House and Senate agree on Wall Street bill as dawn breaks at Capitol

Congress early Friday moved to the brink of passing a landmark overhaul of Wall Street, which would hand President Barack Obama a major victory ahead of the midterm elections.

A 43-member conference of House and Senate lawmakers finished the bill just after 5:30 a.m., after a marathon, all-night session of deal making, lobbying and scores of votes. The 2,000-page bill aims to prevent taxpayer-funded bailouts and revamp regulation of mortgages, credit cards, broad financial system risks and the $600 trillion derivatives market.

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The conference committee action resolved differences between House and Senate versions of the legislation and set up final votes for next week. The House planned to hold a final vote as early as Tuesday. Democrats vowed to send the legislation to Obama’s desk before the July 4 recess. 

Obama said he hoped to sign a final bill by the Fourth of July during a brief statement on the South Lawn before he boarded Marine One to embark on a trip to the G-20 summit in Toronto, where the legislation is likely to be discussed.

He touted the agreement as one of the most significant accomplishments of his administration. 

"Over the last 17 months, we have passed a recovery act, health insurance reform, education reform and now, we are now on the brink of passing Wall Street reform," he said.

Lawmakers dubbed the bill the "Dodd-Frank" bill, after Sen. Chris Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), the two main sponsors.

House and Senate Republicans on the committee unanimously opposed the conference report; Democrats all supported it.

The legislation comes nearly two years after the worst financial crisis since the Great Depression drove the U.S. economy into a deep recession and led Congress to pass a $700 billion bailout of Wall Street. The economy continues to suffer under the weight of 9.7 percent unemployment.

Frank, chairman of the conference committee, said the bill wound up being stronger than he through was once possible to pass through Congress.

"You hate to have the kind of pain people had during the crisis, but it redoubled our resolve," Frank said. "We have done something that has been badly needed and sorely needed for some time," Dodd said.

Treasury Secretary Timothy Geithner said the bill, "represents the most sweeping set of financial reforms since those that followed the Great Depression."

The final conference approval came after an early morning deal on the bill’s thorniest provision — backed by Sen. Blanche Lincoln (D-Ark.) — that would restrict banks’ derivatives trading.

Lawmakers agreed to require bank holding companies to spin off riskier types of derivatives into separate affiliates that would not receive federal taxpayer assistance. They allowed banks to continue trading in markets for interest rate, foreign exchange, gold and silver and some forms of credit default derivatives. They also allowed banks to continue trading derivatives for “risk-mitigating” purposes for their own companies.

The measure’s restrictions would apply to new derivatives contracts entered into after a two-year phase-in process.

“My focus has been on ensuring that banks should be banks and that risky business should be dealt with differently,” Lincoln said.

The Lincoln provision was the source of months of intense debate and vigorous opposition from the banking industry. The provision was added to the bill in April and despite the opposition, it remained in the legislation in its original form until Thursday evening. The original form would have required banks that receive federal assistance to push out derivatives trading to separate affiliate operations.

Senior Obama administration staffers, Treasury Department officials, the chairman of the Commodity Futures Trading Commission (CFTC), lawmakers and financial lobbyists scurried throughout the Dirksen Senate Office Building all day Thursday and early Friday in efforts to resolve and have a last say in the derivatives regulations.

Lawmakers and aides deep into the night traded printed amendments and scribbled notes full of changes as they moved through the bill’s provisions. At 3:55 a.m., Frank explained a short delay in the process of distributing amendments by saying staff was searching for additional printer paper.

Deputy Treasury Secretary Neil Wolin and Assistant Secretary Michael Barr, two architects of the regulatory effort, huddled with senior congressional staffers for hours in the early morning as lawmakers debated the derivatives title.

The measure could cut deep into Wall Street’s bottom line; commercial banks took in $23 billion in revenue on derivatives trading in 2009. The derivatives business is dominated by five large banks, according to the Office of the Comptroller of the Currency.

Centrist House Democrats, senior Obama administration staff and Lincoln spent hours shuttling between meetings. Democratic Reps. Gregory Meeks (N.Y.), Melissa Bean (Ill.), Scott Murphy (N.Y.) and Michael McMahon (N.Y.) held a series of talks on the Lincoln provision.

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New Democrats and members of the New York delegation pushed hard for changes in the provision, arguing the original language would hurt the financial industry and send jobs overseas.

In the hours leading up to the final vote, lawmakers also struck a deal on the “Volcker rule,” a provision that seeks to limit proprietary trading at big financial firms and to restrict bank sponsorship of hedge funds and private equity firms.

Dodd altered the original Volcker provision to provide more explicit limits on proprietary trading, distinguish some forms of hedging from other derivatives trading and to provide explicit conditions for insurers, which are often organized as bank holding companies, to conduct trading normally used for their businesses.

The new form of the rule also allows banks to invest in hedge funds and private equity funds. Dodd’s proposal would allow investment in hedge funds and private equity funds to be limited to no more than 3 percent of fund capital.

Paul Volcker, the Obama administration adviser and namesake for the provision, had earlier opposed the small allowance for fund investments.

Sen. Scott Brown (R-Mass.), among other lawmakers, raised concerns the original version of the proprietary ban would unnecessarily sweep in companies in Massachusetts and elsewhere.

He also raised concerns that asset management firms that invest in alternative funds would be hurt in the process.

Under the final form of the rule, total investment in hedge funds and private equity funds may not exceed 3 percent of the firm’s Tier 1 capital. Senators changed the capital type from tangible common equity to a broader Tier 1 definition of capital.

The debate on the two provisions capped a two-week conference committee process that worked out differences on a new consumer financial protection regulator, new requirements for lenders to retain risks in mortgages and the role of a new council of regulators to oversee risks in the financial system.

The bill also includes a fee of up to $19 billion on big banks and hedge funds to cover the costs of the overhaul. The fee would be collected by the Federal Deposit Insurance Corporation (FDIC) and be placed in an account at the Treasury Department. The money would be held for 25 years and then could be used only to offset the debt.

Most House and Senate Republicans are unlikely to support the final legislation next week. When the House passed its version of the bill last December, Republicans opposed it unanimously. In May, Sens. Brown, Olympia Snowe (Maine), Susan Collins (Maine) and Chuck Grassley (Iowa) were the only four Republicans to support the financial bill.

This story was posted at 5:38 a.m. and updated at 6:08 a.m. and 9:28 a.m.