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The Senate will begin to vote on amendments to Sen. Chris Dodd’s (D-CT) financial regulatory reform bill, and a slew of proposals are expected from both the right and the left. For instance, Sen. Ted Kaufman (D-DE), along with Sen. Sherrod Brown (D-OH), have an amendment capping bank size, while Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) are planning an amendment institutionalizing the Volcker rule, which would prevent banks from trading for their own benefit with federally insured dollars

As evidenced by a document released today by the Senate Republican Policy Committee (RPC), the GOP is also taking aim at some smaller issues, which nevertheless could significantly impede the effectiveness of financial reform. Here are two points made by the RPC that show where the debate is headed:

– The bill creates overlapping and potentially conflicting regulations: The Dodd bill does not fully and clearly preempt state law. Indeed, the bill provides that it does not preempt state laws that provide greater protection than federal law.

– The bill would weaken arbitration, harming consumers and investors. Arbitration is a form of alternative dispute resolution that has long been recognized as an effective tool for efficiently and fairly resolving disputes.

Both of these statements are absolutely true: Dodd’s bill wouldn’t preempt state law and would weaken arbitration. But, contrary to the RPC’s assertions, these are important steps that will protect consumers from the excesses of the financial industry.

Preemption of state law, as I’ve discussed here often, played a large role in allowing the subprime crisis to spread. Many states had laws that went further on cracking down on shoddy lending than federal law, but President Bush’s regulators preempted them, stopping states in their tracks and allowing pernicious lending practices to continue unabated.

Arbitration, meanwhile, is a practice used by the financial industry to ensure that it can’t be sued for exploitative business practices. As Ian Milhiser has pointed out, “for years, the banking industry has padded its profits by forcing consumers to sign a ‘forced arbitration’ agreement denying them to right to sue the bank in a real court, and instead forcing any disputes between the bank and a lender into a biased, corporate-run forum that rules in favor of the banking industry 95% of the time.”

The banking industry is going all out against this legislation, as it is strong in a number of areas and would change the dynamic between consumers and the financial industry in many ways. And it’s these sorts of little changes, in parts of the bill that aren’t getting the headlines, where the industry, aided by willing Republicans, can have a lot of success. Proponents of the bill will have to take a stand against these sort of changes

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Here are snapshots of some of them, which the Senate will be dealing with over the next two weeks or so. No votes on amendments are expected before Tuesday.

* Drop swap-trading desk spin-off rule

The amendment would kill a provision of the Democrats' bill that would force banks to divest their swaps-trading desks.

* Strengthen "Volcker rule"

The amendment would strengthen a part of the main Democratic bill dealing with a proposal from President Barack Obama and economic adviser Paul Volcker that would bar banks from proprietary trading for their own accounts, unrelated to the needs of their customers. The amendment would widen the rule to apply not only to banks, but also to large, interconnected nonbank financial institutions.

* Reinstate Glass-Steagall

Financial giants could be broken up under an amendment to reinstate the 1930s-era Glass-Steagall laws that barred large banks from affiliating with securities firms and insurers.

Those limits were largely repealed in 1999, a high-water mark for deregulation that critics say marked the beginning of changes that culminated in the 2008-2009 financial debacle.

Passage of the amendment could force firms at the center of the crisis -- such as Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase and Wells Fargo -- to spin off investment and insurance operations.

* Make consumer watchdog an agency

The Democrats' bill would create a financial consumer watchdog bureau inside the Federal Reserve that would regulate mortgages and credit cards. Some Democrats want the watchdog to be an independent agency, with more independence and clout than a Fed unit, and will offer an amendment to do that.

* Limit size of banks as percentage of GDP

The amendment would impose a strict cap of 10 percent on any bank holding company's share of total insured U.S. deposits. It would limit the size of non-deposit liabilities at financial institutions to 2 percent of gross domestic product for banks, and 3 percent of GDP for nonbank institutions. And it would set a 6 percent leverage limit for bank holding companies and selected nonbank financial institutions.

* Auto dealer exemption

Amendment would exempt auto dealers from the full reach of the consumer watchdog if the dealers do not do finance their own lending to car buyers.

* Private equity, venture capital fund oversight

The amendment would require managers of private equity and venture capital funds to register with the Securities and Exchange Commission. The Democratic bill in the Senate would only require hedge fund managers to register with the SEC.

* Reversal of Supreme Court ruling on Stoneridge

The amendment would clear the way for shareholders to sue third parties such as banks, lawyers and accountants that are not directly involved in a securities fraud cases.

A 2008 Supreme Court decision in the Stoneridge case helped protect those that aid and abet financial fraud.

* Auditing the Federal Reserve

This amendment would affect the Government Accountability Office's authority to audit the Fed. Currently, the GAO is banned from auditing monetary policy and interaction between the Fed and other central banks.

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A financial industry front group with the deceptive name "Stop Too Big To Fail" (STBTF) is running a new TV ad in Virginia, Missouri and Nevada that tries to trick voters into opposing financial reform by claiming the bill before the Senate institutionalizes taxpayer-funded, big-bank bailouts. A voice-over intones that

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"Congress is considering so-called financial reform that gives our government unlimited executive bailout authority. Unlimited bailouts for big banks, paid for by your and me. Even President Clinton's secretary of labor said, 'it preserves the possibility that the Fed could launch another bank bailout.'"

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The ad demands: "No more bailouts with our money," and then asks viewers to call their senators and ask them to vote against financial reform. President Clinton's Secretary of Labor, Robert Reich, supposedly quoted in the ad, has demanded that STBTF stop using his name. Reich points out that the group's message is consistent with the Republican strategy of constantly using the negative buzzword "bailouts" while seeking to kill the reform bill. The message was crafted by notorious Republican strategist and spinmeister Frank Luntz, who has been reprimanded by American Association for Public Opinion Research for his misleading polling work. Luntz advised Republicans to characterize any meaningful Wall Street reform legislation as “the big bank bailout bill.”

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Left-wing senators to propose amendments to financial reform bill, Politico says

Liberal senators are set to propose several amendments to the Democrats' financial regulatory reform bill, in an attempt to intensify the strictness of the bill, according to Politico. Among the amendments backed by a coalition of groups put together by the AFL-CIO is a measure that would force private equity firms to register as investment advisers and a provision that would give the SEC authority over private equity funds and venture capital. Another amendment would give broker-dealers fiduciary responsibility to their clients

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The next few days will likely determine how smoothly the White House's push to strengthen the rules governing Wall Street will go down. Starting early this week, the Senate will begin voting on amendments to the Democrats' proposed financial regulatory reform bill. Republicans will get a chance to pull the legislation to the right. Progressives will try to tighten it in a few key ways. And the results of those votes will clarify a). how strongly, if at all, Republicans will fight the bill; b). how pleased the White House will be with the final product; and c). how easy it will be to reconcile with the House legislation, which passed last December.

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Sen. Jeanne Shaheen (D-NH) will co-sponsor an amendment that would require government auditors to open up the books at the Federal Reserve.

The "audit the Fed" measure, first introduced by Sen. Bernie Sanders (I-VT), is actually popular on both sides of the aisle, but is staunchly opposed by the White House, the Fed and the financial industry. Sanders is trying to round up the 60 votes it need to overcome a likely filibuster.

The Obama administration will most likely be under intense pressure to veto the entire financial reform bill if "audit the fed" survives.

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Senate Majority Leader Harry Reid doesn't want any screwing around on financial reform, so he's recommending that votes on amendments, and indeed the final bill, be kept to majority rule: no filibusters, no supermajority requirements.

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