Razor's Edge: Why Senate Democrats are Struggling to Pass Financial Reform

Last Updated May 20, 2010 2:05 PM EDT

You know Wall Street's worried when Jamie Dimon pipes up. With Senators duking it out over potentially landmark financial legislation, the JPMorgan Chase (JPM) CEO on Wednesday pleaded for "sensible derivatives reforms based on facts and analysis."

I say "potentially" because, many moons and a global economic recession into the debate over how to repair the U.S. banking system, we still don't know what kind of reform bill Congress will -- or won't -- pass. Will it, as Dimon fears, fundamentally reshape the industry by clamping down on large financial firms' use of derivatives, forcing banks to divest precious businesses, and rebuilding a barrier between commercial and investment banking? Or will it apply a band-aid?

That's what's at issue as lawmakers prepared to vote this afternoon on whether to end debate on the bill, which would "freeze" it as is and clear the way for final passage. That vote -- and which amendments are left in or out -- is critical. Because while the measure could be revised during reconciliation with the House bill, it's unlikely to change by much.

Something else that raises the stakes: Unlike the health care bill that President Obama signed into law in March, which mostly laid out the contours for change, financial reform will lay down laws that could prevail for a long time.

If, that is, a law is even passed, and that's no longer a certainty. The Senate's Democratic leadership is in a bind. The reform bill has gotten tougher on Wall Street in recent days, winning support from more liberal lawmakers. Yet that has caused bank industry execs like Dimon to dig in their heels and risks alienating the one or two Republican votes the Democrats need to pass the bill.

As Jaret Seiberg, an analyst with investment research firm Concept Capital, told trade pub American Banker:

The Democrats have a real problem here, because they have moved the bill far enough to the left that they have lost Republican support and they are in an impossible position where if they moderate it, they will lose the left. But if they don't moderate it, then they can't get moderate Republicans to support it.
The battles over financial reform and health care reform do have one thing in common, and it weighs in favor of senators ultimately coming to terms: The looming mid-term election. For Democrats and Republicans alike, whiffing on financial reform would look bad. Stupid bad. Americans are pissed and want to see action. And the electoral losses by incumbents this week show that voters are ready to throw the bums out.

The bill will pass... maybe.

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    Alain Sherter covers business and economic affairs for CBSNews.com.