WASHINGTON — The House on Wednesday night began debating legislation that would overhaul Wall Street regulations, overcoming a last-minute revolt by moderate Democrats that had stalled one of the Obama administration's priorities.
The legislation, the most sweeping rewrite of banking regulations since Franklin Delano Roosevelt's presidency, would give regulators the tools they say they need to prevent a recurrence of last year's financial crisis.
It cleared its first test vote late in the day by a nearly party-line 235-177 count. With about 30 amendments ahead of them, lawmakers were not expected to vote on final passage until Friday.
The Democratic bill would create a Financial Services Oversight Council to monitor the financial system and watch for future threats. Large, interconnected firms would have to put more money into their reserves. They would have to feed a fund that pays the costs of dismantling a failing competitor. And even if healthy, they could be forced to downsize if they are deemed a grave threat to the economy.
The bill would remove consumer regulations from current banking regulators and place them in a new Consumer Finance Protection Agency with powers to oversee the public's dealings with lenders. Derivatives, complicated financial instruments, would be traded in more regulated exchanges and hedge funds would have to be registered.
Few, if any, Republicans were expected to vote for the bill.
Republicans repeatedly dismissed the measure as a continuation of financial industry bailouts. "This will no doubt continue the troubling practice of the government picking winners and losers in the marketplace," said Rep. Shelley Moore Capito, R-W.Va.
Democrats countered that the legislation would dismantle failing firms, not save them. Rep. Ed Perlmutter, D-Colo., said the bill calls for a pool of money from large firms, "so that those institutions, if they fail, will have a liquidation fund to put themselves out of their misery."
Before it could reach the floor, however, top House Democrats and Treasury Department officials had to huddle in Speaker Nancy Pelosi's offices into the evening to quell party centrists who sought to change some of the bill's tougher provisions.
Of special importance was a change sought by Rep. Melissa Bean, D-Ill., that would eliminate states' ability to enforce tougher state consumer laws. The Obama administration wanted federal consumer finance rules to be a base, and to let states adopt stricter regulations.
Banks objected, saying they would have to meet a crazy-quilt of regulations.
"We're satisfied that we came to a good place on this," Bean said as she emerged from the meeting.
House Financial Services Committee Chairman Barney Frank, D-Mass., said the "differences have been narrowed."
Under the agreement, the House will also get to vote on a moderate amendment that would add exemptions to the types of firms regulated under complex derivatives trades.
Without assurances that their changes would get a vote, moderates had threatened to withhold their support for letting the bill proceed, congressional officials said.
Complicating the negotiations were changes already granted to liberals, and the likelihood they would get votes on some other of their preferences.
Democratic leaders feared that if some of the moderate amendments passed with Republican backing, the overall bill would lose appeal within the broader Democratic majority, thus imperiling its passage.
The Senate is not expected to act on its version of regulations until next year. Democrats wanted to make sure House amendments did not weaken their hand when they have to reconcile bills with the Senate.