Senate opens debate on overhaul

The Senate began debate Thursday on the Democrats' financial-overhaul bill, including a provision to create the first formal regulatory structure for the $605 trillion over-the-counter derivatives market.

Senate Republicans agreed Wednesday to let debate begin on the legislation, which is based on a proposal by President Obama and is aimed at strengthening oversight of Wall Street in response to the worst financial crisis since the Great Depression.

"The status quo, as we all know, is unacceptable," Senate Banking Committee Chairman Christopher J. Dodd (D., Conn.), who offered the legislation, said Thursday as debate began. "We cannot leave the American people vulnerable to the present construct of our financial-regulatory system."

Republicans decided to allow debate after Democrats agreed to change a section of the bill aimed at preventing future bailouts of Wall Street banks similar to the $700 billion rescue Congress approved in 2008 for firms including Citigroup Inc. and American International Group Inc.

Earlier this week, Republicans blocked Democrats from starting debate on the measure in three procedural votes.

At issue is a provision that would give the government new power to take apart failing financial firms whose collapse would shake the economy. It would create a $50 billion industry-supported fund that regulators would use to pay the cost of dissolving a firm. Republicans say the language contains loopholes that would not end bailouts.

"My goal during consideration of this legislation will be to reshape this bill so that it actually ends bailouts, protects consumers without jeopardizing our small-community banks, and brings transparency to the world of derivatives," said Alabama Sen. Richard Shelby, the top Republican on the Senate Banking Committee, which approved the bill last month on a party-line vote.

Shelby, who Wednesday broke off talks with Dodd that had been aimed at crafting a bipartisan compromise, said he would "seek to remove dozens of provisions that unnecessarily expand the reach of the federal government into the private affairs of Americans."

To quell Republican concerns, Sen. Barbara Boxer (D., Calif.) brought up an amendment to the provision on taking apart failed firms. Her proposal would require firms seized by regulators to be liquidated and ban taxpayer funds from being used to keep the company in business.

Any funds the government spends to unwind a failed firm would be recovered through the sale of the company's assets or fees on the financial industry, protecting taxpayers from bearing losses.

"Taxpayer bailouts are done," Boxer said.

The bill includes a derivatives proposal shaped largely by Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.). It would require commercial banks to wall off their swaps-trading desks from bank operations. The provision could cut heavily into the profits of Goldman Sachs Group Inc., JPMorgan Chase & Co., and Bank of America Corp., according to a Federal Reserve staff analysis.

"It will keep banks in the business of banking," Lincoln said.

Lincoln's proposal would also require mandatory clearing and exchange trading for standardized derivative products and impose a fiduciary duty on banks that trade derivatives with municipalities.

Georgia Sen. Saxby Chambliss, the top Republican on the agriculture panel, said his party had significant concerns about the Democrats' derivatives proposal. Chambliss said Republicans would offer amendments addressing the commercial-bank provision. In addition, the size and scope of an exemption from clearing and exchange-trading requirements for businesses that use derivative products to hedge risk remains a problem, he said.

"I fear what I believe to be unintended consequences will subject our American businesses to more risk, not less," Chambliss said.