Financial modernization legislation likely to be unveiled late this week has an excellent chance of passage because it repeals the Glass-Steagall Act while avoiding the inter-industry conflicts that have torpedoed efforts to reform the law since the mid-1970s.

According to Senate Banking Committee staffers, both Republican and Democratic members of the committee and industry lobbyists, the legislation says specifically that banks can affiliate with insurance and securities firms. But, as on several other incendiary issues, it is expected to be silent on whether banks can conduct those activities in an operating subsidiary, letting the regulators and the industries fight that issue out.

The bill as currently drafted limits national banks from conducting such activities as merchant banking, securities and insurance underwriting in operating subsidiaries if they have more than $1 billion in assets. However, because of opposition from Treasury Secretary Robert Rubin and Republican members of the committee in private comments to committee chairman Phil Gramm, R-Texas, last week, the cap is expected to be deleted when the bill is finally introduced.

The Obama administration appears optimistic that it can win support from committee Democrats for allowing banks to conduct nonbanking activities in operating subsidiaries. This represents a change in position from last fall, when committee Democrats supported the Federal Reserve Board position on the issue.

The bill is unlikely to include a definition of insurance and a requirement for functional regulation as demanded by the insurance industry, according to the consensus. But it will include some limits to the comptroller’s deference on legal disputes dealing with insurers and agents, a reflection of the strong campaign finance support from insurance agents’ interests in Texas for Gramm, sources said.

At the same time, it will not touch the issue dear to the securities industry, removing the exemption from Securities and Exchange Commission oversight for bank securities activities, the so-called "level playing field" issue. The SEC and the Securities Industry Association are said to be lining up in opposition to the bill already.

While the Gramm version may win support in the House Banking Committee, Commerce Committee support is unlikely because under the Gramm version, the Commerce panel would lose jurisdiction over securities and insurance activities conducted by banks. Reps. Thomas J. Bliley, R-Va., and John Dingell, D-Mich., chairman and ranking minority member of the Commerce Committee respectively, are likely to be vehemently opposed, according to a former House staffer who is now a securities analyst.