(Updates with additional details, comments from Rep. Frank, congressional progress.)
By Michael R. Crittenden
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- The Obama administration and congressional Democrats are pushing forward with efforts to overhaul regulation of financial markets, though significant questions remain about how the largest firms will be kept from the excesses at the heart of the financial crisis.
An administration official said Tuesday evening that Congress needs to move quickly to enact changes before attention on the need for financial regulatory changes wanes and the process becomes bogged down by the political realities of an election year.
U.S. House and Senate lawmakers are pushing forward with their efforts. House Financial Services Chairman Barney Frank (D-Mass.) told reporters that he hopes for the House to vote on wholesale regulatory changes as soon as the first week of December, and said he does not expect to have major differences with a parallel set of proposals being drafted in the Senate.
Lawmakers will enact reforms that address the weaknesses exposed last year on multiple fronts, Frank said.
"We are beyond the days of the breech-loading musket. This is the automatic rifle, the machine gun," said Frank, whose panel will take up a key measure Wednesday that deals with how the government handles the largest and most risky financial firms.
Those efforts are being matched behind the scenes in the Senate, where Sen. Christopher Dodd (D-Conn.) may be ready to circulate as early next week a draft of his proposals. Dodd is prepared to proceed with the legislation even if it does not garner any Republican support, according to people familiar with the matter, which could allow Democrats to avoid GOP attempts to water down the proposal.
The administration official acknowledged that a number of differences currently exist between the measures being considered by Congress and the proposals circulated by the White House and the Treasury Department. But the core principles being considered - giving federal regulators the tools necessary to deal with future financial panics effectively, and expanding protections for consumers - are not in question, the official said, and the parties are generally in harmony.
The official, who has been briefed on Dodd's legislation, said initial reaction to the Senate measure within the administration has been positive. Still, the administration expects both the House and Senate proposals to go through a number of iterations before they are enacted, with the current drafts acting as frameworks for a more defined product.
One area where there doesn't appear to be room for negotiation is on the administration's proposal to create an agency to regulate the financial products available to consumers. Republicans, and some Democrats, have said they are wary of such an agency, but the official said the administration wouldn't accept a weak or watered-down version of its proposal. Changes already made by the House Financial Services Committee, including an exemption for some smaller banks, are workable, the official said.
A number of other issues also need to be worked out, including how to deal with the cost of having a big financial institution fail, and how to eliminate the hazard of the government condoning "too big to fail" institutions.
Both Frank and the administration official made clear that policy makers do not want to provide aid to struggling firms as they did to the tune of billions of dollars during last year's crisis. Though Frank and the Treasury Department are at odds over when money will be recouped from industry participants to cover a large failure, financial firms will be on the hook.
"There will be no aid to any institution. Aid to the institution will be the equivalent of the last meal," Frank said.
A key sticking point could be congressional attempts to tie the hands of the Federal Reserve, which has been criticized on Capitol Hill for aggressively using its emergency powers last year to lend billions to financial firms. Frank said lawmakers plan to restrict the central bank's ability to lend to specific institutions, instead favoring a lending facility funded by the Fed that would be available to solvent institutions.
"No more Fed to AIG, no more Fed to Bear Stearns," Frank said, referring to the specific loans made to American International Group Inc. (AIG) and Bear Stearns Cos. last year.
But the official said the administration is worried that restrictions on the Fed's emergency powers could go too far because of lingering congressional anger. Officials need to the tools to address systemic problems effectively, the official said, but with the appropriate limits so those authorities are not used indiscriminately.
- By Michael R. Crittenden, Dow Jones Newswires; 202 862 9273; michael.crittenden@dowjones.com