Bailouts deal struck

WASHINGTON – Top Senate negotiators tentatively agreed Tuesday on a bipartisan plan for aiding and dissolving troubled financial institutions, a plan aimed at barring taxpayer dollars from being used for such purposes.

The proposal, part of a massive overhaul of the government’s financial regulatory system, would eliminate a $50 billion fund in the original Democratic-authored bill. That fund was to be paid by large institutions and would have helped dissolve failing firms.

The proposed fund became a convenient target for Republicans, however, who labeled it a pot of bailout money that would wind up costing consumers. Though Senate Banking Committee Chairman Christopher Dodd, D-Conn., said the fund wasn’t a taxpayer bailout, the objections threatened to derail the entire bill.

So Dodd said he and Sen. Richard Shelby of Alabama, the top Republican on the panel, reached an agreement Tuesday.

“I’m satisfied, as I believe my colleague from Alabama is, that we’ve reached an agreement on the too-big-to-fail provisions,” Dodd said.

They wouldn’t publicly discuss the details, but officials who were familiar with the deal said it would permit federal regulators to recoup the cost of aiding failed institutions from those firms’ assets and, if necessary, their creditors. The provisions assume that creditors will be wary of investing in shaky institutions, thus limiting their risk-taking.

In addition, the deal would allow the government to provide loan guarantees to institutions that are in trouble, as long as Congress approved the guarantees. The bill originally would have permitted the guarantees without congressional consent.

Such changes mean “they’re closing the loopholes,” said Sen. Bob Corker, R-Tenn.

A vote on the deal is expected to come at roughly the same time as another vote, this one to bar the use of taxpayers’ money to bail out ailing financial institutions.

Dodd wants both votes – the first major tests of the financial regulation bill – to show that there’s bipartisan support for the legislation, to provide a contrast to the often-bitter partisan debate that characterized health care legislation over the past year.

The financial regulation bill would set up a new agency to protect consumers with mortgages and other forms of consumer credit, and it would bar most direct bank trading of derivatives, the financial products that played a big role in exacerbating the 2008 economic collapse.

Senate Majority Leader Harry Reid, D-Nev., predicted the Senate could finish work on the legislation by the end of next week, but Republicans were skeptical. They – as well as many Democrats – want major changes in the derivatives terms.

Corker, a major player in trying to broker bipartisan compromise, said flatly that the current derivatives plan wouldn’t survive. “One way or another, it will go away,” he said, noting that the Obama administration is cool to the plan.

“I don’t think the Obama administration wants to support it,” he said. “It needs to be fixed.”

Republicans also maintain that the consumer agency’s powers would be too broad and could make it difficult for small businesses to attract investment. They fear that businesses that extend credit would be subject to burdensome new regulations.

The House of Representatives passed its version of financial regulation last year. If the Senate passes its own version, senior lawmakers from both chambers will write a compromise bill, which both houses then would need to approve.