Senate panel seen approving financial reform

Senate Banking Committee Chairman Chris Dodd (D-CT) unveils his financial reform substitute on Capitol Hill in Washington, March 15, 2010.

WASHINGTON (Reuters) - The new financial reform bill introduced in the Senate will likely be approved at the committee level next week, but its shape could change substantially once it comes before the full Senate and winning Republican support comes into play, analysts said on Tuesday.

The 1,336-page measure leaves major issues still to be worked out, likely on the Senate floor and beyond, including regulating over-the-counter derivatives, applying the "Volcker rule" on curbing risky trading by banks, and imposing stricter bank capital and liquidity standards.

The bill introduced by Senate Banking Committee Chairman Christopher Dodd, a Democrat, on Monday faces a reasonably smooth road at the committee level, where Democrats hold enough votes to pass the measure without any Republican support.

But once it advances to the full Senate, the arithmetic changes, with Democrats only controlling 59 of the 60 votes that will be needed to overcome procedural roadblocks that sure to be thrown up by Republicans.

"We caution the bill is currently without Republican support ... so we expect the bill to undergo significant changes over the next month," said Brian Gardner, an analyst at investment firm Keefe Bruyette & Woods. He expects the bill to be passed by the banking committee next week.

Dodd told MSNBC that Congress needs to fast-track reform, despite Republican pleas to slow down. He said Congress should not adjourn for a two-week recess on March 26 without acting.

"We really can't allow this Congress to adjourn without addressing these basic issues," said Dodd, among those concerned that lawmakers will soon become too distracted by the coming November elections to act on major legislation.

Dodd, who is not seeking reelection in November, released his bill on Monday after marathon talks with Republicans failed to produce a bipartisan deal on proposals for the most sweeping overhaul of bank and capital market oversight since the 1930s.

The committee will convene on March 22 to debate and amend the bill in a working session known as a mark-up. Dodd hopes the process can be completed within a week.

Democrats hold 13 committee seats, the Republicans have 10. The bill can win passage in committee with 12 votes.

DODD: 'YOU NEVER KNOW'

Dodd on Tuesday indicated optimism on the bill, but acknowledged that there is work yet to be done.

"We've made a lot of progress, the bill reflects that," he told reporters in the Capitol. "Some Republicans have indicated we're 80 or 90 percent agreed. I think it's a little more optimistic than I would place it.

"We think we have consensus on the committee. You never really know that until you get into the markup," he added.

Working closely with bank lobbyists, Republicans have fought for months to weaken or block regulatory reforms since President Barack Obama's original mid-2009 proposals.

The U.S. House of Representatives in December approved most of Obama's package, but without a single Republican vote.

On Tuesday, almost two years since the near-collapse of former Wall Street giant Bear Stearns ushered in the worst financial crisis in generations, Republicans were pushing Dodd to put the brakes on the banking committee's timetable.

A one-week deadline for committee passage is "way too quick," said Republican Senator Bob Corker, who had tried but failed for weeks to reach a bipartisan deal with Dodd.

Corker was optimistic, however, about chances of Congress approving a reform bill this year. "The odds are very high, and I think there are people on both sides of the aisle that actually want to see a bipartisan bill," he said on CNBC.

The bill unveiled on Monday serves as a placeholder, Dodd told CNBC, noting that a proposed government watchdog for financial consumer products and increased shareholder rights are two issues "still in controversy."

OTC DERIVATIVES IN FLUX

The bill repeats language first proposed by Dodd in November to crack down on the $450-trillion over-the-counter derivatives market. Risky derivatives instruments such as credit default swaps, a type of insurance used by bondholders, have been blamed for helping to cause the financial crisis.

A compromise proposal being worked on by two other senators, Democrat Jack Reed and Republican Judd Gregg, is expected eventually to replace what is in the bill now.

Treasury Secretary Timothy Geithner said on Fox Business Network on Tuesday that he supports changing Federal Reserve governance to eliminate any perception of undue influence by banks. Dodd has proposed making the president of the New York Federal Reserve a presidential appointee.

The New York Fed acts as the U.S. central bank's arm on Wall Street, implementing monetary policy and regulating most of the biggest U.S. banks. Its president is currently chosen by a nine-member board of directors that includes heads of banks it regulates.

Dodd also proposes enforcing the "Volcker rule" -- first introduced by Obama early this year and named after White House economic adviser Paul Volcker -- that would curb proprietary trading at banks and force them out of the hedge fund business. No rule, however, could be imposed until a study is done by a proposed council to oversee systemic financial risk.

"This seems like it is less than a total ban and it is a point that will need to be clarified before the committee votes," said Jaret Seiberg, an analyst at Concept Capital.

The bill also calls for stricter bank capital and liquidity standards, but they are not clearly defined. The details will depend on the efforts of international banking supervisors tasked with developing new standards.

Both Democrats and Republicans seem to agree on other issues, such as forming the new systemic risk council and putting in place a new process for dealing with large financial firms that get into trouble.

With that as a backdrop, Dodd is likely to ram his bill through the banking committee next week, possibly with no Republicans voting in favor it, Seiberg said.

"Once the committee votes, the real negotiations will start," he said.

(Additional reporting by David Morgan, Christopher Doering, Mark Felsenthal and Glenn Somerville; Editing by Leslie Adler)