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Senate Strikes Deal on Failing Financial Firms

Source: WSJ

Posted on 06 May 2010

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Senators overwhelmingly approved a plan to give the government broad new powers to break up failing financial companies.

The 93-5 vote marks the first major bipartisan agreement on the Senate floor regarding any part of a White House effort to revamp Wall Street rules in the wake of the 2008 financial crisis.

Wednesday's vote on the amendment, written by Sens. Christopher Dodd (D., Conn.) and Richard Shelby (R., Ala.), would create new government tools to break up faltering companies so taxpayer money wouldn't be sunk into them, as was done to prevent a wider contagion during the recent meltdown.

Senate Majority Leader Harry Reid hefts a stack of petitions from citizens asking for financial industry reform.

Lawmakers from both parties argue that the financial crisis was made worse because the government didn't have the power to break up Lehman Brothers or American International Group Inc. in 2008, leaving officials to choose between the unpredictable effects of their collapse or a taxpayer bailout.

Differences between Democrats and Republicans on the more sweeping effort to rewrite financial-market rules remain, notably over the treatment of derivatives and consumer protections. Debate on the broader bill is expected to stretch at least another week, and it promises to be quite contentious.

"While this progress is encouraging, the overall legislation still has a long way to go to gain my support," Mr. Shelby said.

Still, Wednesday's move could clear the way for a bipartisan vote later this month to secure passage of the bill.

Democrats offered a concession to get Republican support, agreeing to scrap a $50 billion emergency pool—to be funded by financial firms—that would have been used to liquidate failing companies. Instead, any costs incurred by the government in winding down a damaged firm would be recouped from the financial-services industry and creditors of the insolvent entity. The revision would also give the Federal Deposit Insurance Corp. the power to run the dissolution of failed companies and force creditors to take a partial loss in certain cases, among other things.

Republicans worried that the existence of the emergency fund would encourage investors and banks to take unreasonable risks, in the knowledge the government could step in and cover their mistakes, while assuming taxpayers would cover any costs beyond the $50 billion. Who's Who in the Senate Financial Overhaul

Under the amendment approved Wednesday, regulators would also have to seek congressional approval before they could provide debt guarantees to firms, and payments to a firm's creditors could be clawed back if the government deemed it necessary. Management and directors of failed financial-services firms could also be barred from working again in the industry.

"These measures will prevent large failing firms from holding our country hostage," Mr. Dodd said.

Separately, lawmakers agreed to an amendment by Sen. Barbara Boxer (D., Calif.) that would explicitly prohibit taxpayer dollars from being used to prop up failing firms.

If the Senate passes the broader bill, differences between that chamber's version and one passed by the House in December will have to be reconciled before it can be sent to the White House for enactment.

Lawmakers are expected to consider several other major amendments in the next few days. Some could force commercial banks and investment banks to split apart, re-establishing some of the Depression-era rules against financial conglomerates.

Another amendment, by Sen. Bernie Sanders (I., Vt.), would require audits of the Federal Reserve's emergency-lending operations. The Fed and Treasury Department are pushing hard to prevent this provision's inclusion in the broader bill.

On Wednesday, Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.) clarified a controversial provision on derivatives she has advanced. Under an early reading, many in Congress and on Wall Street thought her measure would force banks to spin off their derivatives operations. In fact, it would allow them to retain these businesses as separately capitalized affiliates.

Wall Street still is expected to fight hard to have the provision stripped from the bill, as it could cost firms billions of dollars in capital. But the clarification could make it easier for other lawmakers to support the provision, because it doesn't force banks to divest themselves of these businesses outright.

If Democrats don't lose any member of their caucus, they still would need at least one GOP vote to pass the full package.