Top Democratic House and Senate negotiators who worked out a deal on a sweeping overhaul of financial regulations regrouped Tuesday to eliminate a $19 billion fee on banks that had threatened to derail the legislation.
Eager to salvage one of President Barack Obama's legislative priorities, lawmakers replaced the bank fee with money generated by ending the $700 billion bank bailout and by increasing bank premiums on deposit insurance.
The bill's fate was thrown into doubt this week following the death of Sen. Robert Byrd, D-W.Va., and after Republican Sen. Scott Brown of Massachusetts vowed to abandon his support for the bill if it retained the assessment on large banks and hedge funds. The money would have been used to pay for the costs of the legislation.
Uncertainty surrounding the bill raised doubts about Congress' ability to complete the legislation by July 4 — a target for both the White House and Democratic leaders. The House was still expected to vote on the bill Wednesday. But Senate Banking Committee Chairman Chris Dodd said he didn't expect a vote in the Senate until after a weeklong July 4 break.
The legislation would rewrite financial regulations by putting new limits on bank activities, creating an independent consumer protection bureau and adding new rules for largely unregulated financial instruments.
Besides Brown, Republican Sens. Olympia Snowe and Susan Collins of Maine, both of whom also voted for the Senate bill last month, said they also had qualms about the bank assessment that negotiators inserted into the bill last week.
Without Byrd's vote, the support of the three Republicans would be crucial to overcome 60-vote procedural hurdles that could defeat the legislation. Only four Republicans for the Senate version of the bill last month.
On Tuesday, Brown sent a letter to Dodd and House Financial Services Committee Chairman Barney Frank saying he would withdraw his support for the bill and vote against it if the fee remained in it.
"It is especially troubling that this provision was inserted in the conference report in the dead of night without hearings or economic analysis," Brown wrote. "While some will try to argue this isn't a tax, this new provision takes real money away from the economy, making it unavailable for lending on Main Street, and gives it to Washington. That sounds like a tax to me."
Seeing nearly a year of work crumbling, Democrats scrambled to eliminate the bank fee and keep at least three of the Republicans on board.
Dodd, D-Conn., said he ran the proposal past the three Republicans to make sure they would support it. "But obviously until they actually cast a vote, you never know," he said.
Working with the White House and Treasury officials, Democrats replaced the fee with $11 billion that would be freed by ending the government's authority to use the $700 billion bank bailout fund, known as the Troubled Asset Relief Program or TARP.
TARP was scheduled to expire in October. The new proposal would end it as of June 25, essentially cutting Congress' spending authority from $700 billion to $475 billion. That creates an accounting adjustment that would generate $11 billion.
The balance of the cost could be covered by increasing premium rates paid by commercial banks to the Federal Deposit Insurance Corp. to insure bank deposits. The premiums would increase from 1.15 percent of insured deposits to 1.35 percent by September 2020. The additional premium would be paid by banks with assets greater than $10 billion.
Senate Republicans on the House-Senate conference committee angrily denounced Dodd's proposal as "smoke and mirrors" that violated Congress' intent to devote TARP repayments to reducing the deficit.
"The American taxpayer should be affronted by this little bit of sleight of hand and gamesmanship," said Sen. Judd Gregg, R-N.H. "What a piece of misleading, misdirected financial management this is."
The House Financial Services Committee chairman, Rep. Barney Frank, D-Mass., encouraged Democrats to accept the new plan even though he said he preferred the bank fee, which would be assessed on banks with assets greater than $50 billion and hedge funds of more than $10 billion.
"Why anyone would think that the large financial institutions should not pay the administrative costs, I don't know, but apparently you couldn't get 60 senators," he said.
"I'm getting caught in the middle of an intra-Republican debate here," he said. "The criticism by the Republican senators was aimed at a provision aimed at satisfying Sens. Snowe, Collins and Brown."
CNBC's Eamon Javers, NBC's Chuck Todd and Ken Strickland contributed to this report.