New York Times: Congressional Negotiators Start Effort to Merge Versions of Financial Reform Bills

By Sewell Chan

Negotiators from the House and Senate gathered on Thursday to merge two bills representing the most comprehensive changes to financial regulation since the Depression, but the script they acted out was largely being written elsewhere.

Republicans quickly accused Democrats of largely putting on a political show in the form of seven days of televised meetings, including debates scheduled over the next two weeks. The White House wants a final bill on President Obama's desk by July 4.

Senator Richard C. Shelby of Alabama, the top Republican on the Senate banking committee, said the biggest differences between the House and Senate bills were being worked out between the Obama administration and Democratic leaders in Congress, and that Republican amendments were unlikely to succeed.

"While I have no illusions about how this process is going to unfold — some of us can count — we should at the very least be honest with the American people about what is happening, where it is happening, and who is making those decisions," Mr. Shelby said.

Soon before the start of the meeting, Democrats released a 1,974-page "base text" that will be the basis for the negotiations. While it was mostly modeled on the version the Senate passed last month, it included several provisions from the House bill, which was adopted in December. They related to protections of racial minorities, mortgage underwriting and oversight of savings and loans.

"It appears that we are off to a rocky start because the base text before the conference was negotiated and completed behind closed doors, and without any Republican participation," Mr. Shelby said. "In fact, we only received it about two and a half hours ago."

Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the banking committee, nominated Representative Barney Frank, Democrat of Massachusetts and the chairman of the House Financial Services Committee, to lead the conference.

The committee of 28 members has 12 senators (seven Democrats and five Republicans) and 16 representatives (10 Democrats and six Republicans). The House had some additional negotiators who will work only on select portions of the bill, like the crucial sections on derivatives trading.

Senator Blanche Lincoln, the author of a provision that would require big banks to spin off their lucrative derivatives-trading operations, said the measure would help restore stability to the banking industry.

"In my view, banks were never intended to perform these activities in the first place," said Mrs. Lincoln, who on Tuesday narrowly won a hard-fought Democratic primary in Arkansas. "It is this economic activity that contributed to these institutions' growing so large that taxpayers had no choice but to bail them out in order to prevent total economic ruin."

Mrs. Lincoln said the provision would make clear that "derivatives dealing is not central to the business of banking," and would still allow banks to use swaps to hedge their loan portfolios and to enter a derivatives contract when originating a loan with a customer.

But another negotiator, Senator Saxby Chambliss of Georgia, the top Republican on the agriculture committee, which Mrs. Lincoln leads, said the new rules would interfere with legitimate uses of derivatives.

"We need to make sure that we don't overreach, not down just to Main Street, but into the manufacturing sector, into the energy sector, and into every other sector that uses financial tools to provide quality products to consumers around the world," he said.

Along with derivatives, another area where the House and Senate bills significantly differ concerns the so-called Volcker Rule, a proposal to stop banks from engaging in proprietary trading, or making market bets with their own money as opposed to trading for their customers' benefit. The Senate bill would restrict such trading after a period of study, and give regulators significant leeway on how to set up the restrictions.

Several Democratic negotiators, including Representative Paul E. Kanjorski of Pennsylvania and Senator Tom Harkin of Iowa, called on Thursday for a far stricter version. They called for reviving some version of the Glass-Steagall Act, the 1933 law that separated commercial banking from investment banking and was watered down before being fully repealed in 1999.

Republicans, as they have in the past, assailed the legislation for failing to spell out the future of Fannie Mae and Freddie Mac, the mortgage finance giants that have been taken over by the government.

Representative Jeb Hensarling, Republican of Texas, said the legislation addressed areas like interchange fees — which retailers pay every time a debit card is swiped — and payday loans that did not cause the financial crisis.

Both sides called for avoiding a repeat of past mistakes. Representative Maxine Waters, a California Democrat, recalled that she sat on a similar conference committee for the Gramm-Leach-Bliley Act, the milestone deregulation legislation that ended Glass-Steagall.

"I feared deregulation would have serious negative consequences," Ms. Waters said. "I voted no. I was right."