Obama, Senate Dems forge ahead on financial reform

President Barack Obama in Washington, April 16, 2010.

WASHINGTON (Reuters) - President Barack Obama will take his push for tighter financial regulation to New York on Thursday, with Wall Street reeling from the Goldman Sachs case and the Senate inching closer to a pivotal vote.

In a new election-year fault line after the fractious healthcare fight, the White House said Obama will speak in Manhattan on the day Senate Democrats plan to bring a reform bill to the floor. The debate will likely go into next week.

The assertive reform push by Obama and the Democrats comes as fraud charges against Goldman Sachs have thrown Wall Street and Republicans onto the defensive after months of working to weaken or block Democratic reform proposals.

"Wall Street and our Republican friends apparently want to leave in place the status quo, but the status quo would leave us vulnerable," said Democratic Senate Banking Committee Chairman Christopher Dodd, the reform bill's main author.

Dodd told reporters at a news conference his bill would have stopped the kind of activity alleged in the stunning fraud charges brought last week against Goldman Sachs by the U.S. Securities and Exchange Commission.

Goldman's stock price closed up 2.62 to 163.32 on Monday amid expectations that it will report higher profits Tuesday.

The firm was accused by the SEC of duping clients with a complex subprime mortgage product during the housing and credit bubble that broke in 2007, triggering a global financial crisis and tipping the U.S. economy into a deep recession.

White House spokesman Robert Gibbs said Obama on Thursday will call for action by the Senate and "remind Americans what is at stake" if strong reforms are not implemented.

REPUBLICAN RANKS HOLDING

The Goldman case has given Democrats more confidence they will be able to win Senate passage for their bill that has been under development for months. The Democrats say the bill is needed to prevent a repeat of the 2007-2009 crisis.

"The SEC's charges against Goldman Sachs increase the chance that regulation is going to pass, though I thought it was already fairly likely," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.

But there were no signs on Monday of cracks in the Republicans' solid opposition. They say the Democratic bill will prompt more bailouts and over-reaching by federal regulators.

"The concern we have is the perpetuation of this 'too big to fail' notion. The legislation unfortunately doesn't stop it. It continues it," Republican Senator John Kyl told reporters.

U.S. Treasury Secretary Timothy Geithner met on Monday with two Republican senators -- Susan Collins and Olympia Snowe, both of Maine. They are seen as moderates who might be persuaded to help Democrats move the bill forward.

Collins told reporters afterward that she still opposed letting formal debate start on the bill, but she hoped that a bipartisan agreement could be reached. Snowe concurred, saying separately that the disagreements were narrow.

"There isn't that much of a gap," Snowe said.

The 1,336-page Dodd bill would achieve other essential aspects of financial reform: setting up new consumer protections and establishing market rules for over-the-counter derivatives. It will also crack down on hedge funds and risky bank trading.

It would also set up a new way to unwind troubled financial firms to prevent bailouts like the Bush administration's 2008 rescue of AIG, while averting disastrous bankruptcies like that of Lehman Brothers, which shook markets globally.

Part of that provision includes a proposed $50-billion "orderly liquidation fund," paid into by large financial firms. Republicans are attacking the fund as potential source of future bailouts. Democrats deny that and note that the fund, at least in part, was originally proposed by Republicans.

The fund was designed to help pay for Federal Deposit Insurance Corp. efforts to seize and dismantle distressed firms -- a process that demands some sort of financial support.

Dodd said he was open to other ideas and pleaded with Republicans to bring any they may have forward.

REGULATORS TO URGE REFORMS

Pro-reform appeals will come on Tuesday from Geithner, Federal Reserve Chairman Ben Bernanke and SEC Chairman Mary Schapiro -- all slated to testify at a congressional hearing on the Lehman Brothers collapse and how it was handled.

Richard Fuld, former CEO of Lehman, is on the agenda to appear at the hearing. In prepared testimony released on Monday, Fuld blamed a "perfect storm" for the firm's downfall and defended its use of a controversial accounting method.

Bernanke will tell the panel, based on prepared testimony, that Lehman's tumultuous bankruptcy could not be prevented in late 2008 because regulators lacked a legal protocol for dealing with the problem.

Later in the week, finance ministers from the G20 nations will convene in Washington, with regulatory reform at the top of their priorities list. A long-awaited report by the International Monetary Fund on taxing banks is expected.

The KBW Bank Index of large bank stocks closed up about 1 percent on Monday after strong results by Citigroup and with investors shrugging off concerns about new regulations and a possibly wider SEC probe of the sector.

All 41 Republicans in the 100-seat Senate last week signed a letter opposing the Democrats' bill, which passed the Senate Banking Committee without their support.

Democrats are only one vote shy of the 60 they will need in the full Senate to overcome procedural hurdles likely to be thrown up in front of the bill by Republicans. Dodd is trying to round up just enough Republican support for reform to lock in that solitary vote.

Senate Republican leader Mitch McConnell said the bill raised concerns, but he said they could be addressed because of the "clear bipartisan support for improving this bill."

"It's my hope that we can work together to close the remaining bailout loopholes that would put American taxpayers on the hook for financial institutions that become 'too big to fail,'" McConnell said.

(Additional reporting by Andy Sullivan, Patricia Zengerle, Karey Wutkowski, Steve Holland, Donna Smith, with Dan Wilchins, Ryan Vlastelica and Maria Aspan in New York; editing by Philip Barbara)