The Wall Street Journal is reporting that senators have outlined a plan to create a new consumer protection unit within the Federal Reserve.
Key senators were close to a deal on legislation to overhaul financial regulations, people familiar with the matter said, bringing the U.S. a step closer to sweeping changes to the way banks interact with consumers and the markets alike.
Top senators from each party were near a breakthrough agreement to create a new consumer-protection division within the Federal Reserve. This has been a contentious point due to heavy criticism of the Fed's past handling of its consumer-protection powers. Senators Christopher Dodd (D., Conn.) and Bob Corker (R., Tenn.) were conferring with other members of their parties last night in an effort to sell that agreement to them, Senate aides said.
The two senators have also reached a deal that would let the federal government break up large, failing financial companies. That plan tackles one of the most politically thorny flashpoints of the economic crisis: What powers should the government have to break up firms so it doesn't have to resort to taxpayer-funded bailouts?
Agreements on these details are expected to shape a bill that Mr. Dodd, chairman of the Banking Committee, plans to introduce in the Senate. The House passed a bill overhauling financial-market rules in December. Differences between the two packages would have to be reconciled before any final agreement could be signed into law by President Barack Obama.
Democrats and Republicans have remained bitterly divided over how best to rework consumer-protection rules. Mr. Obama has called for the creation of an independent Consumer Financial Protection Agency, which would write and enforce rules for any financial product, from mortgages to credit cards to payday loans.
Many Republicans criticised that idea, saying it would freeze up access to credit and create an unwieldy bureaucracy. Many Republicans said new consumer rules would be best placed within the regulator that oversees nationally chartered banks.
The new arrangement, if adopted into law, would create a type of bankruptcy process for failing financial companies that aren't banks, such as bank-holding companies or bank subsidiaries that don't have insured deposits. Regulators would have the option to force any financial company into an FDIC-controlled dissolution if they believed market chaos required such an extreme step. Under the proposal, this step could take place only after the agreement of the Fed's board, a council of regulators, and the Treasury secretary, in consultation with the president.
Messrs. Warner and Corker have said they wanted to create a process that was so painful for investors and management that no one would intentionally steer their company toward such a break-up.
The new deal would wipe out shareholders and give the FDIC the power to remove management. Creditors would be guaranteed only the liquidation value of their claims in bankruptcy, though they could receive more under some circumstances.
Lawmakers debated for months how to pay for such a system. Treasury officials argued the government should be able to provide a bridge loan to unwind the company. Critics of that arrangement said it equated to a taxpayer-funded bailout.