PREVIEW-Wall St. reform’s final round in U.S. Senate

* WHAT: Final vote on Wall Street reform bill

* WHEN: Possibly this week

* OTC derivatives, ‘Volcker rule’ pivotal to bill

* Preemption of state laws key to consumer protection

By Kevin Drawbaugh

WASHINGTON, May 17 (BestGrowthStock) – The Wall Street reform fight
enters its final stages in the U.S. Senate this week with an
overdue reckoning on three issues that cut to the heart of how,
and for whom, the financial system works.

Although a final vote is expected within days on the White
House’s top domestic priority, lawmakers have yet to settle
disputes on regulating over-the-counter derivatives; curbing
risky trading by banks; and the power of state authorities.

There will need to be resolution on these topics before the
Senate can approve a massive Democratic bill designed to make
the financial system less prone to crises like that of

Analysts say that could occur as soon as Wednesday or
Thursday. Delays could postpone full approval to next week,

Major votes on amendments looked unlikely on Monday or
Tuesday, due to primary elections involving senators Blanche
Lincoln and Arlen Specter, both Democrats. Party leaders were
expected to avoid close votes on controversial measures while
the two were away on the campaign trail.

The bill aims to prevent the kind of financial turmoil that
tipped the U.S. economy into deep recession in 2007, and which
academics say has become more common since a wave of
deregulation in the 1980s.

For President Barack Obama, the stakes are high. He is a
staunch advocate of tighter rules for banks and capital markets
following the crisis, the worst in decades, and the politically
explosive taxpayer bailouts of Wall Street that ensued.

Whatever the Senate produces will have to be merged with a
reform bill approved in December by the U.S. House of
Representatives. The process of putting the two together could
run into late May or June. It will be another opportunity for
changes to the package. Once a final bill is agreed on, it
would then be sent to Obama to be signed.

As drafted now, the bill threatens to constrain the banking
sector’s future profitability for years to come. While it has
become more onerous in recent days from the banks’ point of
view, it still weighs only on the profit outlook and does not
fundamentally change the industry’s business model.

That could change, depending on the outcome of the three
key issues that still have to be decided.


First is what to do about regulating the $600-trillion
over-the-counter derivatives market, now unpoliced by the
government. To its critics, this opaque bazaar of complex swap
contracts can resemble a casino more than an adjunct to
efficient capital allocation. A crackdown is needed, they say.

Defenders of the market say it serves a vital role by
helping corporations manage risks that range from changing jet
fuel prices to foreign currency (Read more about trading foreign currency. fluctuations. Tinkering too
much with it could drive the market deeper into the shadows and
put U.S. businesses at a competitive disadvantage, they say.

A handful of mega-firms dominate the market: Goldman Sachs
(GS.N: ), JPMorgan Chase (JPM.N: ), Citigroup (C.N: ), Morgan Stanley
(MS.N: ), Bank of America (BAC.N: ) and Wells Fargo (WFC.N: ). They
are fighting hard to protect the profits they make from it.

At a minimum, analysts expect much of the market will be
redirected into more visible and accountable channels such as
exchanges, electronic trading platforms and central
clearinghouses. But will the banks be barred from the table?

That’s the big question as the Senate considers a proposal
from Lincoln that would force big banks to separate
swap-trading desks from their main business operations. Bank
lobbyists are pushing for the provision to be dropped.


A second major issue is how to restore at least some of the
firewalls that once shielded deposit-taking banks from the
turbulence of trading and investment banks. Those walls fell
years ago in a spurt of deregulation that unleashed banking’s
worst instincts, according to critics.

The industry says large, diversified banks are needed and
that it would be unrealistic and unwise to break them up or
otherwise tie their hands in a range of markets.

Look for a solution, analysts say, that embraces the gist
of the “Volcker rule,” proposed in January by Obama and White
House economic adviser Paul Volcker. It would bar banks from
doing proprietary trading for their own accounts, get them out
of the hedge fund business and limit their future growth.

The third big issue is the so-called Eliot Spitzer question
— if federal bureaucrats are doing too little to police
banking and finance, should state officials’ get more clout?

The Senate bill drafted by Democrat Christopher Dodd would
give state officials more latitude in enforcing consumer
protection laws involving big banks. Industry lobbyists are
pushing the other way — for more centralized bank consumer
protection power in Washington, and less in state capitals.

The outcome looks uncertain, analysts say, with banks’
future compliance costs in the balance.

The industry took two blows last week. The Senate approved
amendments aimed at curbing credit and debit card fees, and at
shaking up the credit rating agency industry. Both amendments
surprised analysts and threw lobbyists onto the defensive.

(For a Factbox on major U.S. financial regulation reform
proposals, double-click on [ID:nN12218192])

(For a Factbox on key Washington players in the Wall Street
reform fight, double-click on [ID:nN12216372])

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(Editing by Andrew Hay)

(Additional reporting by Andy Sullivan and Charles Abbott)

PREVIEW-Wall St. reform’s final round in U.S. Senate