The US Senate approved a sweeping overhaul of Wall Street regulation that would create a consumer protection agency, strengthen oversight of derivative trading and ban proprietary trading at banks.
The Senate's 59-39 vote on Thursday sends the legislation into negotiations designed to reconcile differences with the House bill approved in December.
"When this bill becomes law, the joyride on Wall Street will come to a screeching halt," Senate Majority Leader Harry Reid, a Nevada Democrat, said after the vote.
The bill contains measures that would have a profound impact on the US financial industry, creating a mechanism for liquidating large failing financial firms and a council of regulators to monitor companies for threats to the economy. Among the strongest provisions is a plan to force banks to wall off their derivatives-trading operations, the subject of fierce lobbying by the industry and opposition from regulators including Federal Reserve Chairman Ben S. Bernanke.
Derivatives language will be one of the matters discussed by House and Senate negotiators. Another will be the proposed consumer protection bureau, which the Senate has placed inside the Fed and would have powers to write and enforce rules banning abusive lending.
House Financial Services Committee Chairman Barney Frank, the Massachusetts Democrat who shepherded a financial-overhaul bill through his chamber last year, said in an interview Thursday that he intends to make sure the final bill has a free-standing Consumer Financial Protection Agency, reflecting President Barack Obama's original proposal.
$150 billion fund
Negotiators will have to reconcile differences over a pre-paid $150 billion fund created by the House bill to cover the government's cost of unwinding a failing firm. The Senate bill requires the industry to repay the government only after a firm collapses. Frank said Thursday he would not push to keep the industry-financed pre-paid fund in the bill.
"The two bills are very similar, and the House is ready to go to conference to work out the remaining issues," Frank said in a statement. "I am confident that we can have a bill ready for President Obama's signature very soon."
Congressional Democrats moved to overhaul governance of US financial companies in response to the 2008 financial crisis that followed the collapse of the subprime mortgage market. The Senate and House measures aim to prevent a repeat of the $700 billion taxpayer-funded bailout that helped firms including American International Group Inc. and Citigroup Inc. weather the worst recession since the 1930s.
Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said the bill is "hardly perfect" and will be improved in the House-Senate negotiations.
Dodd said he planned to consider strengthening language to ban proprietary trading by US banks. The issue was raised in an amendment offered by Democrats Jeff Merkley of Oregon and Carl Levin of Michigan that wasn't considered during debate of the bill on the Senate floor.
Dodd said he wants to present a revised bill to the Senate before July 4.
Republicans criticized the Senate bill, saying it failed to deal with government-sponsored enterprises Fannie Mae and Freddie Mac, which were seized by the government in 2008. The Republicans also said the consumer financial protection bureau the bill would establish amounts to a massive new bureaucracy.
"We hope that we have a conference where we all are participants and that we're dealing with trying to reconcile the bill section-by-section and come out with a good piece of legislation, but we'll have to see about that," Senator Richard Shelby, the banking committee's top Republican who voted against the bill, said about the House-Senate talks.
Senate Republicans largely stuck together in opposing the bill. Four voted with the Democrats, including Senator Charles Grassley, who became the first Republican to break ranks when he voted for the derivatives bill in committee.
"It was important and essential to engage in fundamental reform of financial institutions at this moment," Senator Olympia Snowe, a Maine Republican who backed the bill, told reporters after the vote. "The American people have to have the confidence that we're rectifying many of the issues that really contributed to putting our economy on the precipice."
The Obama administration welcomed the vote.
"The House and Senate have now each passed strong bills that protect consumers, limit risk-taking by large institutions and address the problem of "˜too-big-to-fail,'" Treasury Secretary Timothy Geithner said in a statement.
The Senate measure adopts priorities Obama outlined last June for strengthening financial rules. It allows the Federal Deposit Insurance Corp. to take apart failing financial firms in an orderly way if their collapse could threaten the economy.
The legislation would push most of the $615 trillion in over-the-counter derivatives to be processed, or cleared, with a third party.
Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.
The derivatives language, offered by Senate Agriculture Committee Chairman Blanche Lincoln, also contains one of the most contentious issues of the Senate debate the measure that would require commercial banks to wall off their swaps-trading operations.