Financial reform: Do-or-die time

WASHINGTON (CNNMoney.com) -- A second Senate effort to come up with financial reform legislation could run aground unless a deal on protecting consumers is reached.

Negotiations are continuing this week and a new draft bill could be announced next week, aides say.

While there has been bipartisan agreement on such issues as forcing banks to meet stronger capital requirements and unwinding giant financial firms, lawmakers can't agree on a way to protect consumers.

Last December, the House passed a sweeping financial overhaul package. The measure would create a stand-alone consumer agency, impose tougher capital cushions for the largest banks and Wall Street firms, and force them to pay billions into an emergency fund that could be tapped when a troubled company needs to be broken up.

Getting a Senate version has been more problematic.

Early this month, the ranking member of the Senate Banking Committee, Sen. Richard Shelby, R-Ala., officially pulled out of negotiations with the committee chairman, Sen. Christopher Dodd, D-Conn., over an impasse on the consumer agency, although both left the door open for more talks which have since taken place.

Then, a freshman Republican, Sen. Bob Corker of Tennessee, said he'd work with Dodd in crafting a compromise consumer agency.

Key Democrats in Congress and the Obama administration say financial overhaul legislation can't move forward without a strong regulator who's looking to protect consumers.

"The status quo is not acceptable," Assistant Treasury Secretary Michael Barr told the Credit Union National Association in a Tuesday speech. Barr continues to push for a consumer agency, saying it would protect "consumers from sharp practices of the type that pervaded segments of the mortgage market before the crisis."

The clock is ticking -- veteran Congressional watchers say political will to tackle such a complex initiative could crumble as the campaign season picks up this summer.

The White House, the House and Dodd want an independent consumer protection regulator with strong powers to regulate credit cards and mortgages, saying existing regulators fell down on the job of protecting consumers during the financial crisis.

But Republicans -- including Shelby and Corker -- are steadfastly opposed to the independent stand-alone agency, saying a consumer regulator would be at cross-hairs with regulators watching for safety and soundness at banks.

"I believe a stand-alone agency for consumer protection or separating those protections from safety and soundness are nonstarters," Corker said when he started working with Dodd.

To win bipartisan support, Dodd has signaled that he could give up on a stand-alone consumer agency, and instead base the regulator in the Treasury Department or other existing government entity.

As a result, the debate has shifted to how much power and independence a consumer regulator should have and how it should be funded. There's also disagreement about which industries and financial products should be subject to the new regulator, with groups as diverse as credit unions, small banks, auto and payday lenders seeking to avoid a new regulator or new rules.

"Bad actors should be brought into some form of regulatory rubric," said Dan Berger, chief lobbyist for the National Association of Federal Credit Unions."But since credit unions didn't cause the economic crisis we are all clawing out of, we oppose a CFPA (consumer agency) for credit unions."

The banking panel also lacks consensus in a couple of other areas, including what --if anything -- should be done to crack down on executive compensation.

And while senators generally agree that complex financial trades called derivatives should be more transparent and better watched, they disagree about which kinds of derivatives (like trades on currency or trades made by companies to mitigate risk) should get special treatment and continue unregulated.

Lawmakers are also still working out how to strengthen bank supervision and regulator's ability to watch for systemic risk, while reining in Federal Reserve powers.

But insiders say those issues aren't dealbreakers and expect they can be worked out.

"In general, I'm still pretty optimistic we'll get a regulatory reform bill this year," said Brookings Institution analyst Doug Elliott. "This isn't like health care, there are a lot of reasons for some Republicans to join with Democrats."