What Congress has in store for Goldman

WASHINGTON (CNNMoney.com) -- Goldman Sachs has more to fear on Capitol Hill than a grilling.

As some senators questioned Goldman executives about business dealings leading up to the housing market collapse, others are hammering out new reforms that could completely upend the way firms such as Goldman do business.

On Tuesday, the Senate is expected to take another vote on whether to start debating Wall Street reforms, while Democrats continue negotiating a deal to woo enough Republicans to pass a bill. The House passed similar reforms in December.

Goldman (GS, Fortune 500) is front and center when it comes to key aims of the Wall Street overhaul, such as preventing banks from getting too big to fail and making sure taxpayers don't pick up the tab when big banks make risky bets.

In the wake of fraud charges that the Securities and Exchange Commission levied against the Wall Street bank, proposals to overhaul financial rules of the road have grown tougher. Lawmakers want to force Wall Street banks to give up complex financial trades called derivatives or lose access to emergency government loans.

"If the strong version passes, and the most strenuous restrictions get into the bill, then, yes, it would probably be a big change to Goldman's business model," said Raj Date, executive director of Cambridge Winter Center for Financial Institutions Policy, a think tank.

Here are three things that Congress has in store for Goldman:

The Volcker rule, named for former Federal Reserve chairman Paul Volcker, limits the size and scope of banks' investment activities. It's squarely aimed at Wall Street banks such as Goldman.

Congress would empower a council of regulators to study and then impose new rules preventing banks from owning hedge funds and making proprietary trades for their own accounts.

The idea is to prevent banks from making risky bets and then seeking cheap taxpayer-backed loans when they get in trouble.

Proprietary trading is among the most profitable things Wall Street firms do. Not surprisingly, then, the firms oppose the measures, saying it's tough to distinguish trades made for themselves and those made for clients. They say that banning such trades exposes banks to more risk.

"Banks engage in these activities subject to the Volcker rule to manage not just their clients' risk, but their own risk," said Scott Talbott, senior lobbyist for the Financial Services Roundtable. "By prohibiting them, the Volcker rule would expose them to greater risk."

Congress also wants to force complex financial bets called derivatives, which are now traded in private, to be pushed on to clearinghouses and exchanges.

The exchanges, in particular, would impact Goldman. They allow the public to know what a financial product is priced at, which cuts into a firm's ability to set the highest price for the product.

JPMorgan Chase (JPM, Fortune 500) chief executive Jamie Dimon told analysts two weeks ago that such a move would cost his firm between $700 million and a "couple of billion dollars."

Last week, senators made this effort even tougher by prohibiting Wall Street banks from making any derivatives trades. It goes farther than the Volcker rule, because Wall Street banks wouldn't even be able to make trades for their clients.

Banks would be faced with spinning off their swaps desks that make these trades.

"Taking derivatives away from Goldman would be a huge change, it's their giant money fountain," said Barry C. Lynn, director of the Markets, Enterprise, and Resiliency Initiative at the New America Foundation, a think tank.

Date said that if the bans imposed by the Volcker rule and the derivatives provision both become law, Goldman would just dump its banking charter and give up access to taxpayer-backed loans.

"The notion that a firm like Goldman is not going to have swaps dealings is, to my mind, impossible," he said.

Even if Goldman decides it no longer wants to be a bank to duck stronger rules on swaps, it will have to strengthen its capital position, and leverage and liquidity standards.

The Federal Reserve would continue to regulate Goldman, and a new council of regulators would have a say on big Wall Street banks that are considered "systemically" important.

Veteran congressional watchers expect the council and Fed to enact tougher limits on fee income, higher capital requirements and more rules "that will restrain bank profitability," said Jaret Seiberg, an analyst at Concept Capital Washington Research Group, in a report.

However, Wall Street firms, including Goldman are prepared for some new rules in this area.

Goldman chief executive Lloyd Blankfein suggested during a February hearing that his firm supported more "dynamic regulation," as long as such rules also had some flexibility to accommodate "sustained period of economic growth."

One thing that the bill doesn't do: Grant federal regulators strong new powers to break up banks, which has become a battle cry by economist Simon Johnson and other lawmakers. But the Democrats' bill would allow the Fed to shrink a firm such as Goldman if two-thirds of a panel of regulators agrees.

Sen. Ted Kaufman, D-Del. and Sen. Sherrod Brown, D-Ohio, have proposed a measure that goes much further, with Congress setting caps on bank size and requiring regulators to break up or shrink banks that exceed those caps.

"If banks are too big to fail, those banks are simply too big," Brown said Monday.