3 things that could kill bank reform

When Wall Street nearly collapsed

Would panic prevail? That was the question gripping the world in the days surrounding the fall of Lehman Brothers on Sept. 15, 2008. One year after that terrifying Monday, the people who struggled to cope with the financial crisis share what they were thinking as chaos broke out.

View photos

Quick Vote

Where will the Dow end up in 2010?

• Up 0% to 10%
• Up more than 10%
• Down 0% to 10%
• Down more than 10%

or View results

Bailout tracker

The government is engaged in a far-reaching - and expensive - effort to rescue the economy. Here's how you can keep tabs on the bailouts. More

• Bank failures
• Brand name bankruptcies
• Fortune Recovery Index

WASHINGTON (CNNMoney.com) -- More than a year after the financial system came to the brink of collapse, Congress is finally starting to make headway on bills that aim to prevent future catastrophes.

The House has been drafting and re-working legislation for a month, and a key committee is set to delve back into it on Tuesday. The Senate will begin discussing its lengthy version on Thursday and is expected to get into the details of the legislation next month.

But Congress is far from reaching consensus on a bill that could get the filibuster-proof 60 votes in the Senate and pass both chambers.

And there are several key issues on which the ideological gulf between the Senate and House, or between Republicans and Democrats, may not be bridgeable. The divisions could threaten passage of meaningful legislation or drag out the debate and even prevent final passage.

Here are three big points of controversy.

The role of the Federal Reserve: The Senate and House couldn't be further apart on how they see the Federal Reserve and its role as a regulator going forward.

The House proposes stripping away the Fed's consumer protection powers, leaving in place its banking regulatory powers. In fact, the House would make the Fed the principal overseer of financial firms tied to the global economy.

The Senate, by contrast, would limit the Fed's powers to mostly monetary policy. Sen. Chris Dodd, D-Conn., is proposing stripping the Fed of its banking regulatory authority and giving that power to a new consolidated agency.

"It's not designed to basically punish the Federal Reserve at all, but rather to enhance their role and their independence," said Dodd, chairman of the Senate Banking Committee. "You start loading up the Fed with additional responsibilities and that independence could be threatened."

Late last week, high-ranking Treasury and White House officials made it clear in public statements that they're at odds with the Senate on this idea and they think the Fed should keep its regulatory powers and oversee the biggest financial firms.

"No regulator had a perfect record leading up to the crisis, but in our view, the Federal Reserve is the agency best equipped for the task of supervising the largest, most complex firms," Deputy Treasury Secretary Neal Wolin said Friday. "It is the only agency with broad and deep knowledge of financial institutions and the capital markets necessary to do the job effectively."

Too big to fail: Congress has many different ideas when it comes to how to prevent big firms from taking down the entire financial system. Experts say this is one of the most important parts of the regulatory effort. But there are a lot of details involved and a consensus has yet to gel.

The White House and congressional Democrats want to create a mechanism for monitoring large financial firms, like American International Group (AIG, Fortune 500), and unwinding them with a new power called "resolution authority."

Both chambers would charge the Federal Deposit of Insurance Corp. with such unwinding. But some lawmakers from both parties are worried about giving such broad powers to the executive branch.

A related - and contentious - debate is emerging over whether a government agency should have the power to break up companies that could threaten the economy before they do damage.

Lobbyists for the big banks are fighting the break-up proposal hard, calling it "misguided." The proposal could "lead to long-term damage" to the economy, wrote Rob Nichols, president of the Financial Services Forum, in a letter Monday to Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.

But community banks are big fans of the break-up idea, which is included in the Senate bill and is expected to be debated in the House later this week when Rep. Paul Kanjorski, D-Pa., offers such an amendment.

Another point of disagreement: How to pay for a catastrophe fund without tapping taxpayers. The House is leaning toward making financial firms pony up before disaster strikes. The Senate is leaning toward charging after a firm falls.

Consumer Financial Protection Agency: Of the three trouble spots, easily the most high-profile one is the proposed Consumer Financial Protection Agency.

The agency faces a more familiar problem for financial-related legislation in Congress: opposition from the minority party and big business. That push-back could be a deal breaker in the Senate.

The agency would put new regulators in charge of keeping an eye out for consumers, while requiring more disclosure and scrutiny over some of the financial products, like mortgages, credit cards and auto loans, that contributed to last year's crisis.

A wave of populism propelled credit card legislation earlier this year. But Republicans are mostly united against the creation of the consumer agency, calling it an added layer of bureaucracy that could threaten bank soundness.

Observers say the consumer agency is one of the biggest stalemates between Dodd and Sen. Richard Shelby, R-Ala., whose cooperation was key to getting the credit card bill passed by an overwhelmingly margin. President Obama even invited Shelby to the bill signing ceremony.

In late October, the House passed a version of the proposal to create a new consumer agency, with one Republican voting for it and two Democrats voting against it. But that version was watered down to exclude small banks and credit unions from being examined by the agency's enforcement arm. The House bill also excludes auto loans and title insurance from the agency's jurisdiction.