Senate reaches pact on "too big to fail"

WASHINGTON (Reuters) - Key lawmakers reached agreement on Tuesday on dismantling large financial firms that get into trouble, as momentum accelerated in the Senate toward passage of a landmark Wall Street reform bill.

Onlookers gather outside the historic Federal Hall where President Barack Obama is speaking in the heart of Wall Street in New York September 14, 2009. REUTERS/Larry Downing

The agreement came amid several other, smaller adjustments aimed at building support for the main reform bill, signaling that Senate Democrats may be able to find the votes to approve their legislation soon, possibly by mid-May.

Senate Democratic Leader Harry Reid said on the floor he hoped the Senate would finish its work as early as next week, which would give Democrats a significant legislative victory ahead of the November congressional elections.

The first votes on amendments to the 1,600-page bill were slated for later on Tuesday, leading off with one from Democratic Senator Barbara Boxer that would add language saying that taxpayer funds could not be used again to bail out financial institutions. It looked likely to gain wide support.


A more controversial proposal, to force banks out of the swap-trading business, appeared to be losing steam. Swap instruments are bets on the direction of interest rates, or the likelihood of a borrower defaulting on its debts.

Drafted by Senate Agriculture Committee Chairman Blanche Lincoln, the proposal would require banks to spin off their swap-trading desks. Banks that get substantial profits from the unregulated, $450 trillion over-the-counter derivatives market, including swaps, oppose the Lincoln provision.

An influential Republican lawmaker said on Tuesday that he expects the provision will be dropped. “One way or another it will go away,” Republican Senator Bob Corker told reporters.

“I know Treasury doesn’t support it. I know the FDIC doesn’t support it. I don’t think the Obama administration wants to support it,” Corker said. “It needs to be fixed.”

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Obama administration officials have declined to publicly endorse the Lincoln provision. Federal Deposit Insurance Corp Chairman Sheila Bair over the weekend criticized it, saying it would drive swaps trading into less regulated venues.

In a White House blog post on Tuesday, the provision was conspicuously absent from a list of issues that the Obama administration said bank lobbyists were focused on.

Overhauling financial regulation is a top priority for President Barack Obama, who said on Tuesday that proposed reforms were “in no way designed to hamstring businesses.”

On another issue, Democratic Senator Ben Nelson told Reuters the bill will probably be modified to exempt existing derivatives contracts from greater collateral requirements. “I think it is being resolved right now,” he said.

The move could benefit Berkshire Hathaway Inc, billionaire Warren Buffett’s investment powerhouse.

Berkshire, based in Nelson’s home state of Nebraska, has objected to the current version of the bill because the firm would be required to post greater collateral on billions of dollars’ worth of derivatives contracts.


Tuesday’s Dodd-Shelby accord on ‘too big to fail’ firms was expected to include dropping a proposed $50 billion fund, paid into by large financial firms, to help cover costs of dismantling firms when they get into trouble, aides said.

The fund has been a point of contention between Democrats and Republicans, who complained it would institutionalize taxpayer bailouts. Democrats disputed that and pointed out that the fund initially was, at least partly, a Republican idea.

Regardless of its origin, the ‘too big to fail’ issue will be taken off the table by the Dodd-Shelby agreement, reducing the Republicans’ lines of attack on the Democratic bill, which they have been trying to weaken and delay for months along with an army of lobbyists for banks and financial firms.

“There are clearly many people in this chamber who want to do the work of Wall Street. Wall Street is their benefactor,” said Democratic Senator Sherrod Brown on the Senate floor.

But Treasury Secretary Timothy Geithner on Tuesday urged Congress to support an administration proposal to charge financial institutions a tax to pay for bailouts if they get in trouble in the future.

“We anticipate that our fee would raise about $90 billion over 10 years and believe that it should stay in place longer, if necessary” to ensure that the cost of the bailouts undertaken in 2008 by the Bush administration is fully recouped, he told the Senate Finance Committee.

Committee Chairman Max Baucus said the bank tax proposal would likely pass Congress eventually, but he said it would not likely be added to the wider reform bill before the Senate.

While the economy was still deep in recession in December, the House of Representatives approved a bill that embraced many of the Obama administration’s ideas for tougher oversight and stricter limits on banks and capital markets. Whatever the Senate produces will have to be merged with the House bill. Analysts said a final piece of legislation could be on Obama’s desk to be signed into law by mid-year.

The Senate was expected to approve a handful of noncontroversial amendments on Tuesday afternoon.

The European Union is pursuing its own agenda for reform as well.

Additional reporting by Tabassum Zakaria, Karey Wutkowski and David Morgan