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WASHINGTON (AP) — House and Senate negotiators struggled to meet a self-imposed Thursday deadline to wrap up a massive financial regulation bill, with two major sticking points standing in the way of completing legislation that has been one year in the making.
Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, huddled with fellow senators to resolve disputes over how far to go in restricting banks from engaging in securities deals.
Aiming to break a deadlock, Dodd proposed limits on the ability of banks to carry out high-risk trades or invest in hedge funds and private equity funds.
Dodd and House Democrats were still holding talks on whether to force the largest bank holding companies to spin off their business in complex derivatives into separate subsidiaries.
Key votes, including those of Sens. Blanche Lincoln, D-Ark., and Scott Brown, R-Mass., hung on the outcome of the talks.
The House-Senate panel has been working into the evening over the past two weeks to resolve differences between the two bills. The legislation aims to avoid a recurrences of the 2008 financial meltdown by requiring a regulatory council to look for threats to the system, by creating a consumer protection bureau, forcing large failing firms to liquidate and policing financial instruments that have been largely unregulated.
By Thursday, Dodd was beginning to voice frustration with the difficulty of finding agreement to secure the 60 votes he needs to pass the bill in the Senate.
"At some point people have to let me know whether or not they're actually going to be there," Dodd said. "I can't sort of wait and hope they're going to be there. I've got to produce results and I have to produce the votes."
After hours of private negotiations, Dodd appeared to have found some common ground on banking trade limits. The Obama administration has pushed for the restrictions on bank trades, a proposal especially championed by former Federal Reserve Chairman Paul Volcker.
Dodd's proposal would permit banks to carry out trades designed to hedge against market fluctuations. The proposal also would bar banks from betting against their clients on certain investments deals.
Bank holding companies also could invest in hedge funds and private equity funds but would be limited to investing no more than 3 percent of the capital in the hedge fund or private equity fund. There are no such conditions on banks now.
Banks were adamantly opposed to the restrictions and sought the exception for hedge funds and private equity funds. Volcker has urged lawmaker not to insert exemptions in the rule.
House and Senate negotiators were checking off agreements on smaller differences between the bills.
House and Senate negotiators agreed on new standards for what banks keep in reserve to protect against losses. At issue was whether banks should continue to use certain hybrid securities as capital in their reserves.
Under the agreement, bank holding companies with assets less than $15 billion would be allowed to grandfather in any of those securities already in their reserves. Banks above that size would have to replace their reserves with other liquid assets within five years.
Lawmakers also agreed to require regulators to study whether stock brokers should be more accountable for the advice they give clients. The deal would require the Securities and Exchange Commission to conduct a study on the need for such standards and instructs the SEC to consider the results of the study in determining whether to tighten existing rules. The House had wanted brokers to face the same rules that govern investment advisers.
In one side skirmish, big banks mounted a last-ditch lobbying effort to kill a House proposal to add ailing mortgage giants Fannie Mae and Freddie Mac to the type of firms that would be subject to liquidation at financial industry expense.
House negotiators inserted the provision last week to a massive overhaul of financial regulations at the insistence of Republican lawmakers. Senate negotiators have moved to reject it and will likely succeed.
The government took over Fannie and Freddie in 2008 after they suffered heavy loan losses in the housing crash. Their collapse has cost $145 billion and the Obama administration has pledged to cover unlimited Fannie and Freddie losses through 2012, lifting an earlier cap of $400 billion.
Banks now fear getting stuck with that cost.
"We have since heard a great deal of distress from our major financial institutions who feel this might put them on the hook for this," Rep. Barney Frank, D-Mass., the chairman of the joint conference committee, said Thursday. "I don't believe that was the intent, but I can't be sure it's not the impact."
Republicans took delight in pointing out that Democrats were voicing sympathy for the banks.
"If you're going to defend mega-financial institutions who called you this week and told you don't put this on us, then go ahead and do it," said Rep. Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee. "You want to put it on the American people? Do it. Now is the moment of truth and the ball is in your court."