Banks were under intense political pressure as a U.S. congressional panel negotiating a final Wall Street reform bill convened its first meeting on Thursday.
A joint Senate-House conference committee began work as scheduled, broadcast live on television, to merge competing bills from each chamber into what will become the biggest overhaul of the financial rules since the 1930s. The meeting convened just two days after a handful of primary election elections showed U.S. voters supported candidates who were tough on Wall Street.
With conferees seated around a ring of tables stacked high with legislative documents, panel Chairman Barney Frank, a Democrat, promised "a very open process."
Last-minute changes to the base legislation before the committee met included new sections on mortgages and consultations between U.S. and foreign regulators, according to a summary document obtained by Reuters.
None of the changes altered the main provisions of the bill, some of which threaten banks' profits, while others could force structural changes at banks that trade for their own books and dominate over-the-counter derivatives markets.
Conference leaders must weigh demands for reshaping the industry against the need to retain some Republican support for a final bill -- a balancing act that analysts say points toward a more centrist outcome than public outrage might suggest.
On one side, an army of lobbyists for the industry was pushing to blunt the impact of reform proposals, including one that would curb lucrative fees charged on debit card transactions.
On the other side, the Obama administration is pushing for tough reforms, which it hopes to hold out as an example to other nations.
The United States is already further along than the European Union in achieving changes to regulation pledged last year by the Group of 20 countries. The G20 holds a summit in Toronto in two weeks, just as the congressional panel is due to be winding up its work on financial reform.
Base bill released
Democrats on Thursday released the text of the bill that provides the basis for the conference negotiations.
The base text departed in a few ways from the bill approved last month by the Senate, according to the summary document.
Additions include restrictions on mortgage lending that were included in the bill passed by the House last December.
The text also directs the Federal Reserve to require financial firms to update periodically "funeral plans" that lay out how they could be dismembered in emergencies to reflect the results of stress tests on their financial health.
It also requires a new systemic risk council, tasked with spotting looming troubles in the financial industry, to consult with regulators outside the United States.
Lincoln wrote swaps plan
Among the more contentious issues that the panel must resolve is a hard-hitting proposal by Senator Blanche Lincoln that would force banks to spin off their lucrative swap-trading desks.
Lincoln overcame odds to win a tough Arkansas Democratic primary contest, setting her up to compete in a final election in November -- a signal of the voter support for get-tough proposals to rein in Wall Street..
Swaps are financial contracts tied to movements in commodity prices, interest rates or — as in credit default swaps — on the chance of a borrower defaulting on its debts.
Traded in a huge, off-exchange market presently unpoliced by the government, swaps were widely blamed for aggravating the financial crisis. The OTC swaps market is dominated by Wall Street giants such as Goldman Sachs, JPMorgan Chase and Citigroup, which get big profits from it.
These and other major financial institutions were bailed out by taxpayers in 2008-2009, prompting public outrage and unleashing a wave of reform initiatives worldwide.
Analysts continue to expect the Lincoln provision to be dropped from legislation in the conference. The Obama administration, which firmly backs other reforms, has made clear that the proposal is not a high priority for it.
Lincoln has vowed to fight for her plan, and Democratic Senator Christopher Dodd, head of the Senate conference delegation, said her primary victory strengthens her hand.
Democrats must support Lincoln going into her November contest, making it difficult for them to abandon her proposal.
Leaders face balancing act
At the same time, Dodd and Frank must shape final legislation that can win approval in both the House and the Senate. Only then can a bill go to President Barack Obama to be signed into law, something that Democrats want to happen by mid-year.
Six House Democrats on Thursday called for inclusion in the final bill of a strong "Volcker rule" curbing risky business activities by banks, which was first proposed by Obama and White House economic adviser Paul Volcker.
A watered-down version of the rule is presently in the Senate bill. Some Senate Democrats also want it toughened.
The rule would ban proprietary trading unrelated to customers' needs at banks with government backing; get banks out of hedge funds and the private equity business, and limit banks' future growth through a new market share cap.
"The Volcker rule takes an important step in limiting bank depositors' exposure to Wall Street's risky proprietary trading," said Representative Maurice Hinchey, one of the six.