Sen. Blanche Lincoln's surprise primary election victory in Arkansas means, ironically, that legislation to rein in Wall Street could end up being more to the liking of liberals who opposed her.
Lincoln's survival, despite millions of dollars spent against her by liberals and unions, came as the House and Senate begin blending sweeping legislation to put new government restrictions on the financial sector.
Lincoln, chairwoman of the Senate Agriculture Committee, is the leading proponent of a Senate plan that would force banks to relinquish most of their lucrative business in the complex securities known as derivatives. It was a stance that helped her fight an image during the campaign that she was too friendly to banks.
Key regulators and even the Obama administration believe that proposal goes too far, and bank lobbyists had expected that it would be removed this month while lawmakers worked out differences in the House and Senate bills.
In a statement Wednesday, Lincoln said she would "fight attempts to weaken this bill." And her Democratic allies in the Senate said her stunning primary election comeback had bolstered her position.
"It strengthens Blanche Lincoln's hand," said Sen. Richard Durbin of Illinois, the second-ranking Democratic leader. "She comes back not only as chair of the Ag committee and a candidate for re-election, but in a very strong political position."
Sen. Tom Harkin of Iowa, one of the bank bill's Senate negotiators who has supported the provisions to spin off banks' derivatives business, said the election gave his side more influence. "We don't want it tinkered with," he said.
Even Senate Banking Committee Chairman Christopher Dodd, who had declined to endorse Lincoln's provision in the past, said Wednesday that Lincoln was "on the right track."
Bank lobbyists and Senate aides said the Lincoln measure still could get jettisoned during House-Senate talks, but they said other limits on banking activity likely would be made tougher as part of a compromise.
Specifically, Democrats are considering strengthening a provision in the bill that would instruct regulators to limit the ability of banks to make profits by engaging in speculative trading with their own money. That restriction is called the Volcker Rule, named after former Federal Reserve Chairman Paul Volcker, its leading advocate.
The House version does not include that limitation on banks. The Senate version instructs regulators to study such a ban, modify it if necessary and then implement it.
Democratic Sens. Carl Levin of Michigan and Jeff Merkley of Oregon want to do away with the study and not give regulators an opportunity to alter the ban. Unlike Lincoln's proposal, Merkley and Levin would permit banks to create investment markets for clients, but would prohibit them from betting against their clients on trades.
Volcker has supported Merkley's and Levin's approach, and the two senators have been lobbying other Democrats to embrace it.
Lincoln's victory Tuesday, if not assuring the success of her derivatives measure, would give Merkley and Levin a sizable opening to add their bank restriction to the bill.
The House and Senate negotiators are set to begin their discussions Thursday. The panel of negotiators, called a conference committee, will be chaired by Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. Both Frank and Dodd hope to complete their work in time to have the bill to President Barack Obama before Congress begins its July 4 recess.
Besides obliging Lincoln, the conferees also must hold together a fragile Senate coalition and fend off industry efforts to dilute the final legislation.
Only four Republicans voted for the Senate bill; no Republicans voted for the House version.
That leaves Democrats with little room to maneuver.
"If it changes too much you may start losing votes on our side," Harkin said.
Lawmakers also were considering whether to keep a Senate provision that would require banks to restructure their reserve funds. The Senate measure could cost bank holding companies about $130 billion in lost reserves by redefining what can be used as capital. Every dollar of bank capital could support 10 times that amount in potential bank lending — or at least $1.3 trillion.
The proposal would prohibit so-called trust preferred securities from being considered as capital, a move that banks strongly oppose.
The financial services industry maintains that the loss of revenue caused by the Lincoln proposal and the increased capital standards would make banks less profitable.
But supporters of the measures say high risk-taking by banks and weak capital requirements contributed to the 2008 economic meltdown.
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