Bank Reform Bill Is Scrapped : Bailout: But Congress moves to OK $70 billion for strapped deposit insurance fund.

Congress prepared Tuesday night to approve a $70-billion rescue of the bank deposit insurance fund, abandoning the struggle this year for major financial reform.

A House-Senate conference committee working on a compromise banking bill ignored last-minute appeals from the Bush Administration and scrapped a provision in the Senate bill allowing banks to expand across state lines. It was the last remnant of an ambitious Administration-backed program to give banks a vast array of new business opportunities to help them rebuild their weakened balance sheets.

Instead, conferees basically agreed to limit their work to strengthening the bank insurance fund, which guarantees deposits up to $100,000, and to create a system of aggressive early intervention by regulators at troubled banks.

Congress was compelled to act because the insurance fund is virtually broke. In particular, it lacks the money to cope with any significant new bank failures.

The conferees agreed to give the Federal Deposit Insurance Corp., which operates the fund, a $30-billion line of credit at the Treasury to cover losses from the shutdown of insolvent banks. The FDIC also would be allowed to borrow another $40 billion for temporary use, the money to be repaid with revenue from the sale of failed banks’ assets.

The $70 billion would be repaid by the nation’s banks within 15 years. The FDIC would decide on granting any extension on repaying it.

However, the banking system’s ability to raise the money to repay the $70 billion is highly uncertain because of the unpredictability of the general economy and the depressed condition of real estate markets: About 23% of all banks loans are in real estate.

If the banks aren’t profitable enough to repay the loans, a bailout by the taxpayers becomes inevitable.

The Administration had argued that the only way to make banks profitable would be through new business opportunities, including the ability to market and underwrite securities and insurance, and unrestricted movement across state lines. It also wanted commercial and industrial firms to be allowed to buy banks, providing a badly needed new source of capital for the industry.

But Congress wouldn’t accept this formula after various special interest groups fought the plan with skill and determination. Insurance agents objected to banks entering their turf, and small community banks didn’t want big institutions crowding their markets.

And a powerful Democratic chieftain, Rep. John Dingell (D-Mich.), chairman of the Energy and Commerce Committee, didn’t want to shatter the 50-year-old barriers separating banking and commerce.

The result was a stalemate.

Treasury Secretary Nicholas F. Brady made a final, futile plea Tuesday for the reform plan, saying that the narrow bill prepared by the conferees “provides critically needed funding but is otherwise wholly inadequate to the task at hand.”

“It is shocking to me that some in Congress are only now coming to realize the seriousness of the situation,” Brady said in a letter to Senate Banking Committee Chairman Donald Riegle (D-Mich.)

“Fundamental reform of our banking laws, already delayed, is not a ‘we can get to it later’ issue,” Brady warned. “Continued congressional inaction is a recipe for trouble.”

But the legislators rejected his appeal, deciding instead to adopt a bill limited to funding the FDIC and expanding the powers of financial regulators.