Senators lift financial reform talks back on track

WASHINGTON (Reuters) - In an unusual move that cut a senior Republican out of the loop, bipartisan Senate negotiations resumed on Thursday on financial regulation reform, a top priority of the Obama administration.

Restoring momentum to an initiative that had begun to lose headway, Senate Banking Committee Chairman Christopher Dodd, a Democrat, said he was talking about legislation with Senator Bob Corker, a first-term Republican member of the panel.

"I am more optimistic than I have been in several weeks that we can develop a consensus bill to bring about the reforms the financial sector so desperately needs," Dodd said in a statement on his dealings with Senator Corker.

Just six days ago, Dodd said he had hit an impasse with Senator Richard Shelby, the committee's top Republican, in talks that had dragged on for more than a year over proposed bank and capital markets oversight.

President Barack Obama has made financial regulation a top priority for 2010, along with governments in the European Union, which are also developing new rules to prevent a recurrence of the global financial crisis.

Adopting many proposals made by Obama in mid-2009, the U.S. House of Representatives approved a reform bill in December over the objections of Republicans and Wall Street lobbyists.

Corker told CNBC on Thursday he is willing to work with Democrats on financial reform, saying it is "a piece of legislation that needs to be passed."

He also said the Dodd-Shelby impasse would have led "toward a legislative train wreck."

The U.S. Treasury Department said it welcomed Corker's decision to work with Dodd to pass financial reform.

Senate Majority Leader Harry Reid told reporters, after Dodd's announcement, that he was "comfortable we are going to be able to do a really good financial regulation bill."

TALKS BROKE DOWN OVER WATCHDOG AGENCY

Disagreement over Obama's proposal to create a consumer financial watchdog agency torpedoed the Dodd-Shelby talks.

But Corker has also opposed the agency. Last year, when Obama proposed his U.S. Consumer Financial Protection Agency (CFPA), Corker called it "a tremendous overreach ... way out of bounds."

Democratic Senator Mark Warner, a banking committee member, told CNBC on Thursday that the debate on the consumer protection proposal is "a little bit thorny."

He also said financial reform is "too important to fail," and that he and Corker agree on 98 percent of another issue -- setting up a new government body to monitor and manage "systemic risk" in the economy and the financial system.

Senator Tim Johnson, the second-ranking Democratic committee member after Dodd, said in a statement that Dodd's announcement on talks with Corker shows "there is bipartisan interest in completing financial services regulatory reform."

He called the initiative "too important to push off or to become the target of political games."

Dodd introduced a comprehensive reform bill in November that was immediately rejected by Republicans. He then divided his committee into bipartisan teams of two senators each to address specific issues of dispute.

AGENCY CENTRALIZED EXISTING LAWS

Dodd and Shelby were working on the CFPA -- an idea that legions of lobbyists for banks and Wall Street have been working to kill or weaken for months.

A spokesman for Shelby could not immediately be reached for comment.

The CFPA would be a new agency that centralizes consumer protection laws and staff now scattered across several existing agencies, including the Federal Reserve.

Democrats back the idea because they say the Fed and other agencies did a poor job of protecting Americans from abusive mortgages in the run-up to the financial crisis of 2008-09 that triggered calls for reform.

Banks and financial services firms oppose the agency as a direct threat to their profitability and an administrative burden. Republicans say it would be an unneeded government intrusion on the private sector.

Dodd has also discussed possibly downgrading it to something less than an independent agency, possibly making it a division of the Treasury Department.