– John Kemp is a Reuters market analyst. The views expressed are his own –

Financial reform legislation is set to reach the Senate floor as early as this week. With U.S. President Barack Obama and Senate Majority Leader Harry Reid holding most of the cards, pressure on Senate Republicans and Wall Street to find a compromise is becoming intense.



The Senate Banking Committee’s own version of reform (S 3217) was placed on the calendar of the Senate late last week (Calendar No 349) from where the Democratic majority leader can call it up for debate at any time.

In practice, Reid will wait until the Senate Agriculture Committee has had time to approve its own version of derivatives rules. The Agriculture Committee claims jurisdiction over some aspects of derivatives law. It is due to meet on Wednesday to approve a bill drafted by Chairman Blanche Lincoln (D, Arkansas).

Under Senate Rules, the majority leader has almost absolute control over the order in which legislation is called up for debate. Once the Lincoln bill has been reported out of committee, Reid will have discretion to call up the banking and agriculture committee bills any time, which could be as early as Thursday this week.

The banking and agriculture bills need to be melded together in some way. Either Reid will offer a compromise text of his own incorporating elements of both, or the majority leader will bring up the banking bill, perhaps with some or all of the agriculture bill being offered as an amendment.

Ultimately, Senate legislation must be reconciled with the separate Wall Street Reform and Consumer Protection Act (HR 4173) promoted by House Financial Services Committee Chairman Barney Frank and approved by the House of Representatives in December last year by 223 votes to 202.

In practice, it looks like the Senate Banking Committee’s bill has superseded the House measure, and will form the basis of any final law. If the Senate passes a measure, it will be sent to the House for approval. If the House agrees without amendment, it will become law over the president’s signature. If not differences will have to be ironed out in conference committee.

DEBATE CONTROL

Senate conventions and the standing rules of the chamber permit unlimited debate on any measure. To avert endless delay, for routine and non-contentious measures, the majority leader will normally ask for “unanimous consent” (uc) to set aside the normal rules and consider the bill under an expedited procedure.

In this case, Reid is unlikely to obtain unanimous consent. The majority leader will therefore offer a motion to proceed with the bill setting terms for debate. Since the motion itself is subject to a filibuster, the majority leader will need the support of at least 60 senators to invoke “cloture” limiting debate to just 30 additional hours.

The motion to proceed, once passed, would control debate on the bill itself. On final passage, only 50 votes are needed for approval (the vice-president can vote to break a tie).

The point of this detour into Senate procedure is that it helps explain the structure of the poker game each side is now playing.

The only point of leverage the Senate Republican caucus has is its power to block a motion to proceed and therefore prevent the bill ever coming to the floor in a manner it can be approved without unlimited debate.

But while Senate Republicans can prevent the matter coming to a head, the majority leader can raise the bill any time, as many times as he decides, and keep it on the floor of the Senate, and in the headlines, for as long as he wants. Reid can force the Republicans to go on the record opposing financial reform and keep media and public attention on Wall Street issues for as long as it suits his purposes.

POLITICAL POSITIONING

And it suits Reid and the Democrats to keep the spotlight on this issue. Unlike healthcare, where Democrats were divided, and found lackluster and ebbing public support, the party is fairly unified on financial reform and seems more in tune with the popular mood, which wants tough reforms as payback for the financial crisis.

In contrast, Republicans appear divided and uncertain, anxious about being seen to align themselves too closely with Wall Street interests opposed to substantial change.

Keeping the spotlight on financial reform keeps Democrats united and their opponents divided and off balance. It keeps public attention on an issue the party hopes is a plus point, away from more controversial areas such as healthcare, which dominated the headlines only a few weeks ago, until it was pushed aside by financial reform and the retirement of Supreme Court Justice John Paul Stevens.

Congressional Democrats and the White House have found the perfect issue on which to take an aggressive stand.

If the bill passes, they notch up the second significant legislative victory in six months, on something that energizes the party’s core voter base and resonates reasonably well with the rest of the electorates.

If the bill stumbles, because the 41 Senate Republicans refuse cloture on a motion to proceed, Reid will force them to cast a vote on the record and tie themselves to Wall Street. The Democrats will then make it a centerpiece of a populist campaign in the autumn, running against both Republican obstruction and Wall Street itself.

Being linked to unpopular Wall Street interests is the last thing Senate Republicans want in the mid-term elections. The party would much rather turn the conversation back to healthcare, over-reaching by an activist government, ballooning deficits and unaffordable entitlement programs.

PLAYING THE END GAME

Reid will almost certainly force the 41 Republicans to make a recorded roll call vote against cloture. He might even challenge the Republicans to start filibustering the bill and keep it on the floor for a few days to maximize the publicity and embarrassment. Senate Republicans are keen to avert this sort of showdown.

The caucus unified last week to send a unanimous letter to Reid. Some have interpreted this 41-siganture letter as an aggressive filibuster threat. In practice, it seems more like a plea to be let into negotiations so the party could avoid embarrassment and vote for something that could be branded a bipartisan bill. “We encourage you to take a bipartisan and inclusive approach,” the signatories urged.

In contrast to healthcare, where many Republicans, and a large section of the electorate, favored no bill to the one the Democrats were promoting, on financial reform there is a clear majority for change. “Inaction is not an option,” as the Redrafting from scratch is not an option at this stage. Neither the White House nor Senate Democrats have any interest in doing the bill over again.

But Senate Democrats and the administration would probably offer some minor amendments to secure Republican support. Republicans and banking lobbyists will need to identify two or three key issues where they can secure compromise.

One will have to be the $50 billion bailout fund and issue of resolution authority. While this is a relatively inconsequential point, on which there are good arguments on both sides, the bill’s opponents have made it a signature issue. Since it was not originally suggested by the Treasury, though, it can easily be dropped. One or two other key changes are also possible at this stage, allowing both sides to declare victory and move on.

But it is much too late to change the basic form and direction of the bill. It is hazardous to predict the outcome of last-minute legislative maneuvering. But my guess is that this bill will be approved, by a lopsided majority, after a few amendments are agreed in the next few days, as quite a few Republicans sign on to neutralize the issue.

Otherwise, the matter will go before the voters in the fall.