The most comprehensive changes in financial regulation since the 1930's are unlikely to clear their first obstacle in the Senate tonight as Republicans try to hold out for a bill more favorable to Wall Street.
They were attempting to carve out a better deal for the banks even as news broke today of additional outrages in the government fraud case against Goldman Sachs and as the latest Washington Post-AP poll showed support for strict new curbs on Wall Street by more than two thirds of the American public.
President Obama and Democrats are seen as having seized the political initiative on the issue despite being short by one Republican vote they need to side with them in their attempt to begin debate in the Senate this afternoon.
Doing the bidding of the banks, Senator Richard Shelby, the chief GOP negotiator on finance reform, said his party will stand firm in blocking debate. "If we hang together on the floor, we can create critical mass," he told a gathering of bankers this morning.
Democrats say a setback would be only temporary because Republicans don't want to be seen siding with a deeply unpopular finance industry in the lead up to this year's congressional elections.
The final bill is now expected to take a hard-hitting approach to regulation of derivatives. The very strict proposals put forward by the Senate Agriculture Committee have been merged with those of Sen. Christopher Dodd, D-Conn., the chairman of the banking committee. The compromise includes many of the tougher provisions including one that is strongly opposed by the big banks because it would force them to spin off much of their derivatives business. The compromise rules on derivatives also say that any bank dealing in swaps, a particularly lucrative type of derivative, would be barred from the Federal Reserve's emergency borrowing window and also from federal deposit insurance.
The White House and many Democratic lawmakers pointed to the continuing revelations of fraud at Goldman Sachs to bolster their case for the so-called Volcker Rule, which would restore the barrier between commercial and regular banks. A restoration of that barrier would curb earnings at companies like Goldman Sachs, considered to be the most profitable firm in Wall Street history.
The progressive, Nobel prize-winning economist Paul Krugman urged this weekend that people not forget the role of the credit rating agencies in the economic crisis. "Credit rating agencies bestowed AAA ratings on hundreds of billions of dollars worth of dubious assets," he said. "The rating agencies skewed their assessments to please their clients and helped the financial system take on far more risk than could it could safely handle."
Politico reported today that in addition to new financial regulations, new taxes on banks are on the horizon.
"I don't think there's much doubt that there will be a bank tax," Senate Finance Committee Chairman Max Baucus was quoted as saying.
The Montana Democrat also said Congress will crack down on hedge fund managers and private equity partners who shelter their income as capital gains - taxed at half the top 35 percent rate.
Some progressives continued to raise strong concerns about moves they say could seriously weaken finance reform.
One such issue is connected to the bank tax. There are reports that the Treasury Department, for example, would like to see stronger taxes written into the law now making its way through Congress. Treasury has made no secret, however, of its desire to see the liquidation fund, paid for by the banks out of their profits, taken out of the law.
Baseline Scenario's Simon Johnson said Dodd is making the bill weaker than politically necessary in order to maximize Wall Street backing: "The presumption is that Sen. Dodd is negotiating with one or more Republicans who are the easiest to bring on board. This would make sense if Sen. Dodd wanted the strongest bill possible. But Sen. Dodd is closeted in negotiations with Se. Richard Shelby who stands for the most pro-Wall Street bill possible. The goal is to bring as many supporters of Wall Street as possible on board with the legislation, at the same time as framing the issues so the pro-reform camp looks bad when it presses for more."
Photo: Sen. Richard Shelby, R-Ala., left, and Senate Minority Leader Mitch McConnell, R-Ky. Republicans threaten to filibuster against the finance reform bill to carve out a better deal for Wall Street. Susan Walsh/AP