WASHINGTON U.S. President Barack Obama vowed on Friday to veto any financial reform bill that is too soft on the derivatives market, while all 41 Republicans in the Senate lined up against a bill being pushed by Democrats.
As the debate in Washington on tighter oversight of banks and capital markets intensified, regulators charged Wall Street giant Goldman Sachs with fraud linked to subprime mortgages, driving bank shares and the broader stock market lower.
The Senate was expected to vote in coming weeks on a reform bill months in the making. Democrats moved on Friday to put in place one, last unfinished piece -- tough new rules for the unpoliced, $450-trillion over-the-counter derivatives market.
"I will veto legislation that does not bring the derivatives market under control and some sort of regulatory framework that assures that we don't have the same kind of crisis that we've seen in the past," Obama said at a meeting with outside economic advisers.
Democratic Senator Blanche Lincoln, who chairs the agriculture committee, unveiled an aggressive draft bill that she hopes will force banks to choose between serving depositors and speculating in risky derivatives.
Lincoln's measure will be folded into a larger regulation overhaul package backed by Obama and the Democrats as they tackle what they see as industry excesses, a popular cause with voters ahead of congressional elections in November.
Obama said passing the reforms would mean no more taxpayer bailouts like the ones the Bush administration extended in 2008 to AIG, Bank of America, Citigroup, JPMorgan Chase, Morgan Stanley and Goldman.
"I expect that we are going to have a strong reform proposal that demands new accountability from Wall Street and provides new protections for consumers," Obama said.
"This is reform that will force banks and financial institutions to pay for bad decisions that they make and not have taxpayers pay for those bad decisions. And that means no more bailouts."
Republicans -- still smarting after Democrats passed healthcare reform without a single Republican vote -- have charged that the Democratic bill would lead to more bailouts.
"We are united in our opposition to the partisan legislation reported by the Senate Banking Committee," said a letter signed by all 41 Republicans in the 100-seat Senate and addressed to its Democratic Leader Harry Reid.
"As currently constructed, this bill allows for endless taxpayer bailouts of Wall Street and establishes new and unlimited regulatory powers that will stifle small businesses and community banks.
In response to the Republicans, Reid said in a statement that strong reform is needed, "not some letter that is intended to delay efforts to hold Wall Street fully accountable."
Senate Banking Committee Chairman Christopher Dodd called the letter "nonsense" and asked Senate Republicans, who have not drafted an alternative reform bill, for their ideas.
The back-and-forth came on the same day that Goldman was charged with fraud by the Securities and Exchange Commission over marketing of a debt product tied to subprime mortgages.
The SEC lawsuit is the biggest crisis in years for Goldman, which emerged from the global financial crisis as Wall Street's most influential bank.
Goldman shares fell as much as 15.6 percent and stock markets weakened on the news.
"This could be the beginning of a period where you have a regulatory cloud over Goldman Sachs, and perhaps even the entire investment banking industry," said Hank Smith, chief investment officer at Haverford Trust Co in Philadelphia.
The industry faces regulatory uncertainty worldwide, with reform efforts also under way in the European Union, where authorities are discussing higher capital standards for banks, and possibly imposing a new bank tax. The idea is to make the banks, not taxpayers, bear the cost of future bailouts.
The G20 group of nations will discuss the issue next week at a meeting in Washington, with the International Monetary Fund making recommendations to G20 finance ministers intent on better coordination of international regulatory standards.
The White House has said repeatedly it will oppose Republican attempts to weaken the Senate reform bill. Republicans have worked closely for months to do just that with lobbyists for the banking industry and Wall Street.
Opinion polls show bankers are deeply unpopular with voters after a severe financial crisis tipped the economy into a deep recession, hammering home values, jobs and retirement plans.
Obama said he expected the drive for reform would take several more weeks, after which the administration would shift its focus to energy and climate change legislation.
(Additional reporting by Ross Colvin, Patricia Zengerle, Christopher Doering, Charles Abbott, and Roberta Rampton, with Jonathan Stempel and Steve Eder in New York; Editing by Eric Walsh)