WASHINGTON — Financial reform legislation finally began to move forward again Wednesday with the Senate taking steps aimed at eliminating "too big to fail."
The Senate approved an amendment 96 to 1 from Sen. Barbara Boxer that would ensure taxpayer dollars would not be used for bailouts of large financial institutions. It also passed 93 to 5 a separate measure from the bill's top negotiators — Senate Banking Committee Chairman Chris Dodd and Republican Sen. Richard Shelby — to tighten the bill's resolution authority.
Both provisions were significant in that they broke a stalemate on the "too big to fail" debate that had delayed action all of Tuesday as leaders harangued back and forth over legislative language.
"We had a very strong day today," Dodd said. "We were able to resolve 'too big to fail' which was the major argument over several weeks on this bill."
But the hardest work may still be to come, as lawmakers face a slew of amendments designed to tackle other issues including derivatives and consumer protection.
"A lot more work will be done. We have about 90 amendments," Dodd said.
Shelby hinted at the task ahead even while he endorsed his joint amendment with Dodd.
"I strongly support these changes and I urge my colleagues to support them as well," Shelby said. "Now that we are over this particular hurdle, I will be addressing many additional concerns that I have in the coming days."
The Boxer amendment would specifically require the liquidation of institutions put into receivership and said no taxpayer money shall be spent to bail out or shut down a failing financial firm.
As expected, the Dodd-Shelby amendment to tighten the Federal Deposit Insurance Corp.'s resolution language would scrap a proposed $50 billion resolution fund, which would have been created by assessments on systemically important institutions to cover their possible failure.
The amendment would also address several other concerns raised by the Alabama Republican that the bill provided too much discretion for the FDIC to pick and choose winners and losers for political reasons.
For example, the amendment would essentially nullify the bill's discretion for the FDIC to treat similarly situated creditors differently. The amendment adds a clawback provision to ensure that any payouts to creditors by the FDIC of a systemically significant firm are equalized after the fact by recouping any payouts that would have exceeded what the creditor would have received in a bankruptcy proceeding.
Shelby also highlighted several provisions that were tightened up to rein in the government's ability to help support distressed institutions. He cited changes that would restrict the Federal Reserve's ability to provide liquidity during a crisis, force it to get approval from the Treasury secretary before using its emergency authority and establish strict solvency, collateral and accountability standards for any such action.
Shelby also pointed to changes that would require prior congressional approval for the FDIC and the Treasury Department to provide debt guarantees.
Despite progress on "too big to fail," senators from both parties took to the floor to stake out other positions on issues where there is no agreement.
Senate Agriculture Committee Chairman Blanche Lincoln responded to criticism of her provision that would ban banks from acting as swaps dealers which is opposed by the Fed and the FDIC.
"The suggestion that this provision will force derivatives into the dark without oversight is absolutely false," she said.
The Senate was also expected to begin debating a GOP amendment that would put a proposed consumer protection division inside the FDIC rather than the Fed.
The proposal would require the consumer division's rules, regulations and orders be subjected to the approval of the FDIC board. Shelby has been fighting for keeping consumer protection and safety and soundness embedded together.
Under his amendment, the board approval is meant to ensure that actions taken by the division appropriately consider the safety and soundness of financial institutions while ensuring consumer safeguards are in place.