May 20, 2010 3:00 am

Democrats delay reform legislation

Democrats in the Senate yesterday failed to amass enough votes from their own party to overcome the last big hurdle to financial regulatory reform.

The delay gives more time for banks to convince senators that the legislation represents a risk to the markets, but it also provides an opportunity for the bill to be toughened further.

Maria Cantwell, the Democratic senator from Washington, and Russ Feingold of Wisconsin, defied their leadership to vote against "cloture", the procedure that calls time on debate. Two Republicans voted in favour.

The motion required 60 votes to pass but fell short with 57. Harry Reid, the majority leader in the Senate, voted against for procedural reasons while Arlen Specter, the Democrat from Pennsylvania, failed to make it back to the chamber after his humiliating defeat in Tuesday night's primary election.

Eleven months since the US Treasury laid out its blueprint for reform, final passage is still some way off. The Democratic leadership can call another cloture vote but will need to secure at least one more senator - either Ms Cantwell or Mr Feingold or another Republican - to vote with Mr Reid and Mr Specter for cloture. "We hope to be able to have another vote tomorrow," Mr Reid said.

"I understand two Democratic senators withheld their votes because they want this bill to be stronger," said Dick Durbin, the majority whip. "I hope they'll come round. I hope they'll vote with us." Ms Cantwell opposed ending the debate without a vote on her amendment to reinstate the Glass-Steagall Act, the Depression-era law that separated commercial banks from investment banks.

That far-reaching change would go beyond anything in the current bill but there are already proposals which, if made law, would force the biggest banks into sweeping changes of their business models.

Michael Cavanagh, JPMorgan Chase's finance chief, told the Financial Times yesterday that a provision from Blanche Lincoln, the Senate agriculture chairman, to force banks to spin off their swaps desk would hurt markets.

"If the [Lincoln] amendment stands, you are going to have liquidity and credit provided by the US banks in the derivatives space contract and that cannot be good for the market," he said. "It is a very troublesome situation."

"We are on a dangerous path," he added. "This change, for the US banks alone, will make the US financial system less competitive when compared to its international peers."

An attempt to craft a compromise over derivatives reform in the US was yesterday abandoned by Chris Dodd, the Senate banking committee chairman, in the face of opposition from the largest banks.

On Tuesday, Mr Dodd filed an amendment to the financial regulation bill that would have banned banks from derivatives dealing for their own account in two years' time but give regulators a final say on whether to implement the plan.

But yesterday morning, after the industry aired fears over the new language overnight, he decided not to offer it to a vote, according to Mr Dodd's spokeswoman.

Banks had warned that the proposal could drive clients to overseas competitors because of the uncertainty over whether dealing would be banned and precisely what type of contracts would be covered.

"It just gets worse and worse and worse in a rather irrational way that's almost surreal," said Judd Gregg, a Republican senator from New Hampshire.

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