Goldman Sachs in cross hairs of financial reform debate

The proposed overhaul of financial regulations was boosted by Senate hearings that turned Goldman Sachs Group Inc. executives into poster boys for Wall Street excess, but the bill senators started debating Thursday would do nothing to outlaw the secret bets Goldman made against the very securities they sold to investors.

“There’s a fundamental conflict of interest that needs to be addressed,” Sen. Carl Levin (D-Mich.) said about one of the key issues at this week’s Goldman hearings.

Levin and several colleagues will push to amend the legislation to outlaw such conflicts. It’s one of many ways that the legislation will be altered during the debate that is expected to stretch over the next two weeks.

And despite well-publicized complaints by financial industry leaders that the bill goes too far, some senators contend that it doesn’t go far enough in reining in Wall Street.

“I think this bill is not tough enough,” Sen. Bernie Sanders (I-Vt.) said. “If this bill becomes watered down so it really is something that Wall Street eventually accepts … I will not vote for it.”

Sanders, other liberals and even some Republicans plan to offer amendments that would crack down harder on financial institutions.

Those proposals include forcing the breakup of the largest banks, imposing caps on interest rates that can be charged to consumers, requiring the Federal Reserve to detail the institutions borrowing its funds and reinstating the Depression-era law separating investment and commercial banking.

Such provisions could endanger support from moderates in the Senate and the House, further complicating attempts to pass the most sweeping overhaul of financial regulations since the Great Depression.

“We have to be on the lookout for that,” said Sen. Richard J. Durbin (D-Ill.), the second-ranking Senate Democrat. “It’s a balancing act.”

Liberals echoed their critique of President Obama’s healthcare legislation as not doing enough.

But Democratic leaders are far less worried that those complaints will destabilize the political coalition propelling the current bill, largely because the pressure to enact it is strong given the public’s outrage over Wall Street’s risky behavior and the taxpayer bailouts that followed.

But that public anger also is spurring senators to take the strongest action against Wall Street to prevent another financial crisis. Consumer groups and other activist organizations support them in many cases.

“I feel that in almost every area, the bill takes significant strides in the right direction,” said Sen. Jeff Merkley (D-Ore.). “There are a couple of places I’d like to take additional strides.”

One involves the so-called Volcker rule. Pushed by former Fed Chairman Paul Volcker, now an economic advisor to President Obama, the rule would sharply limit risk-taking at the nation’s largest banks by prohibiting them from owning or investing in securities operations that benefit only themselves.

The financial overhaul plan includes a provision calling on regulators to study the Volcker rule and then promulgate rules that make the provision effective.

But Merkley, Levin and others believe the wording is vague. They’re concerned regulators could decide not to create the rules. So their three-pronged amendment would order regulators to do so.

The amendment, based on legislation they introduced last month, also would limit speculation by large financial firms that are not banks, in part by requiring them to set aside higher amounts of money to cover potential losses.

And it would prohibit securities brokers from betting against investments they are promoting to their clients — the practice for which Goldman Sachs executives were criticized.

Merkley said no Republicans have signed on yet. But at Tuesday’s Goldman hearing, Sen. Susan Collins (R-Maine) said such conflicts of interest in selling securities “certainly seemed ethically questionable.”

A Collins spokesman said she planned to introduce an amendment that also would address the issue by imposing a fiduciary responsibility on Wall Street broker-dealers to act in the interest of their clients.

Sens. Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.) hope to limit the size of large U.S. banks by capping any banking company’s share of federally insured deposits to 10% of the total nationwide. Their amendment also contains restrictions on deposits and other liabilities.

“The bill we will be considering . . . is strong, but this is stronger,” Brown said Thursday. “If it’s too big to fail, it’s too big.”

Sanders wants to require regulators to break up financial institutions deemed too big to fail, cap consumer interest rates at 15% and require more extensive congressional auditing of the Federal Reserve’s lending activities than called for in the legislation.

The move to audit the Fed has strong support from conservatives as well as liberals — 22 Republicans and 10 Democrats have co-sponsored a separate bill to do so.

Among the Republicans is Sen. John McCain (R-Ariz.), who also joined with Sen. Maria Cantwell (D-Wash.) to call for regulators to reinstate the prohibition against commercial banks engaging in investment banking activity.

Merkley said he hopes some Republicans will support his amendment, but realized there are strong forces working against it.

“The challenge is, there’s an army of lobbyists that want to keep the status quo and they’re going to be doing all they can to not put these core reforms in place,” he said.

Republicans also plan to offer a series of amendments that Merkley said could weaken the bill. If those pass, it would jeopardize his support.

“If the bill was seriously undermined, then I would very much consider voting against it,” he said.

jim.puzzanghera@latimes.com

janet.hook@latimes.com