The fight to impose sweeping financial reform in the US is moving into its endgame, with Wall Street braced for tougher legislation from Congress than it had expected just a few months ago.
As President Barack Obama met with leaders from both parties to press the case for a strong reform package, it emerged that major Wall Street banks face big curbs on derivatives trading, one of their most lucrative activities.
And the industry seems likely to have to pay more than $50bn (£32bn) now to set up a fund for the resolution of future financial crises so that taxpayers are no longer left to bail out banks whose collapse threatened the wider economy.
In battle after battle, Wall Street's lobbyists have met with fiercer resistance than expected, in part because of the political resurgence of Mr Obama since he secured victory for his healthcare reform proposals.
The President and his aides hope a financial reform Bill will pass the Senate by the end of next month, despite opposition from Republicans. Speaking to reporters before yesterday's meeting at the White House, he said the goal was to prevent banks from becoming "too big to fail", and he also put a spotlight on the clampdown coming in the derivatives market.
Many exotic derivatives, such as the credit default swaps and collateralised debt obligations that were central to the financial crisis, do not currently have to be traded on exchanges. Instead, they are traded directly between banks, and the lack of transparency and the intertwining of financial institutions caused the 2008 financial panic to spread through the financial system. Much of the derivatives market exists in a "shadow economy", Mr Obama said, and "we want to get that into daylight".
The major Wall Street banks have been lobbying for significant exemptions to the rule that would force trading on to exchanges. But on Tuesday, it became clear that the Senate's agriculture committee, which oversees derivatives markets, wanted exemptions to be limited to a small number of transactions carried out on behalf of real economy companies.
The Senate Bill also includes a version of the so-called "Volcker rule" – named after the former Federal Reserve chairman Paul Volcker – which would prevent investment banks from owning hedge funds, private equity firms and from trading with their own money instead of just on behalf of clients. The House of Representatives passed its own reform Bill last year, and the two will have to be spliced together before the legislation is signed by the President. The centrepiece of both Bills is a new "resolution authority", which would supervise the closure of giant financial institutions that get into trouble. Winding down institutions requires short-term financing, and while the Obama administration originally proposed that it should come from taxpayers, with Wall Street paying it back later, both Bills seek to tap financial institutions now to set up a resolution fund. The House Bill puts the fund at $150bn, the Senate at $50bn.
Mr Obama said: "If there's one lesson that we've learnt, it's that an unfettered market where people are taking huge risks and expecting taxpayers to bail them out when things go sour is simply not acceptable."
Some reform issues remain unresolved, including exactly how much discretion regulators will be given to interpret the Volcker rule, and whether there will be explicit limits on the size of big banks. Republicans, who have fought to water down numerous aspects of the bills, say they will oppose all the plans on the grounds that they legitimise future bailouts of Wall Street.