WASHINGTON – Key Democrats and Republicans said Wednesday that they are close to agreeing on the main elements of a bill to overhaul the nation’s financial regulations, raising the prospect that the Senate could begin formal discussion of the landmark legislation early next week.

“I’m more optimistic than I’ve ever been,” said Sen. Richard Shelby of Alabama, the lead Republican negotiator. “I think we can put a bill together pretty soon.” His counterpart in months of talks, Senate banking committee Chairman Christopher Dodd, D-Conn., agreed that they were on the cusp of a consensus.

If no last-minute hurdles arise, Senate Majority Leader Harry Reid, D-Nev., plans to hold a test vote Monday, aides said. If he gets 60 or more votes, he could move ahead with formal debate on the bill, which among other things would create an agency to protect consumers against abuses in mortgages and other loans, set up a council of regulators to watch for risks to the financial system, and give the government power to wind down large, troubled financial firms.

The likely emergence of a bipartisan consensus is a notable departure from the fractious debate over health care legislation, which passed last month without a single Republican vote. This time, some Republicans say they are looking forward to supporting the financial bill, which arose out of an economic crisis that has left millions of Americans angry and bereft of their jobs, homes and savings.

With both parties eager to claim that they are tackling financial excesses, Republicans have been focusing their objections on specific tenets of the legislation rather than on its overall thrust, allowing for more compromise.

The effort to build bipartisan support received a small but perhaps critical boost Wednesday as the Senate Agriculture Committee approved a measure that would establish oversight of the vast market for financial derivatives, with Sen. Charles Grassley, R-Iowa, joining the Democratic majority. Grassley’s yes vote was noteworthy, particularly after his lead role in failed negotiations over the health care bill last summer.

The derivatives measure, proposed by committee Chairman Blanche Lincoln, D-Ark., could dramatically reshape several critical markets and deprive financial firms of a major source of revenue. The proposal will be added to the broader overhaul bill sponsored by Dodd.

“This is no time for small fixes or tweaking around the edges,” Lincoln told her colleagues, adding that “to contemplate inaction is unacceptable.”

While Grassley expressed disappointment that the measure did not garner more Republican support, he said in a statement that he voted for it “because I think transparency is the right policy.” He added that Lincoln’s draft “isn’t perfect” and that his vote does not mean he will support the overall bill.

Lincoln’s legislation bans big Wall Street banks from trading derivatives, contracts that allow financial traders to make side bets on the direction of stocks, commodities and other assets. Derivatives trading, which aggravated the financial crisis, has roots in the trading of certain farm commodities, which is why the agriculture committees in the Senate and House have some jurisdiction over it. Treasury officials and some Democrats on the Senate Banking Committee, which is also interested in derivatives, do not support the ban.

Lincoln’s measure could prove more favorable to food manufacturers and other commercial firms than to banks, even though her staff made some late adjustments, at the request of Treasury officials, to limit derivative trading by non-financial companies. The bill that emerged out of the banking committee is tougher on these companies. Lawmakers must resolve the differences between the proposals.

After Grassley’s vote, some lawmakers said passage of a sweeping regulatory bill is more likely than ever.

“There are a lot of Republicans who want to be for this,” said Sen. John Thune of South Dakota, a member of the GOP leadership. “We realize that, in the end, something is going to pass.”

Republicans said progress on the bill was due to the unified position taken last week by all 41 Republican senators, who warned that they could vote as a bloc against the legislation.

Meanwhile, Democrats seized on Grassley’s vote as a sign of growing consensus on the need for financial reform, given his central role in almost every piece of key domestic legislation approved with bipartisan support in the past decade. “It’s a significant signal, I think,” said Sen. Kent Conrad, D-N.D., who serves on three committees with Grassley.

In meetings with Treasury Secretary Timothy Geithner on Tuesday, several Republicans asked the administration to clarify how new regulations would affect community banks and small businesses, and expressed opposition to a $50 billion “resolution fund” to wind down large, troubled financial firms. Republicans have said that this fund, though financed by the financial industry, would open the door to future taxpayer-funded bailouts.

Obama administration officials do not view these demands as burdensome. Originally, the administration also opposed the creation of such a fund.

Formal debate, if the Senate moves ahead with it Monday, would probably last at least two weeks, according to Senate aides. Under that time line, the Senate could pass the legislation by mid-May, at the latest, giving the House two weeks to approve the latest version of the bill and send it to President Obama’s desk before a planned one-week Memorial Day break.


Washington Post Staff Writer David Cho contributed to this report.


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