By Brady Dennis and Neil Irwin
Washington Post

The Senate voted Monday afternoon to prevent the start of formal debate of legislation to overhaul financial regulation, creating a largely partisan standoff over a far-reaching Democratic bill meant to strengthen oversight of Wall Street.

It would have taken only a few Republican votes to reach the 60-vote threshold needed for debate to begin. The measure received 57 votes with 41 senators voting in opposition. Two Republicans did not vote.

Sen. Ben Nelson (D-Neb.) joined Republicans in voting to prevent debate from proceeding. When the outcome was clear, Senate Majority Leader Harry M. Reid (D-Nev.) also voted no, a move that allows him to reintroduce the measure later.

While the procedural vote delays formal consideration of the overhaul bill, lawmakers in both parties have said they expect it will ultimately be debated -- and passed -- in the coming weeks, though the exact contours of the final legislation remain uncertain.

There are signs that at least a handful of Republicans will ultimately vote for some form of the bill. Democrats in recent days have increasingly coalesced around the far-reaching legislation. They are eager to pressure Republicans into a difficult vote, in which liberals could characterize those who oppose the bill as trying to protect Wall Street.

Monday's vote also came after a new Washington Post-ABC News poll shows that about two-thirds of Americans support stricter regulations on the way banks and other financial institutions conduct their business.

Sen Richard C. Shelby, the lead Republican negotiator, said that he and Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, are "conceptually very close" to a deal on the pending bill but that Shelby is pushing to "tighten up some language."

Shelby said the changes he wants focus on three key areas: the particulars of a proposed regulator to protect consumers against lending abuses; the details of new government powers to wind down large, troubled firms without using taxpayer money; and measures to establish oversight of the sprawling and largely opaque market for financial derivatives.

The Washington Post-ABC News poll showed that majorities of Americans back greater federal oversight of consumer loans, as well as the creation of a fund, paid for by the financial industry, that would cover the costs of dismantling distressed firms whose failure could put the larger economy at risk.

Results were more mixed on the complicated topic of derivatives, which essentially are contracts that allow traders to bet on the direction of stocks, commodities and other assets. The poll showed 43 percent support federal regulation of the vast derivatives market; 41 percent are opposed; and 17 percent, nearly one in five people, expressed no opinion on the topic.

"I think we basically know what went wrong. . . . The question is, do we agree basically on how to fix it?" Shelby told the community bankers Monday. "We're not there yet; I hope we'll get there."

Even as the specifics of the 1,400-page bill remain in flux, members on both sides of the aisle say the legislation is likely to pass in coming weeks. Shelby himself seemed to acknowledge that the Democrats currently have the upper hand as they try to push the bill through Congress.

"There's only 41 of us," Shelby said, noting the huge Democratic majority in the Senate. "I liked [when there were] 55."

Shelby said he would continue negotiating with Dodd "in good faith" to try to find a consensus that both parties could embrace.

"I would hope that any agreement we reach, that we hang together on the floor and create critical mass between Democrats and Republicans," Shelby said. "That's my goal."

But aides to Shelby said Monday afternoon that Republicans could introduce their own version of the legislation.

"We have been drafting an alternative approach since the very beginning," said one staff member. "It may come to the point where Republicans decide, 'Let's just put out specifically what we're for.' That decision hasn't been made yet."

Aides declined to talk in depth about how a Republican alternative bill would differ from the Dodd legislation, but they said it almost certainly would include language to overhaul the massive government-sponsored entities Fannie Mae and Freddie Mac.

The Dodd bill does not tackle that issue, although administration officials say they have plans to overhaul the mortgage giants after Congress passes new financial regulations.

Republican staff members on Monday also cast doubt on repeated assertions from top lawmakers in recent days -- including Dodd, Shelby and leaders of both parties -- that negotiations are progressing and that the two sides are closer than ever to an overall deal.

While Dodd and Shelby have continued to meet and speak periodically by phone, they said, their staffs have not sat together to try to hammer out specifics of the legislation for more than a week.

"We need to be in a room, at the staff level, nailing down the language, and that's not happening," said one Shelby staff member. "They stopped talking to us."

As if to illustrate the chasm that remains, despite philosophical agreement on many core issues, the aide said that if Dodd and Shelby "met today and resolved every issue, it would still take us days to get it all together."

Shelby aides on Monday continued to insist that Dodd's bill contains crucial flaws -- among them provisions that could leave the door open to future bailouts of financial firms.

Proponents of the bill say it ensures that taxpayers no longer will be on the hook and that failing firms will be put out of business. But Shelby's staff argues that the bill gives the FDIC too much flexibility, allowing the agency to treat creditors differently and possibly choose to bail out some creditors over others.

"The moral hazard issues really need to be examined," one staff member said.

Republican aides also cited other objections that they have maintained for months, including their view that a proposed new bureau of consumer protection is far too powerful and unaccountable. The bureau is designed to guard against abuses in mortgages, credit cards and other such loans.

Shelby aides said they also had discussed with Dodd's staff ways to include "some version" of the so-called Volcker Rule, which would prevent banks from participating in certain types of risky trading, such as owning hedge firms.

Republicans said Monday they had not yet seen the text of new legislation Democrats put together over the weekend to establish oversight of the vast trade in financial derivatives.

Staff writer Jon Cohen contributed to this report.