The battle over the shape of financial services reform legislation is heating up as the Senate version of the bill edges closer to floor action and the Obama administration makes it clear it would support it.

Specifically, in comments at a White House meeting April 14 with the Senate and House leadership of both parties, President Barack Obama said, “I am actually confident that we can work out an effective bipartisan package that assures that we never have ‘too big to fail’ again.”

The meeting was prompted by strong comments at mid-week by Sen. Mitch McConnell, R-Ken., Senate minority leader, and a response by Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee.

In his response April 14, Sen. Dodd said he will start the maneuvers needed to bring his bill to the Senate floor “in the next several days.”

At the same time, two other issues of apparent importance to the life insurance industry emerged last week.

The first critical issue involved the reporting out of legislation by the Senate Agriculture Committee that narrowed the exemption that swaps traders have from conducting their activities through major exchanges.

Bills passed by the House and the Senate Banking Committee provide an exemption for end-users such as airlines, manufacturers and farmers, which use them to hedge against business risk, although the exemption is through different means.

The life insurance industry sought the exemption because they use derivatives to reduce their interest rate and capital loss risk on long-term securities used to fund insurance policies, annuities and other products.

However, while narrowing the exemptions, the Agriculture Committee bill does exempt from placement on exchanges those transactions “for those end users who are hedging legitimate commercial risk.”

Although industry lobbyists said they had not seen the actual language, they believe the tighter language will still allow use of custom derivates by insurance companies.

On another issue, the American Council of Life Insurers signed on to a letter objecting to a provision in the Senate bill that would prohibit institutions deemed systemically important from lending an amount to any unaffiliated company that exceeds 25% of the capital stock and surplus of the lending institution.

The letter said that could limit lending to institutions such as insurers by the Federal Home Loan banks, citing different language in the House version of the legislation.

“We urge you to consider similar language in the bill under consideration in the Senate,” the letter said. “If passed in its current form, the bill would have an immediate impact on many banks, insurance companies, and credit unions, forcing them to reduce their advance positions to comply with the cap.”

The concern raised by Sen. McConnell is important to the insurance industry, because it involves the extraordinary authority under which the Federal Reserve Board ultimately provided an estimated $182 billion at one point to bail out American International Group.

McConnell said that the legislation effectively “authorizes permanent bailouts” via a number of provisions. He also singled out a provision that would collect fees from large financial institutions to create a $50 billion fund.

Democrats argue that such a fund would be used so that taxpayers don’t have to cover the cost of dismantling a large failing financial institution, akin to what happened with Lehman Bros. in September 2008.

McConnell’s comments drew a strong rebuke from administration officials and Sen. Dodd.

Dodd implied that he would soon seek floor time for his legislation. He is the primary author of the Senate version of the bill.

In comments on the Senate floor on April 14, he defended his legislation, saying, among other comments, that “our bill extends oversight to dangerous nonbank financial companies like AIG that could pose a risk to our financial stability.”

Second, he said, “our bill eliminates the Federal Reserve’s ability to prop up individual institutions using its 13(3) authority, another way to stop banks from thinking they could be bailed out.

“The Fed’s lending authority is strictly restricted, not expanded as some have claimed,” Dodd said.

Third, he said, “our bill sets up a predictable, orderly, and safe process for shutting down dangerous Wall Street firms that fail without endangering the entire economy. No financial firm will be ‘too big to fail’.”

Dodd also added, “The largest Wall Street firms will have to put up money for a $50 billion fund to cover the costs of liquidating the failed financial firm, and any shortfall will be made up by the largest and riskiest financial firms.”

That issue is also of importance to the insurance industry because both life and property and casualty companies won language in the legislation that exempts every insurance company with more than $50 billion in assets from pre-paying into the fund except for MetLife. MetLife must pay because it is a large bank holding company, with more than $425 billion in assets.