Embattled credit-rating agencies like Moody's Corp. and Standard & Poor's could catch a break when U.S. lawmakers sit down to craft a final rewrite of financial regulations.
The legislation as it stands would effectively upend the entire industry's business model, but lawmakers from the Senate and the House of Representatives could strip that provision as they begin resolving differences between their two Wall Street reform bills.
Democrats in charge of the process say there are relatively few differences between their two bills, which both aim to avoid a repeat of the financial crisis that plunged the world economy into a deep recession and led to massive taxpayer bailouts of Wall Street firms.
They plan to postpone the most contentious issues, such as how to regulate derivatives, until the end of the two-week process they began Thursday with opening statements.
Still, they will face billion-dollar decisions when they meet at 11 a.m. for their first full day of work.
The credit-rating industry has been widely criticized for assigning rosy ratings to dubious debt offerings that imploded and brought Wall Street to its knees during the 2007-2009 financial crisis. The Senate's bill, passed last month, would set up a new government panel to eliminate perceived conflicts of interest.
But Representative Barney Frank, who heads the House-Senate conference committee, is instead pressing for a one-year study of the issue by the Securities and Exchange Commission.
That would allow credit raters to continue soliciting business directly from the businesses, municipalities and other issuers' offerings which they assess.
A spokeswoman for Democratic Senator Al Franken, sponsor of the original proposal, called Frank's counter-proposal "very concerning."
House Democrats also want to strike a provision that would exempt private equity funds from having to register with the SEC.
Frank also aims to exempt smaller hedge funds and other private funds from registering with the SEC. The Senate bill, which is being used as a starting point for negotiations, would require firms that manage more than $100 million in assets to register; House Democrats hope to raise that to $150 million.
The agenda highlighted a surprising dynamic that has emerged over the past year of legislating: House Democrats, usually viewed as more liberal than their Senate counterparts, may in fact be Wall Street's best bet for softening legislation that is sure to crimp industry profits for years to come.
Republicans have largely opposed the reform effort and are not expected to play a significant role in final negotiations.
Frank and his counterpart in the Senate, Democrat Christopher Dodd, have pledged to conduct the committee's business in the open as they try to craft a final product for President Barack Obama to sign into law by July 4.
Behind the scenes, negotiations continued as Democrats sought to resolve their most divisive issue -- how to regulate the $650 trillion derivatives market that led to the downfall of titans like insurer AIG during the crisis.
Democratic Senator Blanche Lincoln sought to reassure big banks that they would still be able to participate in the lucrative swaps market under her proposal, which is included in the Senate bill.
That provision would require banks to choose between their swaps desks and access to the Federal Reserve's emergency loans and other protections, stirring widespread concern on Wall Street.
On Monday, however, a document showed Lincoln was seeking to mollify concerns that her measure goes too far. The Fed would be able to extend emergency loans to all swaps participants and banks would be able to keep using swaps in-house for their own hedging, according to the document.
But under the revised plan, banks would have to set up a separately capitalized affiliate to conduct any swaps dealing. That would protect banks' deposits, which are insured by the federal government, but allow the parent company to still reap billions from the market.
Lincoln's provision has become a central target for Wall Street lobbying efforts and banking regulators during the final stages of resolving legislation that stretches to 2,000 pages.
Many Democrats have expressed doubt over her approach, arguing that taxpayers and bank customers could be better protected by limiting banks' ability to engage in speculative trading.
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