By Brady Dennis
Monday, April 26, 2010; A01
Senators will face a crucial test vote Monday that could clear the way for debate on far-reaching legislation to overhaul the nation's financial regulatory system -- or end in a partisan standoff -- as Wall Street once again takes center stage on Capitol Hill.
Elsewhere, lawmakers will be preparing to condemn the alleged sins of Wall Street's past and also wrestling over how to prevent such excesses in the future. Top executives from Goldman Sachs, beset by charges that the bank misled its clients by selling them mortgage investments secretly designed to fail, will face questions Tuesday about how the firm profited from betting against the U.S. housing market.
Senate Republicans said Sunday they plan to block efforts to move forward with an overhaul bill unless Democrats alter central elements of the legislation. Meanwhile, Democrats and Obama administration officials spent much of the day finalizing strict new rules to rein in the huge derivatives trade, including measures that could threaten profits at some of the biggest banks.
Despite optimism on both sides that a bipartisan compromise will emerge, the lack of a deal has increased the chances of at least a temporary showdown between the two parties.
Democrats need support from at least one Republican to reach the 60 votes required to overcome a filibuster and proceed with formal debate on the bill. Republicans angling for changes do not appear ready to relinquish that bargaining chip.
"It's my expectation that we will not go forward with this partisan bill tomorrow," Senate Minority Leader Mitch McConnell (R-Ky.) said on "Fox News Sunday." "It's not ready yet."
The lead GOP negotiator on the bill carried that same message to NBC's "Meet the Press."
"I think that nothing happens between now and tomorrow, that the Democrats will not get cloture," Sen. Richard C. Shelby (Ala.) said in an appearance alongside Sen. Christopher J. Dodd (D-Conn.), chairman of the banking committee.
Republican and Democratic aides said they expect the Monday vote to fail unless at least one GOP senator supports the measure. Not that either side would mind terribly: Democrats could say the GOP is standing in the way of reform, and Republicans could say the bill's flaws would cause the economy more harm than good.
Still, the measure's long-term prospects seem promising. Aides on both sides said they expect it to remain in limbo until Shelby and Dodd strike a deal or end talks. Senate Majority Leader Harry M. Reid (D-Nev.) could then move to revive the bill, possibly within days, although negotiations could extend longer.
Dodd and Shelby exhibited Sunday the differing tones that have epitomized their months of on-again, off-again negotiations.
Dodd was animated, clearly eager to complete the legislation. "We need to move forward," he said. "Tomorrow, if another crisis occurred in the country, we're no better off than we were in the fall of 2008."
Shelby, soft-spoken and stoic, appeared willing to hold out in hopes of winning concessions on elements of the bill. "This is a very complicated piece of legislation," he said. "It's very tedious. . . . I think we're closer than we've ever been. Will we get a bill by tomorrow? I doubt it."
Both men repeated assurances that "we're getting there," saying their staffs were continuing to work out details. But it was unclear how far they remained from the finish line. Asked whether the remaining differences represented a matter of inches, Shelby said, "Inches sometimes are miles."
Dodd's 1,400-page bill, which recently passed the banking committee on a party-line vote, would, among other things, create a bureau housed within the Federal Reserve to protect consumers against abuses in mortgages and other loans. It would also set up a council of regulators to monitor for risks to the financial system, establish oversight of the vast derivatives market and give the government power to wind down large, troubled financial firms.
Republicans have recently focused most of their criticism on a proposed $50 billion "resolution fund" that would help cover the costs of dealing with a major financial firm's failure. Although the financial industry would pay for the fund, Republicans have argued that it would allow regulators to treat creditors of failing firms unevenly and could leave the door open to bailouts.
The two parties must find common ground over the "Volcker rule," a proposal that would ban Wall Street banks from engaging in certain investment activities, such as owning hedge funds. They also have lingering disagreements about the details of the proposed consumer regulator.
Republicans have also objected to measures that would roll back the doctrine of preemption, which allows big banks to answer solely to federal regulators. Dodd and the Obama administration want states to have the authority to press beyond federal laws, arguing that preemption has prevented state regulators from quelling obvious abuses.
The Senate banking and agriculture committees have passed legislation that would impose new rules on the market for financial derivatives -- contracts that allow financial traders to bet on the direction of stocks, commodities and other assets.
Staff members of both committees worked with administration officials through the weekend to harmonize the two bills, and people familiar with the talks said the larger overhaul package would include most provisions put forth by the agriculture committee and its chairman, Blanche Lincoln (D-Ark.).
"Basically, it will be the base language" for derivatives oversight in Dodd's bill, a source familiar with the negotiations said Sunday, adding that the legislation would include "the majority" of the provisions passed by the agriculture committee.
That is significant, because Lincoln's bill could dramatically reshape several critical markets and deprive large financial firms of a major source of revenue. The source said a controversial provision to ban big Wall Street banks from trading in derivatives would remain, despite initial objections from administration officials.
Democrats view the effort to bring transparency and accountability to the $600 trillion derivatives market as an area in which they might gain Republican votes for the overall legislation.
Sen. Olympia J. Snowe (R-Maine) joined Democratic colleagues last week in calling for "comprehensive, strong derivatives reform," and one Republican, Sen. Charles E. Grassley (Iowa), voted in favor of advancing the derivatives legislation out of the agriculture committee last week. That underscores the challenge GOP leaders face in trying to keep all 41 Republican senators united against Dodd's bill as they try to shape key provisions.
Lawmakers on both sides are acutely aware of the widespread anti-Wall Street backlash. On Sunday, officials seized on that sentiment, saying the recent fraud charges against Goldman Sachs highlight the need for new regulations, even as they declined to comment specifically on the recent case brought by the Securities and Exchange Commission.
"From my perspective and the perspective of a lot of people in America, we've got to end, once and for all, the casino atmosphere of Wall Street, where they are gambling, basically, on synthetic ideas and so forth," Shelby said on NBC.
Speaking on CBS's "Face the Nation," Obama's chief economic adviser, Lawrence H. Summers, said the Goldman case shows the "very, very important" need for meaningful financial reforms.
Summers said: "This underscores what is at the center of the president's vision here: the importance of transparency; the importance of things being in the open; the importance of it being known who's in a position to benefit from what; who's got a stake in success; who's got a stake in failure."
Goldman chief executive Lloyd C. Blankfein and fellow executives are scheduled to testify Tuesday before the Senate Permanent Subcommittee on Investigations. The panel released e-mails over the weekend showing Goldman executives in 2007 celebrating the windfall they stood to make from betting housing prices would fall.
Committee Chairman Carl M. Levin (D-Mich.) suggested that Goldman's actions were indicative of an investment-bank culture that often bet against the very products it sold and benefited at the expense of clients.
Staff writer Shailagh Murray contributed to this report.