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Financial Reform Bill's Core Element Has Lots Of Critics

With Senate and House conference members set to deliver opening statements Thursday as they seek to draft a compromise bill on sweeping financial reform, Congress’ proposed remedy for too-big-to fail firms appears to be far too little for more than a few legislators.

Columns and steps
Columns and steps

What’s more, two years after the domino-like failure of a handful of financial giants from Bear Stearns to Lehman Brothers, the central component of the reform bill is widely expected to take a back seat to battles over a number of arguably less important measures from consumer protection to derivatives regulation to capital requirements. (See a rundown of key differences here.)

Even more striking is that the criticism can be found on both sides of the political aisle and transcends the usual rhetoric and poliitics.

Republican Sen. Bob Corker of Tennessee, a conferee who spent countless hours working on the too-big-to-fail component of the Senate version remains calls the government's resolution authority in the final product “disappointing.”

“Is it better than having nothing? Yes,” adds Corker, in what is hardly a ringing endorsement.

Another Republican conferee, Rep. Scott Garrett of New Jersey, who helped craft the GOP’s reform plan, won’t even say that.

“It was a bad idea," says Garrett. “What you have is a bill that will put into statute what we did in the past. Back then, we didn’t know better. Now we do.”

Garrett and others wanted to create a new section of the Bankruptcy Code to unwind the businesses of failing financial firms and leave the government out of it. They also wanted to strip the Federal Reserve of any emergency lending authority.

Even Democrats, whose party have managed to push through reform bills by narrow margins in both hoses of the Congress with minimal or non-existent GOP support, are more than a bit concerned and skeptical.

For some, too big to fail is too big to exist, and the failure to address that in the bills is a problem.

“If you believe we have not dealt with too big to fail in this bill and the resolution authority is not what we thought it was, then it is very difficult to resolve one of these monsters,” says Sen. Ted Kaufman of Delaware, referring to the mega firms.

Kaufman, for example, would reinstate the Glass-Steagall Act keeping insurers, banks and securities firms out of each other’s business, as well as impose a firm limit on the amount of government insured deposits a firm can hold, as a way of capping its size

Clockwise from top left: Sen. Bob Corker (R-Tenn.), Rep. Scott Garrett (R- NJ), Sen Ted. Kaufman (D-Del.), Rep. Brad Sherman (D-Calif.)
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Clockwise from top left: Sen. Bob Corker (R-Tenn.), Rep. Scott Garrett (R- NJ), Sen Ted. Kaufman (D-Del.), Rep. Brad Sherman (D-Calif.)

Kaufman and those of a like mind draw a strong connection between size and risky business, which is why they support measures to limit firms proprietary trading and derivatives activities.

Democratic Congressman Brad Sherman of California, who twice voted against the $700-billion TARP rescue package in the fall of 2008, says’ “it’s easy to break them up, and is want to remind that during the crisis of 2008-2009 the big firms “held us hostage on the basis of their size.”

Despite their differences, legislators like Sherman and Garrett, for instance, share some important common ground. Both remain concerned that the Fed's emergency lending authority, though checked somewhat in the bills, leaves room for massive taxpayer exposure—what Sherman calls, “the mother of all bailout authority.”

Garrett stresses that firms should not be ”implicitly backed by US taxpayers.”

Proponents of the too-big-to-fail measures say they combine an “early warning system’ and regulatory intervention to force firms to take the necessary steps—such as increasing capital, disengaging in certain activities, even shrinking in size—to slow or even better stop their slide into the failure zone..

Corker, who considers the resolution authority of the Senate bill better than that of the House, pushed for an updated, adjusted bankruptcy code that would have brought “real judicial review” into the process, to complement and supplement the enhanced powers of regulators.

The Senate bill also includes an amendment by Barbara Boxer (D-Calif.) that specifically prohibits the use of any taxpayer funds in rescuing the firms.

That may sound clear and simple, but to some it is also simplistic and hardly absolute.

“It’s still broad enough with that amendment to allow for a bailout,” says Garrett.

Some of the concern also reflects what Republicans consider a non-partisan, ramrod approach to the legislative process as well as residual bad blood between the legislative and executive branches, dating back to the hasty passage of the TARP plan, which at different times became was a political football and slush fund.

In that context, much about the current legislation reflects the White House’s policy choices, say critics, and once again that is not a partisan assessment.

“The administration has gotten its ideal bill,” says Corker, who adds it demonstrates “a desire to give as much freedom to regulators as possible.”

“They want the regulators to have a heck of a lot more authority than we do,” says Kaufman, who quickly adds that the failure of regulators in the recent crisis was not that they were asleep on the job but that they had little interest in doing it.

To some that explains apparent inconsistencies in the Obama administration’s choices.

For one, it supports a bank tax to recoup TARP funds, but opposes a so-called resolution fund paid for by financial firms, in the event of future bailouts are needed.

Moreover, it opposes Senate provisions to toughen capital requirements and have banks create separately-capitalized units for their swaps operations, but has proposed the Volcker rule, which limits proprietary trading and some derivatives contracts..

“They’re consistent; they want executive power with few restrictions,” says Sherman. “They want the power to bail, they want the power to nail.”

Slideshow: Richest Members of CongressComplete Economics & Government Coverage

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.