Financial reform faces Senate test: Sen Dorgan

WASHINGTON (Reuters) - Financial regulation reform is likely to emerge from the U.S. Senate Banking Committee too watered down and, if so, will face a challenge on the Senate floor, a senior Democratic senator told Reuters on Friday.

Senator Byron Dorgan, an outspoken critic of Wall Street, said it is reasonably certain the banking committee's bill, expected to be released next week, "will be something far short of what is necessary" to fix the financial system.

"That doesn't mean that the product is going to be worthless. I'm just saying it's going to be watered down and that it will have to be taken up on the floor," Dorgan said in an interview.

"There will be those of us who will want to make certain it does all the things that are necessary," he said, listing basic goals such as ending the notion that some financial firms are "too big to fail" and regulating hedge funds and derivatives.

The lawmaker's comments underscored the tricky political path forward for legislation under development for months in the U.S. Congress aimed at tightening bank and capital market oversight after the worst financial crisis since the 1930s.

On his left, Senate Banking Committee Chairman Christopher Dodd faces Democrats, such as Dorgan, who are determined to win hard-hitting regulatory changes. On his right, Dodd must deal with Republicans working to weaken or kill reforms altogether.

Seeking a middle way, Dodd has been working with Republican Senator Bob Corker on a bipartisan compromise that they expect to release next week.

Dodd also this week resumed formal negotiations with Senator Richard Shelby, the committee's top Republican, who has been hammering out substitute legislation of his own that will likely be offered as amendments at the committee

level.

The banking panel is on track to vote on a bill in March, sending it to the Senate floor shortly later.

The House of Representatives approved a bill in December. The Dodd-Corker measure is sure to be pared back from the House bill, which itself was more moderate, in some ways, than the bold proposals made in mid-2009 by President Barack Obama.

All along the way, lobbyists for banks and Wall Street have worked to delay and minimize reform proposals.

Dorgan, who is not a banking committee member, said watching the process unfold has not been comforting.

"The participants that have gathered to oppose reforms have a pretty strong hand in this town," he said.

"They've engaged a lot of assistance in town and are trying to make sure they get through this without the kind of regulation that I think is necessary," he said.

If the "too big to fail" issue is not adequately addressed in the bill, "we're going to have to have amendments on the floor and I'm going to be involved in that," Dorgan said.

(Reporting by Kevin Drawbaugh; Editing by Andrew Hay)