysts say, a bill could pass in May or June. Next would be merging it with the House bill.

But if Dodd and Democratic leaders cannot win passage on the Senate floor, that would kill financial reform and hand Obama a damaging political defeat ahead of the elections.

HOUSE-SENATE COMPROMISE

If the Senate can produce a bill, it will almost certainly be more moderate than the one backed in December by the House, which garnered no Republican support.

Merging the two bills could be done in a back-and-forth process by the two chambers, or through a conference committee, which is favored by House Financial Services Committee Chairman Barney Frank. He will play a central role in either case.

OBAMA SIGNATURE

The White House has signaled it wants a tough bill and Obama could veto a measure that doesn't meet his expectations.

But with disappointing outcomes on other fronts, such as healthcare and climate change, Obama and the Democrats need a victory going into November, making it unlikely that Obama would reject whatever Congress can manage to produce.

(Reporting by Kevin Drawbaugh; Editing by Andrew Hay)