WASHINGTON—A bipartisan Senate coalition has rejected a proposal to limit the size of the nation's largest banks as a means of reining in the financial sector.
The Senate voted 61-33 against a proposal that would have required the nation's giant banks to split up. The Obama administration has argued that the size of financial institutions was not the root cause of the 2008 Wall Street crisis.
The proposal by Democratic Sens. Sherrod Brown of Ohio and Ted Kaufman of Delaware was staunchly opposed by the bank industry. Brown and Kaufman argued that cutting banks down to size would end firms deemed "too big to fail."
Among the banks that would have been affected were
THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.
WASHINGTON (AP) -- Senate Democrats, prodded by President Barack Obama, rejected a Republican consumer protection plan that would have diluted a central element of the administration's financial regulation package.
The vote cleared one of the sharpest partisan disputes over a sweeping overhaul of financial regulations.
Democrats and the president argued that the GOP proposal would have "gutted" consumer protections. The vote was 61-38, with two Republicans -- Sens. Olympia Snowe of Maine and Charles Grassley of Iowa -- joining Democrats to defeat the GOP measure.
Following last-minute adjustments, a separate proposal to audit the Federal Reserve that the Obama administration once opposed was attracting broad support from conservatives and liberals alike. The Senate was expected to vote on that measure next week.
Momentum for the audit grew after the Obama administration withdrew its earlier opposition to the proposal on Thursday, saying it was satisfied that the audit would not interfere with the Fed's authority to set monetary policy.
Senators prepared to vote on a measure pushed by Senate liberals that would limit the six of banks. It took particular aim at the six biggest banks in the United States -- Bank of America, JPMorgan Chase, Citigroup,
The proposal would limit the size of banks to assets of no more than 2 percent of GDP and to deposits of no more than 10 percent of the nation's total deposits. The Obama administration has argued that size alone was not responsible for the economic crisis and that reducing the size of the largest banks would hurt their competitiveness internationally.
The consumer protection measure is one of the key features of Obama's package to rein in financial institutions. The overall legislation, the most sweeping rewrite of Wall Street rules since the Great Depression, would also set up a system to watch out for risks in the system, create a method to liquidate large failing firms and write new rules for complex securities blamed for helping precipitate the 2008 crisis.
Democrats have proposed an independent bureau within the Federal Reserve to write and enforce regulations that would police lending. The Republican proposal would create an agency within the Federal Deposit Insurance Corp. The FDIC would have to approve regulations and enforcement would be left to bank regulators.
Republicans said the Democratic bill overreached and would give a powerful consumer agency too big a voice in banking affairs. The Democratic version of the legislation already contained some concessions to Republicans, and Democrats showed no willingness to cede any more ground
"Alternatives that gut consumer protections and do nothing to empower the American people by cracking down on unfair and predatory practices are unacceptable," Obama said in a statement before the vote.
The consumer protections provision has been a point of great partisan friction and has prompted a massive campaign by the U.S. Chamber of Commerce and bank lobbyists to limit its reach.
The bill would turn the U.S. financial system into "a social justice mechanism" by giving a powerful consumer agency a huge voice in banking affairs, said Sen. Bob Corker, R-Tenn.
Sen. Richard Shelby, R-Ala., said the Democrats go too far by allowing state laws to trump federal laws and he rejected claims that his alternative proposal is too weak.
Senate Banking Committee Chairman Chris Dodd, D-Conn., dismissed the Republican plan as "a stimulus package for scam artists."
The one-time audit of the Fed would be conducted by Congress' investigative arm, the Government Accountability Office. It would focus on the Fed's emergency lending to financial institutions in the months leading up to and after the 2008 financial crisis. At its peak, at the end of 2008, the Fed's lending totaled $1.16 trillion.
The Fed has become one of the targets of public anger in the aftermath of the financial crisis, blamed for not seeing the meltdown coming and for having what some perceive as too-cozy a relationship with the nation's largest institutions.The audit measure, proposed by Vermont Independent Sen. Bernard Sanders, has populist support from across the political spectrum, from tea party activists to liberals and labor organizations.
Associated Press writer Charles Babington contributed to this report.