updated 5/6/2010 7:33:01 PM ET 2010-05-06T23:33:01

Following last-minute adjustments, a proposal to audit the Federal Reserve that the Obama administration once opposed was on the verge of passing the Senate as it attracted broad support from conservatives and liberals alike.

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The administration withdrew its objections to the proposal Thursday, saying it was satisfied that the audit would not interfere with the Fed's authority to set monetary policy.

The one-time audit would focus on the Fed's emergency lending to financial institutions in the months leading up to and after the 2008 financial crisis. At its peak, at the end of 2008, the Fed's lending totaled $1.16 trillion.

The Fed has become one of the targets of public anger in the aftermath of the financial crisis, blamed for not seeing the meltdown coming and for having what some perceive as too cozy a relationship with the nation's largest institutions. The audit measure, proposed by Vermont independent Bernie Sanders, has populist support from across the political spectrum, from tea party activists to liberals and labor organizations.

The building momentum for the audit measure came after the Senate, prodded by President Barack Obama, rejected a Republican consumer protection plan that would have diluted a central element of the administration's financial regulation package.

Democrats and the president argued that the GOP proposal would have gutted consumer protections. The vote was 61-38, with two Republicans — Sens. Olympia Snowe of Maine and Charles Grassley of Iowa — joining Democrats to defeat the GOP measure.

Democrats have proposed an independent bureau within the Federal Reserve to write and enforce regulations that would police lending. The Republican proposal would create an agency within the Federal Deposit Insurance Corp. The FDIC would have to approve regulations and enforcement would be left to bank regulators.

Republicans said the Democratic bill overreached and would give a powerful consumer agency too big a voice in banking affairs. The Democratic version of the legislation already contained some concessions to Republicans, and Democrats showed no willingness to cede any more ground

"Alternatives that gut consumer protections and do nothing to empower the American people by cracking down on unfair and predatory practices are unacceptable," Obama said in a statement before the vote.

The sharp divisions over the consumer protection stood in contrast to the wide bipartisan support for the Federal Reserve audit.

The amendment would require Congress' investigative arm, the Government Accountability Office, to undertake a one-time audit of the Federal Reserve's emergency lending to financial institutions in the months leading up and after the financial crisis of late 2008.

The Federal Reserve and the Treasury had opposed such an audit, arguing it could interfere with the Fed's independence.

But Sanders has said the audit would focus exclusively on the Fed's short-term lending for financial institutions from December 2007 until the present. The audit would have to be completed within one year of the financial regulation legislation becoming law.

Sanders said he wants to see if there were conflicts of interest involving the institutions that received the money and members of the boards of the Fed's regional banks. Moreover, Sanders said the audit should examine whether financial institutions received no-interest loans from the Fed that they then used to buy interest-bearing government bonds.

"If that was the case, and I suspect it was, you're looking at a huge scam," Sanders said.

The amendment also would require the Fed to post on its website by Dec. 1 information regarding its lending before and after the crisis.

The Fed's short-term lending, designed to increase the liquidity of banks reeling from the crisis, grew dramatically at the height of Wall Street meltdown.

Thursday afternoon, Deputy Treasury Secretary Neal Wolin voiced the administration's opposition to the audit proposal. But hours later, following negotiations with Sanders, Wolin withdrew the opposition.

"We are confident that the revised amendment proposed by Senator Sanders strikes the appropriate balance: providing full transparency of lending programs while protecting the bedrock principle of central bank independence on monetary policy that has served our nation so well," Wolin said in a statement.

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