WRAPUP 3-U.S. Senate backs plan attacking 'too big to fail'

* Dodd-Shelby 'orderly liquidation' plan approved 93-5

* Plan drops $50 bln fund from earlier proposals

* Sen Reid: Republicans "making love" to Wall Street

* Sen Chambliss: GOP wants banks to stay in swaps business

(Recasts with Dodd-Shelby, Boxer amendments; adds Gibbs, Chambliss comments)

By Kevin Drawbaugh and Andy Sullivan

WASHINGTON, May 5 (Reuters) - The U.S. Senate made progress on a financial regulation reform bill on Wednesday, approving two amendments aimed at preventing a repeat of the massive taxpayer bailouts of Wall Street in 2008.

By overwhelming votes, the amendments were added to a broader reform bill, along with two other non-controversial measures, but more troublesome issues loomed ahead dealing with consumer protection and regulation of derivatives markets.

The Senate voted 93-5 for a plan that would set up a new government protocol for seizing and dismantling large financial firms that are in distress.

The meaasure seeks a middle path between the widely criticised 2008 bailouts of firms such as AIG (AIG.N) and the bankruptcy of Lehman Brothers LEHMQ.PK.

Under the plan, the Federal Deposit Insurance Corp would manage an "orderly liquidation" process for troubled firms whose collapse would pose risks to the banking system.

The plan excludes a $50 billion liquidation fund previously proposed, opting instead to cover the costs of liquidations from asset sales and, in case of shortfalls, from fees assessed against other large firms.

Lawmakers said the plan, if enacted into law, would help end the notion that some firms have become "too big to fail."

It was added to the broader reform bill after Democratic Senator Christopher Dodd and Republican Senator Richard Shelby agreed to it. They are the chief negotiators in the Senate on the continuing Wall Street reform effort.

(For a Factbox on the Dodd-Shelby agreement, double-click on [ID:nN05191316])

White House spokesman Robert Gibbs said the Dodd-Shelby measure appeared to preserve one of President Barack Obama's core principles, "and that is that never again should the taxpayers of this country be on the hook for the reckless irresponsibility of big banks or Wall Street."

Obama is pushing for regulatory reform to prevent a recurrence of the 2008-09 financial crisis that paralyzed markets and tipped the economy into a deep recession. Similar efforts are under way in the European Union.

The Senate also approved, by a 96-1 vote, an amendment from Democratic Senator Barbara Boxer specifying that taxpayer funds could not be used to bail out troubled firms.

FINAL PASSAGE EXPECTED IN WEEKS

Both the Dodd-Shelby and Boxer amendments moved the Senate closer to final passage of the bill, which analysts expect to come in a matter of weeks, but numerous additional hurdles remain.

After the votes on the Dodd-Shelby and Boxer amendments, Republicans moved to bring up their own version of legislation to establish a new financial consumer watchdog. Details of their plan were unclear.

The U.S. House of Representatives approved a reform bill in December that embraced many of the proposals unveiled by the president in mid-2009. Whatever the Senate passes would have to be merged with the House bill to produce final legislation.

If Democrats can enact reform into law, they would score an important victory going into November's elections.

Republicans have worked for months to weaken and delay the legislation, along with Wall Street and banking interests whose profits are threatened by reform.

"We expect that the Dodd bill will pass some time in the next few weeks," said Brian Gardner, a policy analyst at investment firm Keefe Bruyette & Woods.

More than 80 amendments to the bill had been filed as of late Wednesday, risking gridlock on the Senate floor and challenging the Democratic leadership to work out a procedural plan for debate to proceed under tight time constraints. (For a Factbox on key amendments to the reform bill, double-click on [ID:nN04109024])

Senate Democratic Leader Harry Reid wants to finish the bill by the end of next week, but could be overly ambitious.

Reid complained on Wednesday that Republicans were still delaying action nearly a week after they agreed to debate.

"The Republicans are having trouble determining how they're going to continue making love to Wall Street," he said at a news conference.

CONSUMER WATCHDOG AT ISSUE

Disagreement continues between Shelby and Dodd on his proposal to set up a new financial consumer protection watchdog inside the Federal Reserve. Republicans say it would be an overreach of government and want to check the watchdog's power, while some Democrats want to make it even stronger.

Heated debate also continues on regulating the $450 trillion over-the-counter derivatives market, including swaps.

Swaps are derivative contracts that allow financiers to wager on the direction of interest rates, foreign currencies or -- in the case of a type known as credit default swaps -- the likelihood of a borrower defaulting on its debts.

Senate Agriculture Committee Chairman Blanche Lincoln has proposed that banks be required to spin off their swap-trading desks to get them out of that risky business. But that idea appeared to be losing support.

Wall Street giants, which rake in huge profits from OTC derivatives trading -- such as Goldman Sachs (GS.N), JPMorgan Chase (JPM.N), Citigroup (C.N), Bank of America (BAC.N) and Morgan Stanley (MS.N) -- oppose the Lincoln provision.

The Obama administration has declined to endorse the provision and FDIC Chairman Sheila Bair has criticized it.

Banks wold be allowed to keep their swaps desks under a softened set of regulations proposed by Republicans on Wednesday. The proposal could lead to a bruising Senate floor fight as Democrats advance the tougher Lincoln rules.

"It's something we've been working on as Republicans, and there's pretty general agreement on our side," Republican Saxby Chambliss, one of the amendment's authors, told Reuters.

(For a full story on Chambliss' comments, double-click on [ID:nWBT013904]) (For a Factbox on the major provisions of the Senate bill, double-click on [ID:nN26197405]) (For a Factbox on Republicans counterproposals, double-click on [ID:nN27140788]) (For a Factbox on the key players in reshaping U.S. financial rules, double-click on [ID:nN26201371])