On Tuesday, Senate Banking Committee Chairman Christopher Dodd (D-CT) voiced concern over the so-called Volcker Plan during a committee hearing. The proposal, brainchild of former Federal Reserve Chairman Paul Volcker, has been championed by the Obama administration. It seeks to prevent banks from using customer deposits to trade for their own account ("prop trading") and caps their exposure to various liabilities. While many regulation advocates love the idea, others believe that eliminating prop trading would have done little to avoid the kinds of risks that led to the financial crisis and that it's hard to figure out how to limit banks' exposures to different kinds of products. And although Dodd is no opponent to the regulation in theory, he worries that the President may be reaching too far in advocating this plan.
As I've noted before, the Senate is having a very difficult time putting together a financial regulation bill that can pass. Dodd is rightly concerned that the President's ambitious proposal will make getting the legislation done even more difficult, if possible. Further, the Wall Street Journal reports:
Mr. Dodd also appeared slightly annoyed that President Barack Obama threatened during his State of the Union speech last week to veto the legislation if administration officials weren't satisfied with it. Mr. Dodd called it "somewhat interesting" that the White House would threaten a veto when Mr. Dodd's bill was the only major piece of legislation in the Senate that had a chance of attracting Republican support. White House officials didn't respond to questions about Mr. Dodd's comments on the veto threat.
Mr. Dodd also slammed the White House for not having answers to technical questions about the proposals, saying he was calling the administration and "not getting good answers."
Dodd's anger is understandable. The Obama administration is clearly stepping on his toes. He's been working hard for the past two months to put something together that can actually get through the Senate, and the President's insistence on having this highly controversial measure included in the bill as a pre-requisite for his signature makes Dodd's job next to impossible.
I think, ultimately, Dodd will call Obama's bluff on this one. It's incomprehensible that the President will refuse to sign a broad financial regulation bill similar to the one the House passed in December if it comes across his desk -- even if it doesn't include the Volcker plan. I just can't see Obama cutting off his nose to spite his face here.
But this stance by Dodd pretty much puts the last nail in the coffin containing the Volcker plan. I interpreted it as an obvious political play from the very beginning, with little chance of actually making its way through Congress. Without Dodd's support, it doesn't stand a chance.