Financial reform: four sticking points

Although Republicans said Wednesday they will no longer seek to block floor debate in the Senate on financial reform, plenty of disagreement remains. Here are four sticking points.

By , Staff writer

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    Senate Majority Leader Harry Reid of Nev., left, and Senate Banking Committee Chairman Sen. Christopher Dodd, D-Conn., wait in a hallway on Capitol Hill in Washington, Wednesday, before they spoke about financial reform.
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Congressional bargaining over the shape of financial reform isn't over, but it appears to have entered an endgame phase.

With Republicans saying Wednesday that they will no longer seek to block floor debate leading toward a vote on the Senate bill, the stage is set for final maneuvering over the reforms.

The goal, both sides say, is to prevent a repeat of the kind of crisis that rocked US financial markets in 2008 – and ushered in a deep recession. Also, lawmakers of both parties are pledging to end taxpayer bailouts of big banks that fail.

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But when it comes to the specific language of, say, Section 1012, plenty of disagreement remains. (That section spells out powers of a proposed new agency for consumer protection in the arena of financial products.) The floor debate could include a range of amendment proposals from Democrats as well as Republicans on what should be in or out of the mammoth bill.

The battles will reflect industry arm-twisting – based on the leverage of large campaign contributions to both parties – as well as differing political views. But public opinion polls suggest the public wants to see reforms pass.

"I don't want [lobbyists] writing the bill," President Obama said Wednesday in a warning to lawmakers, as a town-meeting crowd cheered in Quincy, Ill.

Here are the reform provisions on which key battles may remain:

Consumer protection. Republicans say they're wary of over-regulating an industry that has brought ATMs and money-market funds, not just a boom in toxic mortgage products. Mr. Obama is among Democrats arguing that more oversight of consumer protection will help industry competition rather than harm it.

Democrats are backing the idea of a new agency, rather than having the Federal Reserve wear multiple hats – keeping tabs on both the financial health of banks and issues like truth in advertising for consumers. Republicans may try to limit the powers of the new agency.

Derivatives. Wall Street reaps big profits from complex products that allow investors to bet on things like bond default risk. Backers of reform say greater oversight and transparency will help protect the banking system from an unforeseen panic in times of stress. But those reforms would also crimp bank profits.

Battles could come over just how tough to get. Billionaire Warren Buffett – who once called derivatives "financial weapons of mass destruction – has been pushing against one provision that would impose new costs on the derivatives portfolio at his firm, Berkshire Hathaway.

A wall between banking and trading. The so-called "Volcker rule," named after the former Federal Reserve chairman who backs it, would ban banks from engaging in proprietary trading of investments. Currently, "proprietary trading" in their own accounts is a key part of the business at many megabanks.

This is one of several ways the bill seeks to reduce risk at firms that play central roles in the financial system. But it's controversial and could stir a battle on the Senate floor.

Bailouts. Senators may tussle over the details of coping with the failure of a systemically important firm, such as the collapse of the investment bank Lehman Brothers in 2008. The Dodd bill called for a $50 billion "orderly liquidation fund" for large firms like Lehman Brothers that may collapse.

Some Republicans have said that setting up such a "bailout fund" in advance of any new crisis would send exactly the wrong message to Wall Street. With or without the fund, both parties agree that the ultimate costs of a firm's failure should be shouldered by the financial industry, not taxpayers.

Related:

Republicans relent, clear financial reform bill for debate

Financial reform: why the GOP strategy is risky

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