Democrats expect to advance Wall St reform bill

WASHINGTON (Reuters) - U.S. Democrats expect to have the votes needed on Thursday afternoon to advance the biggest overhaul of financial regulation since the 1930s, paving the way for a final Senate vote within days.

One of President Barack Obama's top domestic priorities, the bill stumbled over a procedural roadblock on Wednesday. But Richard Durbin, the Senate's No. 2 Democrat, said he believes there is sufficient support this time to move ahead.

"We feel we have the votes to get it," Durbin told reporters in the Capitol.

Democrats have scheduled a 2:30 p.m. EDT vote that would allow them to move toward final passage of the bill which includes still controversial proposals such as a ban on banks operating lucrative swaps desks. Democrats fell two votes short on Wednesday.

The banking industry would benefit if the bill is approved sooner, rather than later, policy analysts said.

Most of the scores of possible amendments still under consideration would further threaten industry profits already under pressure from key elements of the legislation.

Senators from both parties are eager to look tough on Wall Street ahead of November elections, analysts said.

For instance, the Senate is expected to vote on an amendment to tighten the proposed "Volcker rule" that would curb proprietary trading by banks using their own money.

The amendment from Democrats Jeff Merkley and Carl Levin could be approved, analysts said.

Bank lobbyists have worked for months to weaken the Senate bill and are refocusing on prospects for watering it down in the conference that would follow Senate passage. The bill, if approved, would have to be merged in conference with one passed by the House of Representatives in December.

"We believe there is room to try to roll back some of this in a House-Senate conference. We just urge investors against assuming it will be fixed as it will be an uphill climb," said Concept Capital analyst Jaret Seiberg.

LINCOLN PROPOSAL AT ISSUE

The Senate debate resumed as U.S. stocks fell sharply. The Dow Jones industrial average was off 2.6 percent.

Democrats needed to find two more votes to advance the sweeping legislation that would tighten Wall Street rules to avoid a repeat of the 2007-2009 financial crisis.

Democratic Senator Arlen Specter, who missed Wednesday's vote after a primary election defeat in Pennsylvania, has returned to Washington and is expected to support the measure.

But Senate Democratic Leader Harry Reid still needed one more supporter in order to clear the 60-vote threshold needed to limit debate and move toward final passage.

One dispute still unsettled was Democrat Senator Blanche Lincoln's proposal to force banks to separate swap trading desks from core operations. Giant Wall Street firms whose dominance of the $600-trillion over-the-counter derivatives market would be threatened oppose Lincoln's approach.

A White House official on Thursday praised Lincoln's provision, which is part of the broader bill.

"Senator Lincoln has put forth a very strong proposal -- one that corresponds in very large part with the proposal in Dodd's original bill -- and we are confident that the senators will come to the best resolution for the American people," the official said.

"If the Senate bill passes, we also expect there to be a conference where the difference in the House and Senate bills are worked out," the official said.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, again on Thursday raised concerns. She said she hopes Congress will "really think hard" about whether to force U.S. banks to spin off their swap trading desks.

"It could increase, not decrease, risk," Bair said.

FBR Capital Markets policy analyst Paul Miller said, "We are still hearing that the requirement that banks spin off their swaps desks will not make it into the final bill."

FEINGOLD, CANTWELL EYED

Two Democrats withheld their support for wrapping up debate on the bill on Wednesday.

Senator Russ Feingold, one of the chamber's most liberal members, was not expected to change his position.

But Reid and other Democrats hoped Senator Maria Cantwell would decide to support the bill after she was allowed to discuss her proposal to tighten derivatives regulation.

Cantwell "may be willing to switch her vote if she can get consideration of an amendment that would require all standardized swaps to be cleared," Miller said.

Republican Scott Brown also was viewed as a potential supporter. Brown had previously said he would support the bill, according to Democrats, but voted against it on Wednesday because it did not include certain unnamed provisions.

Reid met with Brown, the Senate's most junior member, on Thursday to discuss his concerns, a Democratic aide said.

"He's new here, he's trying hard," Reid told reporters afterward of Brown. "I'm sure it was a misunderstanding."

(Additional reporting by Karey Wutkowski, Thomas Ferraro and Patricia Zengerle; Editing by Andrew Hay)