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Banks Playing Both Sides On Bankruptcy Bill, Have Reform On Life Support

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Senate Majority Whip Dick Durbin (D-Ill.) and other Senate Democrats have spent the last several weeks negotiating with major banks, including JPMorgan, Bank of America and Wells Fargo, hoping to come to a compromise on bankruptcy legislation that moved with great fanfare through the House in early March.

Meanwhile, those banks' umbrella group, the American Bankers Association, has been whipping votes against it after having left the negotiating table in late March. Community banking groups and Senate minority whip Jon Kyl (R-Ariz.) have also been whipping votes against it. Backers of the bill have been waiting to come up with a compromise to start whipping support, said a person familiar with the negotiations, and it appears to have backfired, with the banks picking up votes in opposition.

The central debate is whether to allow bankruptcy judges to reduce -- or cramdown -- mortgages for homeowners who enter bankruptcy. The banking lobby strongly opposes allowing cramdown.

Sen. Jon Tester (D-Mont.), a key vote on the banking committee, dealt a blow to the bill Wednesday, telling the Huffington Post that he is "opposed to cramdown."

He went on: "I just think a deal's a deal. I have a lot of empathy for folks who tend to get led astray, but I just think it's going to create some problems - pretty obvious, actually. I don't have to list them. I'm generally opposed. I don't think it works well."

The Durbin strategy, say three people familiar with the negotiations, was to come to a compromise with the banks first and then use the bank support to win the votes of conservative Democrats and a few Republicans to get the 60 needed to overcome a promised Republican filibuster. But that left the banks' umbrella group to lobby in a vacuum.

"We are no longer at the negotiating table, but the concerns we have remain," Peter Garuccio, a spokesman for the ABA, told the Huffington Post.

"You're right to say it's kind of a vacuum right now," said a Senate aide involved in the negotiations. "We're still working to get a deal, but we don't have a deal, so it's hard to do the math...It's premature to count votes on a bill that doesn't exist yet." The bill doesn't exist yet, say negotiators, because the Senate is heavily rewriting the House version.

A lobbyist for the banking industry said that they also now expect to win the votes of Democratic Sens. Ben Nelson (Nebraska), Mark Pryor (Ark.) and Blanche Lincoln (Ark.).

Sen. Mark Warner (D-Va.) might join that list.

A key vote on the banking committee, the conservative Democrat expressed reservations about the bill to the Huffington Post Wednesday. Asked if he was supportive of it, he said, "I'm not. I think there are probably some changes that need to be made to get something that can pass."

Warner said that he was philosophically open to cramdown, but only if it was tightly defined. "I think it could be used as a viable last resort but only in a very narrowly defined set of circumstances," said Warner. "I don't think defaulting to bankruptcy should be a way out of your obligations. There shouldn't be principal readjustment."

Warner said that any compromise needs to require, for homeowners, "an appropriate set of steps you have to go through first -- if there was a good faith effort. Can you put in place enough steps so it can be used as a tool to force a meeting of the minds pre-bankruptcy? It could be used as a tool but something that's rarely if ever defaulted to."

The Durbin strategy could ultimately pay off, said a Senate aide, if negotiators can come to a deal with the banks. "We know that Republican leadership has been very clear this will be a 60-vote threshold. The entire point of negotiation is to get enough votes to get to that point. We can have those discussions once we have a bill. But it's hard to have negations when you don't have a bill."

Warner, for his part, is still open to compromise. Asked what specific changes he wanted to see in the bill, he declined to comment because, he said, "some of these conversations are going on right now."

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