Democrats dump bank tax from financial reform bill

House Financial Services Committee Chairman Barney Frank (D-MA) (C) talks with a group including Ranking Member Spencer Bachus (R-AL) (L) during a recess from a committee conference on Wall Street reform to hammer out sweeping changes in financial regulation legislation on Capitol Hill in Washington June 24, 2010.

WASHINGTON (Reuters) - Democrats on Tuesday stripped out a controversial tax from their landmark financial reform bill in a scramble to win the votes needed to pass it through Congress.

Democrats hoped the change would draw enough moderate Republicans to allow them to pass the sweeping overhaul through both chambers of Congress and send it to President Barack Obama to sign into law by July 4.

Though a supposedly final version of the bill had been hammered out last week, Democrats called a fresh negotiating session after support for the bill appeared to be waning.

Heeding the concerns of moderate Senate Republicans, they axed a $17.9 billion tax on large financial institutions that was added to cover the bill's costs in the wee hours on Friday as lawmakers wrapped up an all-night bargaining session.

Their new plan would cover most of the bill's costs by shutting down the government's $700 billion bank bailout fund ahead of schedule. It also would raise the amount that banks must pay to insure their customer's deposits.

"I'm prepared to make some compromises to get this very important bill through," said Democratic Representative Barney Frank, who has overseen the process.

Democrats hope they can still meet their July 4 timetable. Leaders in the House of Representatives set the stage for a quick vote on Wednesday, while their counterparts in the Senate hoped to act by the end of the week.

But their plans may be complicated by the death of Democratic Senator Robert Byrd. His absence leaves them one vote short of the 60 needed to clear a Republican procedural hurdle in the 100-seat chamber.

Furthermore, Byrd's body was scheduled to lie in state on the Senate floor on Thursday, delaying any legislative action.

Analysts said while that timetable may slip, they were confident the bill would eventually become law.

"Not a question of if, but when," Concept Capital analyst Chris Krueger said in an e-mail.

The bill, which aims to prevent a repeat of the 2007-2009 financial crisis that shook the global economy, is a top priority for Obama and would give him and fellow Democrats a big legislative win ahead of November congressional elections.

RETIRING TARP EARLY

It would force banks to reduce, but not cease, risky trading and investing, set up a new government process for liquidating troubled financial firms and establish a new consumer-protection bureau. It would saddle financial firms with a host of new regulations and reduce their profits.

Wall Street and many Republicans have tried to delay or water down the bill, but it has grown stronger during its yearlong journey though Congress as Democrats have ridden a wave of public disgust at an industry that has awarded itself fat paydays while the rest of the country struggles with high unemployment.

A handful of moderate Republican senators, mindful of the measure's popularity, managed to win concessions in return for helping the Democrats advance it, but several threatened to withdraw their support over the bank tax.

The new funding mechanism would shut down the politically unpopular Troubled Asset Relief Program, which was set up in 2008 to buy toxic assets from banks but was instead used to bail out teetering Wall Street giants and Detroit automakers.

The program is currently scheduled to expire in October, except for companies like General Motors that still rely on it.

Shutting it down early would save $11 billion, Democrats said.

The bill would raise another $5.7 billion by raising the fees that banks pay to the Federal Deposit Insurance Corp to insure their deposits from 1.15 percent to 1.35 percent.

Republicans said the new approach was simply a budgeting trick. The repaid bailout money should be used to pay down the deficit, they said.

"This is fraud on the American taxpayer, that's clear and simple," Republican Senator Judd Gregg said.

Democrats countered that they had to drop their original funding mechanism, which would have cost financial firms at least $50 billion, because of Republican objections.

(Additional reporting by Kim Dixon, Corbett Daly, Susan Cornwell, David Morgan, Richard Cowan and Andy Sullivan in Washington and Joe Rauch in Charlotte; writing by Andy Sullivan; editing by Anthony Boadle)