Financial regulation deal is in works; Senate bill expected soon Banking panel's leaders resolve key differences

The chances that the Senate would produce bipartisan financial reform legislation seemed to grow longer with each passing minute at the mid-November hearing at which Sen. Richard C. Shelby (R-Ala.) read 2,600 words of scornful disapproval for the draft bill circulated by Sen. Christopher J. Dodd (D-Conn.).

As Dodd jokingly thanked Shelby for his support, the differences between the two men appeared vast and fundamental.

That scene made for a striking contrast with Wednesday's announcement by the two senators, who serve as chairman and ranking member of the banking committee, that they have resolved key differences and hope to complete a compromise by the end of the Senate's winter vacation.

While both sides cautioned that a deal remained far from certain, political analysts said they were not surprised that Dodd and Shelby had returned to the bargaining table, even amid the partisan rancor of the simultaneous debate over health-care reform.

"There is a political imperative on both sides of the aisle to get a financial reform bill done before the election" in the fall, said Jaret Seiberg of Washington Research Group. "This is about incumbents being able to tell their constituents that they are not going to allow another financial crisis."

President Obama declared financial reform one of his major legislative priorities this summer as he unveiled a package of proposals that would effect the greatest increase in federal oversight of the financial industry since the Great Depression. His administration pushed Congress to take action by the end of the year, and the House passed a bill containing most of the president's proposals earlier this month.

Dodd, who is guiding reform legislation through the Senate, initially said he also planned to produce a bill this year. But Dodd and other Democrats decided not to adopt the administration's proposals on key issues, and they entered into time-consuming negotiations with Republicans. The House bill was passed without any support from the minority party, but that is a more difficult battle in the Senate,

Aides to both parties say that senators would prefer to find common ground. The poisoned atmosphere of the final health-care debates even prompted Dodd to recently seek out Minority Leader Mitch McConnell (R-Ky.) on the Senate floor to emphasize that he was serious about working across party lines on financial reform.

"Our country needs financial regulatory reform and we are committed to working together on legislation to create a sound regulatory structure," Dodd and Shelby said in a joint statement issued Wednesday.

That commitment to bipartisanship appeared to break down in November when Dodd and Shelby suspended talks over Shelby's opposition to creating a new agency devoted to protecting consumers from abuse by lenders. Dodd views the agency as a key reform, while Shelby believes that keeping consumers safe and banks healthy should be handled by the same agency so that the two priorities remain in balance.

Dodd circulated draft legislation among Democrats, but not even his own party was lined up behind him. At the hearing at which Shelby aired his opposition, several moderate Democrats also expressed concerns about the powers of the new consumer agency, along with other elements of the bill.

Dodd and Shelby decided to resume talks, splitting the major issues among four bipartisan pairs of senators.

The two men kept for themselves the questions of how to safeguard consumers and banks. Dodd and Shelby have declined to comment on the details of their talks, but one possible compromise favored by moderates and only narrowly defeated in the House would create a consumer agency to write rules that would be enforced by banking regulators.

Dodd and Shelby also are negotiating an overhaul of banking regulation, now divided among four federal agencies. The administration proposed eliminating one agency, the Office of Thrift Supervision. Dodd also wants to strip regulatory responsibilities from the Federal Reserve and the Federal Deposit Insurance Corp., creating a single banking regulator. Congressional sources say Shelby favors stripping the Fed's bank regulatory powers, but giving its responsibilities to the FDIC, preserving a separate federal regulator for banks with state charters.

Meanwhile, Sens. Mark Warner (D-Va.) and Bob Corker (R-Tenn.) are discussing the best system for shutting down troubled financial companies. During the latest financial crisis, the government was forced to choose between letting firms fail abruptly, as it did with the troubled investment bank Lehman Brothers, or offering indefinite life support, as it is doing with American International Group. There is broad support for a system to slowly unwind failing companies, as the FDIC does with failed banks.

Sens. Charles E. Schumer (D-N.Y.) and Michael D. Crapo (R-Idaho) are negotiating the government's role in setting limits on executive compensation and corporate governance. Sens. Jack Reed (D-R.I.) and Judd Gregg (R-N.H.) are discussing the regulation of derivatives and appropriate oversight of the companies that assign credit ratings.

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