Today at 2:00pm ET, exactly 2 years after the collapse of Bear Stearns in March 2008, Senate Banking Committee Chairman Chris Dodd will unveil his financial reform bill. This bill promises to bring sweeping change to all major US banks. Even Morgan Stanley and Goldman Sachs will not be spared as the bill is said to contain a provision that hinders these firms from revoking their bank holding company charter they adopted during the financial crisis.
But the bill may not live up to its promise. While the bill will undoubtedly change the regulatory structure, it is unclear how much it will affect banks. So far, the regulatory changes are much less drastic than Democrats originally intended. The Consumer Financial Protection Agency will be watered down and incorporated into the Fed. Furthermore, a council of regulators will have the ability to veto CFPA regulations. The aspect of the bill with the strongest immediate effect on banks, the Volcker Rule, is not even a sure thing. The bill only gives regulators the power to implement the Volcker Rule after a "study."
What will ultimately drive this bill is not the specific provisions but broader political dynamics. Democrats will focus all of their attention on financial reform over the next half-year because this gives them the strongest position during mid-term elections. The goal is to put Republicans in the most difficult position possible: either side with the President or side with Wall Street. For that reason, I would expect this bill to be passed before mid-term elections. So far, Republicans' stance -- that they are pro-reform but need more time -- hasn't gained traction since Democrats have made a bipartisan effort on financial reform for an entire year.
Obama's approval rating is now at an all-time low (Gallup: 46%). This low approval rating is a serious impediment to his domestic agenda as well as his foreign policy (as shown by the recent Netanyahu incident). Financial reform may be the only Obama initiative that the public still supports. If I were him I would milk that for all its worth.
