* No agreement yet on financial reform - Dodd spokeswoman
* White House official reaffirms agency independence is key
* Dodd, Corker discuss Fed as watchdog compromise - sources
* Shelby and Dodd have proposed other possibilities
* Watchdog's rule-writing power still a key to dispute
(Adds Dodd aide, White House official comments, background)
By Kevin Drawbaugh and Rachelle Younglai
WASHINGTON, March 1 Two key senators were
discussing making the Federal Reserve the home of a proposed
U.S. government watchdog office for consumers that has been the
main obstacle to bipartisan agreement on financial reform, said
sources familiar with Senate discussions on Monday.
The Fed option, as unlikely as it may seem given recently
sharp criticism of the central bank's past performance as a
consumer protection regulator, could constitute a breakthrough
in a stubborn dispute that has frustrated lawmakers.
But a spokeswoman for Senate Banking Committee Chairman
Christopher Dodd, who is leading financial reform negotiations
for the Democrats, cautioned that no deal is at hand yet.
"Senator Dodd is keeping members informed on how things are
progressing as he has throughout this process," said Dodd
spokeswoman Kirstin Brost. "We do not have an agreement yet.
He hopes to have a consensus bill in the coming days."
President Barack Obama first proposed in mid-2009 that an
independent Consumer Financial Protection Agency (CFPA) be
created as part of a sweeping package of financial reforms.
But Republicans and bank lobbyists have resisted that
proposal and Dodd has been seeking a compromise that will win
enough Republican support to move a financial reform bill out
of the banking committee and onto the Senate floor.
Dodd and Republican Senator Bob Corker, a first-term
committee member, were talking about the Fed option, said
sources close to the committee's ongoing negotiations.
Responding to reports about a Fed option being eyed, an
administration official who asked not to be named said:
"The president is strongly committed to an effective and
independent consumer agency, with real accountability for
setting and enforcing clear rules of the road in the financial
Other options on the table in the Senate in recent days
have included putting a consumer watchdog in the Federal
Deposit Insurance Corp. or in the Treasury Department.
Senator Richard Shelby, the committee's top Republican, has
proposed making the watchdog a division of the FDIC, with some
rule-writing power and a director who is appointed by the
president and confirmed by the Senate, documents showed.
DODD PROPOSED TREASURY OPTION
Dodd himself has proposed putting the watchdog in the
Treasury Department, but Republicans have rejected that idea.
If Dodd were to settle on the Fed option, it would mark a
dramatic turnaround for him.
In November he released a draft financial reform proposal
that called for stripping the Fed of its consumer protection
and bank supervision duties, leaving it focused on its core
responsibility of managing the nation's monetary policy.
When he released the draft, Dodd said, "We saw over the
last number of years when (the Fed) took on consumer protection
responsibilities and the regulation of bank holding companies,
it was an abysmal failure."
The urgent discussions swirling around the issue showed
that negotiations among Shelby, Dodd and Corker are in full
swing, but still have some ground to cover.
After marathon talks over the weekend, lawmakers remained
snagged on how much rule-writing power the new watchdog should
have, no matter where it is located within the government.
"We are at the start of a political dance between Dodd and
Shelby. We expect more draft language -- and more headlines --
throughout the week," said financial services policy analyst
Jaret Seiberg at investment advisory firm Concept Capital.
Tightening bank and capital market oversight is one of
Obama's top priorities. Nearly a year and a half since a severe
financial crisis tipped the U.S. economy into its worst
recession in decades, financial regulation has changed little
in the face of stiff resistance from banks and Wall Street.
But lawmakers in both parties generally concur that reforms
are needed and analysts expect legislation this year.
CFPA THREATENS PROFITS
Obama's proposed CFPA would threaten the profits of banks,
mortgage lenders, credit card companies and other businesses.
Republicans have said it would also unwisely divorce
consumer protection laws from bank supervision.
But the CFPA is backed by many Democrats who see it as
needed to shield Americans from deceptive financial products
such as the subprime mortgages that played such a key role in
inflating the real estate bubble behind the crisis.
The U.S. House of Representatives approved a sweeping
financial reform bill in December that included Obama's CFPA.
Consumer activists were dismayed by the Senate debate,
which they saw as leading to a watering down of reforms.
"We're holding out hope, but the White House seems to be
losing the high ground as Congress waters down their proposal
day by day," said John Taylor, president of the National
Community Reinvestment Coalition, a public interest group.
(Reporting by Kevin Drawbaugh and Rachelle Younglai;
Editing by Richard Chang)