Banker knives out for House-Senate reform panel

By Kevin Drawbaugh - Analysis

WASHINGTON (Reuters) - Wall Street will brandish its loophole-carving knives next week as the Congress moves to a House-Senate conference on merging the two chambers' sweeping bills to tighten financial regulation.

Political momentum over three weeks of Senate debate favored reformers and overwhelmed the financial services industry, which was unable to stop amendments that threatened its profit forecasts, if not its core business models.

With the bears running the stock market, giants like Goldman Sachs <GS.N> under a cloud, and November congressional elections ever nearer, the climate does not favor Wall Street, but industry lobbyists will still do what they can to weaken the legislation as the conference moves along.

"Conference committees have two critical tasks: reconciling two different, complicated bills and figuring out how to do this so the House and Senate will pass them again," said Karen Shaw-Petrou, managing partner at Federal Financial Analytics, a firm that advises on regulatory policy.

"This is made even harder now because the political mood that made Senate passage so difficult surely won't get any better anytime soon," she said.

Crucial to the outcome will be the personalities appointed to the conference panel. Shoe-ins include Senator Christopher Dodd and Representative Barney Frank, the Democratic authors of the Senate and House financial reform bills, respectively.

Their Republican committee counterparts are likely members too -- Senator Richard Shelby and Representative Spencer Bachus, both longtime foes of Democratic reform proposals.

Beyond them, the panel's tone will depend on the mix of lawmakers who want tougher reforms, those who like the bills just as they are, and those who want to weaken reforms.

EDGE SEEN FOR FRANK

"These selections are important, but we believe Rep. Barney Frank enters these talks with the most clout," said Concept Capital policy analyst Jaret Seiberg.

"For industry, that is a positive as Frank understands how the financial system works better than almost anyone else in Congress. So there is less of a risk of unintended consequences," he said.

House Republican Leader John Boehner, in a letter to House Speaker Nancy Pelosi on Friday, called for a wide-open conference debate that is streamed live onto the Internet.

Bank trading limits and capital standards are among the controversial proposals that could come under the blade, following the Senate's passage on Thursday of a bill that left some key issues unresolved.

For instance, a swap-trading desk 'push-out' plan from Senator Blanche Lincoln is in the Senate bill. It would force banks to spin off swap-trading units into affiliates, potentially meaning structural changes at some major firms.

Big banks whose core business models are threatened want the Lincoln plan killed. She has vowed to fight for it. She faces a primary run-off election on June 8. A win would help her plan in the conference, while a loss would hurt.

Lobbyists are keen to know whether she will be named to the negotiating conference. Her status as chairman of the Senate Agriculture Committee puts her firmly on the list of potential selections, expected to be announced on Monday.

VOLCKER RULE AN ISSUE

Another flashpoint for House-Senate conferees will be the so-called 'Volcker rule' to curb banks' proprietary trading. It would bar deposit-taking banks from buying and selling investments using their own money unrelated to customer needs.

The Senate bill includes the rule, but leaves it up to regulators to write its details and possibly water it down later. The House bill, approved in December, does not include the rule, which was unveiled in January by President Barack Obama and White House economic adviser Paul Volcker.

But the House bill would let regulators bar proprietary trading in cases where it threatens financial stability.

An amendment in the Senate that would have tightened the Volcker rule language in the bill died, but its sponsors -- Democratic senators Jeff Merkley and Carl Levin -- have vowed to press for its inclusion in the conference report.

They want to give regulators more explicit orders on implementing the rule. Dodd has offered them some support.

The Lincoln plan and the Volcker rule embrace a common principle -- that deposit-taking banks backed by the federal government, with the security and cost-of-capital edge that confers, should not be allowed to invest like hedge funds.

It remains to be seen how much the final package sent by Congress to Obama reflects that idea, which looks ahead to the next possible crisis more than other parts of the bills.

Analysts said the Lincoln measure may go by the wayside given the opposition of big banks, Republicans and some Democrats. "We continue to hear that (the Lincoln provision) will be removed or significantly modified in conference," said FBR Capital Markets policy analyst Paul Miller.

He said he expected the House and Senate will vote on a final bill in June, with Obama signing it into law by July 4.

(Editing by Andrea Ricci)