WASHINGTON — The Senate on Wednesday voted 93-5 to revamp how regulators can dissolve large financial firms that are dubbed "too big to fail," a rare bipartisan agreement that replaced a controversial proposed $50 billion bank-financed fund to help break up ailing companies.
The Senate also voted 96-1 to guarantee that no taxpayers' money will be used to bail out financial institutions, a stand of political cosmetics since no bailouts are contained in the legislation. Those tallies kicked off Senate voting on the historic bill that would overhaul how the government regulates and oversees the nation's financial institutions.
The votes were important steps, since the agreement on breaking up big firms resulted from months of talks by leaders of the Senate Banking Committee from both political parties. Instead of the partisan rancor that's dominated Congress for years, lawmakers are signaling this time that they're willing to compromise on one of 2010's biggest legislative challenges.
Senate Banking Committee Chairman Christopher Dodd, D-Conn, hailed the votes as a "fundamental change in our country's ability to protect taxpayers from the economic fallout of having a large, interconnected firm collapse."
"This is very positive," said Sen. Judd Gregg, R-N.H.
The House of Representatives passed a similar bill last year, and President Barack Obama hopes to sign final legislation this summer, but significant obstacles to Senate passage remain.
The legislation, written largely by Democrats, would create an agency inside the Federal Reserve Board to protect consumers with credit products such as mortgages and credit cards. Republicans fear that the agency could force small businesses to endure burdensome regulations and make it hard for them to attract capital.
Dodd says the bill would do no such thing, but Sen. Richard Shelby of Alabama, the top Banking Committee Republican, who negotiated the Wednesday agreement with Dodd, offered an alternative consumer-protection plan after the initial lopsided votes.
"I don't want to leave the impression I support the overall bill," he said.
The other flash point is likely to involve the bill's ban on most bank trading of derivatives for their own accounts. Derivatives are exotic financial products that played a big role in the 2008 economic collapse.
Changing the proposed ban on bank trading of derivatives is expected to attract bipartisan support. "What we have now is a disaster," Gregg said of the current language, written largely by Senate Agriculture Committee Democrats.
The view of Sen. Mary Landrieu, D-La., was typical of many Democrats. "Derivatives have to be regulated and transparent," she said, but when she was asked whether she wanted to change the legislation's stand on the topic, she added, "I'm not sure. I'll read the amendments and make a judgment."
Still, Wednesday's vote cleared one big hurdle. Republicans had charged that the legislation's $50 billion liquidation fund, paid by the institutions, was a back-door taxpayer bailout, arguing that consumers ultimately would bear the cost.
While Dodd — and most independent analysts — insisted that taxpayers wouldn't bail out failed institutions, Dodd suggested that giving up the fund was no big deal, especially since the White House was cool to the idea.
"Because whether they pay in advance or after the fact," Dodd said, "these costs will be paid by Wall Street and not taxpayers."
The Dodd-Shelby agreement would create a new mechanism for breaking up big firms. Currently, the Federal Deposit Insurance Corp. can seize troubled smaller banks, but for large, internationally connected banks, there's no process short of bankruptcy.
During the 2008 economic collapse, regulators ruled out bankruptcy as an option because of the disruption it could cause to financial markets. Regulators saw these big institutions as "too big to fail" because their collapse could harm the broader U.S. and global economies.
The Dodd-Shelby measure says the FDIC would finance the liquidation of failed big companies with credit lines from the Treasury Department backed by the failed companies' assets. The money would be recovered through the sales of the assets, with shareholders and creditors in the failed firms taking losses.
In theory, this language should make creditors less likely to invest in companies that take too many risks. They also may be reluctant to invest in big companies knowing that the government won't automatically guarantee their bailouts.
Troubled firms could be eligible for loan guarantees, but only if Congress approves.
The Obama administration was said to be wary of giving Congress that authority, maintaining that it would delay the process and handcuff its ability to act quickly in an emergency.
(Kevin G. Hall contributed to this story.)
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