Democratic Rift Stalls Financial Overhaul

Senators Reject Call for a Final Vote on Bill, as Some Dissenters Press for Further Consideration of Restrictions on Banks

By GREG HITT And DAMIAN PALETTA
WASHINGTON—A handful of Democrats joined with Republicans to block a bid by the Senate Democratic leadership to end more than three weeks of debate on sweeping legislation overhauling regulation of U.S. financial markets.

The 57-42 roll call fell short of the 60 votes needed to close off debate and hold a vote on the bill itself.

The surprise failure was a setback for Senate Majority Leader Harry Reid, who orchestrated the showdown in hopes of clearing the floor for other high-priority bills, including legislation funding military operations in Iraq and Afghanistan.
"We have to put this thing to rest," Mr. Reid said.

For weeks, Mr. Reid has tussled with Republican leaders over the bill, including one high-profile fight over whether debate should even begin on the White House-backed initiative.

Now he is struggling with the demands of some liberal Democrats pushing proposals to impose new restrictions on bank activities, beyond those already included in the 1,500-page bill.

The legislation is designed to close the regulatory gaps and end the speculative trading practices that lawmakers say contributed to the collapse of U.S. financial markets two years ago.

Two Democrats, Sens. Russell Feingold of Wisconsin and Maria Cantwell of Washington, joined with 39 Republicans to vote against the motion to close off debate. Two Republicans, Maine Sens. Susan Collins and Olympia Snowe, joined 55 Democrats in support of the motion. Sen. Arlen Specter, who lost the Democratic primary Tuesday in his home state of Pennsylvania, didn't vote.

At the last minute, Mr. Reid also voted against shutting off debate. That was a procedural quirk meant to preserve his right to keep the issue alive. Only senators who vote "no" on a matter are permitted to later ask that it be reconsidered.

Ms. Cantwell said she wanted to toughen provisions in the bill that would restrict trading by banks in derivatives, complex financial instruments often used to hedge risk. Many lawmakers argue that bad speculative bets by banks on derivatives exacerbated the financial crisis in 2008, and that therefore the sector needs closer regulation.

Mr. Feingold said he wanted to reimpose Depression-era rules that would bar traditional banks from affiliating with investment firms, among other things.

"We need to eliminate the risk posed to our economy by 'too big to fail' financial firms and to reinstate the protective firewalls between Main Street banks and Wall Street firms," said Mr. Feingold, who is up for re-election this year. "Ending debate on the bill is finishing before the job is done."

Mr. Feingold also wants the bill to include additional restrictions, notably on the size and complexity of U.S. banks. Efforts to include specific amendments to address the issue either failed or didn't get a vote.

A second vote will take place Thursday, as Mr. Reid vowed to "continue working on this" bill.
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Mr. Reid later blamed Republicans for standing in the way of the bill, saying they "want to do the bidding of the big bank executives ... they want to let Wall Street off the hook."

Sen. Charles Grassley (R., Iowa) disagreed with Mr. Reid and said the "opposition from Republicans and Democrats" was about ensuring consideration of additional amendments.

Sen. Grassley cited a number of proposals on which he wanted action, including an amendment that would potentially limit the fees imposed on ATM transactions. "It wasn't responsible to shut down this bill at this time," he said.

But Mr. Reid's more immediate problems were on the Democratic side of the aisle. He held the vote open for nearly an hour, and attempted several times to convince Ms. Cantwell to support ending debate and moving forward with the bill.

"They're pretty cranky on the other side," crowed Sen. Bob Corker (R., Tenn.), who voted against the motion to shut off debate. Mr. Corker said there was chaos on the floor, as senators milled in the well and the vote dragged on.

For much of the last 18 months, Mr. Reid has shown canny ability to maintain party unity, especially on White House-backed priorities, such as the economic-stimulus package and legislation overhauling the nation's health-care system.

Now, however, the Democratic leader is navigating a bill deep in an election year as voters show strong displeasure with business as usual in Washington. Indeed, some of the remaining proposals for amending the bill reflect a desire by some senators to get tough on Wall Street.

Sens. Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.) are proposing to bar banks from using their own capital to engage in speculative trades, and prohibit firms from betting against securities packaged and sold to their own clients.

Sen. Sheldon Whitehouse (D., R.I.) proposed to allow individual states to limit the interest rates that nationally chartered banks can charge, an amendment aimed at empowering states to drive down credit-card costs. Late Wednesday, Democratic leaders cleared the way for a vote on the proposal, a nod toward the demands for action. However, the Whitehouse amendment attracted only 35 votes, well short of the 60 votes needed for passage.

Earlier in the day, Senate Banking Chairman Chris Dodd (D., Conn.) backed away from a proposal to dilute provisions of the bill that would crack down on banks' trading of derivatives.

Mr.. Dodd had proposed to delay for two years provisions of the bill that could force banks to spin off their derivative-trading operations. He dropped the idea after it prompted an outcry from both fellow Democrats and the finance industry, which said it would increase uncertainty.

The legislation is designed to combat the root causes of the 2008 financial market collapse. Among other things, the bill would create a new system to manage the failure of a large financial institution and would establish a new consumer-protection agency, which would provide additional oversight of the home mortgage business.

Write to Greg Hitt at greg.hitt@wsj.com and Damian Paletta at damian.paletta@wsj.com