President Obama plans to make a major speech on financial regulatory legislation Thursday in New York, as Democrats prepare to do battle over the bill on the Senate floor, citing the latest Goldman Sachs scandal as justification for their measure.

“We [Democrats] want real reform…It’s time now to act,” said Senate Banking Committee Chairman Christopher Dodd of Connecticut, the chief architect of the Senate bill overhauling the financial regulatory system. “Wall Street and Republicans want to leave in place the status quo.”

While Republicans initially have presented a solid front in opposition to sweeping financial regulatory reform legislation, which Senate Democrats expect to introduce on the floor this week, not everyone believes that front will hold as citizens across the country increasingly are blaming Wall Street for their economic ills.

The Securities and Exchange Commission (SEC) last week charged that Goldman Sachs allegedly defrauded the public in the sale of mortgage-related instruments that were designed to fail. This, combined with the SEC’s statement that it is investigating other similar cases, will make it harder for lawmakers to vote against a crackdown.

“We are united in our opposition to the partisan legislation reported by the Senate Banking Committee. As currently constructed, this bill allows for endless taxpayer bailout of Wall Street and establishes new and unlimited regulatory powers that will stifle small businesses and community banks,” wrote Senate Minority Leader Mitch McConnell of Kentucky and 40 other Republicans in a letter last week to Senate Majority Leader Harry Reid (D-NV).

“We urge you to support…bipartisan negotiations by the Banking and Agriculture committees. We are confident that the Senate can overcome political tensions and provide a bipartisan approach to financial reform this year,” they said.

“From day one, I have insisted that the only way to address an issue as serious as the financial security of our country was to work across the aisle. My door has always been open. I am always willing to listen to anyone with good ideas,” responded Dodd.

Democrats had hoped that Republican Sen. Susan Collins of Maine would break ranks and support the Senate banking panel’s bill, but she signed the letter opposing the measure. As for the Democrats, potential opponents include Sens. Ben Nelson of Nebraska, Mark Warner of Virginia, Evan Bayh of Indiana and Ted Kaufman of Delaware, CQ Today reported Friday.

While it appears that Republicans are duplicating their strategy on health care reform — that is, agreeing that reform is needed, but refusing to contribute to consensus legislation — it’s a strategy that may not help them in the upcoming elections when they will have to explain to angry constituents why they apparently sided with Wall Street. A favorite comment of political pundits across Capitol Hill was, “This is not health care.” The majority were giving 70-30 odds that a financial reform bill would make it out of the Senate.

It was noted that several senators, while signing the Republican manifesto, made comments indicating this was not their final word on the subject. Particularly, since agricultural interests, anxious to avoid another run-up in energy commodities prices, have coalesced behind the reform, it could gain support from some farm state Republicans.

The broad legislation overhauling the financial regulatory system was passed out of the Senate Banking Committee last month with no support from the Republicans (see Daily GPI, March 24). Dodd refused to entertain any amendments at the committee level, sending the bill straight to the floor after it cleared the committee on a straight up-or-down vote.

Legislation that was unveiled by Senate Agriculture Committee Chair Blanche Lincoln (D-AR) Friday, and which is scheduled for a one-day markup Wednesday, would be folded into the Senate Banking bill if it clears the Senate agriculture panel (see Daily GPI, April 19). The bill seeks to rein in commodities market speculation by forcing over-the-counter (OTC) derivative trades onto regulated exchanges and clearinghouses. And as expected, it would include an exemption for large commercial traders who use derivatives to hedge the risk associated with trading of physical products.

The bill could significantly restrict trading by large Wall Street banks, such as JPMorgan Chase & Co. and Goldman Sachs Group, by barring swaps dealers from receiving any type of federal assistance (including federal deposit insurance and access to the Federal Reserve discount window) in connection with their trading of derivatives (see Daily GPI, April 16). As a result the measure could force the banks to spin off their lucrative derivatives operations.

The Lincoln bill would require mandatory exchange trading and clearing of standardized derivative contracts. However, large commercial traders would be exempted from mandatory clearing/trading if they are hedging commercial risk.

The agriculture panel’s bill contains language similar to the omnibus House legislation on financial regulatory reform, which preserves an exemption for derivatives trades involving end-users or commercial traders hedging bona fide commercial risk (see Daily GPI, Dec. 14, 2009). But the Senate bill’s provision with respect to derivatives trading by swaps dealers, including large Wall Street banks, is much stricter.

Derivatives are a financial instrument whose value is derived from one or more underlying assets, such as natural gas or electricity. It’s estimated that the notional value of the market is $600 trillion.

Derivatives, which were partly blamed for the financial meltdown in the fall of 2008, are used by commodity producers and large consumers to hedge against price fluctuations and other business risks.

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