Senate nears Wall Street bill showdown

WASHINGTON (CNNMoney.com) -- Several sticking points need to be hammered out if Senate leaders are to succeed in bringing a compromise Wall Street reform bill to the floor this week.

Both Senate Banking Committee chairman Christopher Dodd, D-Conn., and ranking member Richard Shelby, R-Ala., said Sunday that talks toward a bipartisan deal are continuing.

But Shelby, who appeared with Dodd on NBC's "Meet the Press," said he did not expect an agreement by late Monday, when the Democrats have scheduled a vote on beginning debate.

"If nothing happens between now and tomorrow, the Democrats will not get" any Republican support to open debate on the measure, Shelby said. Without at least one Republican vote, debate won't be able to begin.

Should the debate begin, there's broad bipartisan agreement to prevent bailouts, increase capital cushions at banks, protect consumers and shine a light on complex financial contracts now traded in the shadows.

But Democrats and Republicans disagree about several issues, ranging from how to prevent bailouts to how to empower a new consumer regulator.

Here are some of the remaining conflicts that could determine the fate of the overall bill:

The proposal: Create a council of regulators who keep an extra eye on firms whose failure would threatens the economy. Empower the Federal Deposit Insurance Corp. to step in and take down big Wall Street banks, tapping a pot of money that banks pay into.

What the critics say: New unwinding powers and the resolution fund suggest an implicit guarantee of future government intervention. It could also create conflicts over how to pay creditors.

Shelby underlined that point Sunday. He said the bill leaves too much flexibility for the Federal Reserve and the FDIC.

"We need to tighten that up to make sure that it doesn't happen," Shelby said. "The message should be unambiguously that nothing is too big to fail and if you fail, we're going to put you to sleep."

Possible solution: Democrats indicate that they may be willing to drop the $50 billion fund, and instead tax banks after the FDIC has stepped in to unwind a Wall Street bank. The House reform proposal, passed late last year, has a $150 billion fund. Those and other differences would have to be resolved through a conference between House and Senate leaders before President Obama could sign a bill into law.

The proposal: Make bets on complex financial contracts known as derivatives more transparent, pushing them onto clearinghouses and exchanges. Make those involved post collateral, backing up the bets.

What the critics say: Too much regulation will hurt U.S. businesses, such as airlines and farmers, who benefit from making such bets to shed the risk of swings in prices and interest rates. And it will push the industry to make trades overseas.

Sen. Bob Corker, R-Tenn., said Sunday on ABC's "This Week" that he supports putting as many derivatives as possible onto a clearinghouse. But, he added, there are limits.

"What people don't I think appreciate so much is that all of these tools are used for capital formation. They help companies hedge their risk," said Corker. "They help companies create capital, and I think if we start drawing lines in the sand where we take these tools away, what we really do is hamper companies' ability to access capital.

Possible solution: A final Senate bill could end up looking a little more like the House version, which allows those big broker dealers who make contracts with airlines and farmers to duck tougher rules.

The proposal: Create a new independent consumer financial protection regulator. The Senate measure houses the regulator inside the Fed but gives it strong powers to make its own rules, such as capping credit card fees and fees for paying down mortgages early. New rules can get vetoed by a council of regulators. The House goes further with a stand-alone agency.

On CNN's "State of the Union with Candy Crowley," Sen. Robert Menendez, D-N.J., said the agency's role "is to empower consumers to give them plain English language opportunities for them to understand and be part of a system that protects" them.

What the critics say: If the consumer regulator's rules are too tough and cut too deeply into banks' balance sheets, the banks could become unstable and insolvent.

Possible solution: This piece is among the most contentious, having previously caused a breakdown in talks between Dodd and Shelby. So solutions are anyone's guess. There could be some effort to ensure the consumer regulator works more closely with existing regulators.

The proposal: The Volcker rule, named for former Federal Reserve chairman Paul Volcker, limits the size and scope of banks' investment activities. The rule prevents banks from owning hedge funds and trading on their own accounts. The Senate Agriculture panel enhanced this effort on Wednesday by passing a bill that would force banks to spin off their swaps desks that make these trades.

What the critics say: Big banks that got back on their feet quickly and paid back their TARP bailouts after the last financial crisis did so in large part from their investment activities. Preventing such activities could push firms to move their business to other countries.

Possible solution: Dodd's bill gives an oversight panel of regulators the power to set rules banning proprietary trading, but adds that regulators have to do it. Lawmakers could leave more of the decision to limit banks' investment activities in regulators' hands.

Shelby, while opposed to the Volcker rule, agreed that something needs to be done about this problem.

"We've got to end once and for all the casino atmosphere on Wall Street, where they're gambling basically on synthetic ideas and so forth -- with somebody else's money, putting banks and our whole banking system at risk and producing nothing," he said.

If the Senate decides to debate the Wall Street reform, it will have quite a backdrop.

On Tuesday, the Homeland Security's subcommittee on investigations will question Goldman Sachs officials, including CEO Lloyd Blankfein, about the bank's role in the housing meltdown that helped trigger the financial crisis. The committee released documents Saturday that appeared to show how the firm used bets on mortgage securities in a bid to profit as the housing market began to plummet several years ago.

Goldman Sachs (GS, Fortune 500) was charged with fraud earlier this month regarding the sale of a mortgage security that was created by a hedge fund trader who plan to bet against the package.

The Obama administration is actively pushing the reform move through Congress, with the president himself fresh off a speech in New York last week supporting the measure.

In his weekly radio address that aired Saturday, Obama against spoke in favor of the legislation.

"These reforms would put an end - once and for all - to taxpayer bailouts," the president said. "They would bring greater transparency to complex financial dealings. And they will empower ordinary consumers and shareholders in our financial system."

--Senior writer Jennifer Liberto contributed to this report.