Democrats press advantage on financial reform

Senate Banking Committee Chairman Chris Dodd (D-CT) gestures as he speaks during a news conference to discuss efforts to reform Wall Street on Capitol Hill in Washington, April 19, 2010.

WASHINGTON (Reuters) - Democrats in the Senate pressed forward on a sweeping regulation overhaul on Wednesday, backing a measure to drive banks from the lucrative derivatives market at the heart of the financial crisis.

As President Barack Obama prepared to call on Wall Street to get behind reforms, Democrats sought to ride widespread public anger at the financial industry to a legislative victory in Congress. Bank stocks were mixed in broadly flat trading.

Democratic Senator Christopher Dodd, who is heading up the overhaul effort, said he would present legislation to the Senate within hours, but aides cautioned that a pivotal procedural vote could not come until early next week.

The overhaul will likely include a crackdown on the unregulated $450 trillion derivatives market, which could drive Wall Street behemoths like Goldman Sachs and Morgan Stanley to restructure or spin off derivatives trading.

"If banks want to be banks, they can remain banks, but they're going to need to spin off that activity," Senate Agriculture Committee Chairman Blanche Lincoln said after her panel voted to advance the measure on derivatives.

Lincoln's hard-hitting bill, in whole or in part, was expected to be folded into a broader measure already approved by the Senate Banking Committee. Debate on it could begin next week. The Senate is not slated to cast any votes on Friday.

Democrats see Wall Street reform as a chance to harness voter anger at big banks for their role in the 2007-2009 economic crisis ahead of November's congressional elections.

Fraud charges brought last week against Goldman Sachs have given the overhaul more momentum. "It just reinforces the perception that people have about some of these Wall Street investment banks," Senator John Thune told reporters.

After meeting with other Republicans on the status of negotiations with Democrats over reform proposals, Thune said it was still possible to hammer out a bipartisan measure.

"I think we're going to end up with a bipartisan bill," said Republican Senator Bob Corker on the Senate floor.

Senate Banking Committee Chairman Christopher Dodd is negotiating with Republican Richard Shelby, who told reporters after the briefing that the two sides were still talking.

Democrats need at least one Republican vote to advance the broader reform measure in a procedural vote. Key Republican moderates like Susan Collins have said they will withhold their support until Dodd and Shelby have reached a deal.

Asked if he was confident all 41 Republicans could hold together and block the Democratic bill, if it came to that, Thune said, "I'm not entirely confident, but I'm hopeful."

OBAMA URGES TIGHT RULES

The Democrats' reform bill would cut the U.S. budget deficit by $21 billion over the next 10 years, according to Congressional Budget Office estimate obtained by Reuters.

The estimated reduction in the budget deficit over the 2011-2020 period stems largely from charging the financial industry assessments for a fund to liquidate large, troubled financial firms, the office said.

Obama called for tighter rules against Wall Street excess.

"We have gotten into one of those places where we need to update those rules of the road," Obama said in an interview with CNBC on the eve of a financial speech in New York.

In his speech on Thursday, Obama will tell Wall Street to "join him in the effort to reform the financial system -- not fight it" and urge lawmakers to pass the legislation under consideration now by the Senate, a White House official said .

Republican Charles Grassley voted with Democrats to advance the derivatives bill, although he said he might still vote against the wider bill on the Senate floor.

Any proposal that clears the Senate would have to be reconciled with an overhaul passed by the House of Representatives last December.

Lincoln shocked markets last week by proposing banks participating in the swaps market should give up protections like access to the Federal Reserve discount window -- which could force them to sell off swaps trading desks.

Derivatives, which are based on underlying assets like bonds or commodities, have been blamed for exacerbating the credit crisis and contributing to the sort of run on assets that downed Lehman Brothers.

Swaps transactions also helped trigger insurer American International Group's massive government bailout.

The bill would require most derivatives to trade on exchanges and pass through clearing houses.

The head of the Securities and Exchange Commission criticized the bill for removing certain securities options, exchange-traded funds and securities forwards from the agency's oversight.

Lincoln's bill is the latest salvo in a barrage of tough measures meant to crack down on Wall Street for the excessive risk-taking that precipitated the recession.

A congressional panel investigating the origins of the crisis said it has issued a subpoena to Moody's Corp, a major credit rating agency, because it has not complied with voluntary requests for information.

(Additional reporting by Christopher Doering, Roberta Rampton and David Lawder; editing by Carol Bishopric)