Senator Dodd's exit roils financial reform

WASHINGTON (Reuters) - How Senator Christopher Dodd handles his final months in office is suddenly the big question surrounding U.S. efforts to tighten financial regulation, with some analysts now expecting a more moderate reform.

The Democratic chairman of the Senate Banking Committee -- in trouble politically back home in Connecticut over his ties to the unpopular financial services industry -- announced on Wednesday that he will not seek reelection.

He is expected to complete his term and fulfill his commitment to win Senate passage of the Obama administration's financial reform agenda, or something close to it.

Without the imperative of winning votes for reelection, Dodd may be less motivated to press a populist reform agenda, making him more prone to compromise on controversial issues, said analysts and lobbyists.

Moreover, Dodd's status as a lame duck will reduce his influence as chairman, undercutting his ability to get his way, said Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution, a Washington think tank.

One reform proposal that could be in jeopardy is Dodd's idea to consolidate U.S. banking supervision into one agency, Elliott said.

Another potential soft spot on the agenda is the Obama administration's proposal to create a Consumer Financial Protection Agency (CFPA) to regulate mortgages, credit cards and other products, said Edward Yingling, head of the American Bankers Association, a lobbying group for banks.

Dodd strongly supports the CFPA, along with many Democrats. But Yingling, whose group opposes it, along with Republicans and other business interests, said: "The concept of an independent CFPA is unlikely to pass in the Senate."

COMPROMISE STILL ON CARDS

Jaret Seiberg, a policy analyst at investment firm Concept Capital, said Dodd's announcement is a neutral for banks and unlikely to impact financial reform legislation.

Dodd introduced a 1,139-page reform bill in November that was in some ways more ambitious than the 1,279-page bill pushed through the House of Representatives last month by Representative Barney Frank.

The Dodd bill was slammed immediately by Senator Richard Shelby, the top Republican on the banking committee. Dodd responded by setting up four bipartisan teams of two committee members each to work on controversial issues.

Some committee members have said they are making progress toward agreement, with key provisions of Dodd's original bill undergoing significant change.

"Dodd was already going to have to compromise ... if he wanted to enact the bill. His decision to retire after the election does not alter this equation," said Seiberg.

As Round Two of Congress' punishing fight over financial regulation gets under way this month, Dodd will have his legacy in mind as he ends a long career on Capitol Hill. He will also be watching the fragility of the Democrats' Senate majority.

Democratic Senator Byron Dorgan said on Tuesday he will not seek reelection.

Dug in deeply in opposition to reforms are Republicans and the "fat cat bankers on Wall Street," as President Barack Obama has labeled them. They suffered a defeat on December 11, when the House approved a bill loaded with reforms the bankers opposed.

Now they are throwing everything they've got into blocking reforms in the Senate, knowing it is an arena where millionaire lawmakers often look after their own.

The Senate will not fully reconvene until January 20.

DODD BEHIND IN POLLS

It has been clear for months that Dodd was far behind in the polls in his home state where he has been hounded by questions about his ties to the unpopular financial industry.

In 2003, he took out two low-rate mortgages from Countrywide Financial Corp, once the largest U.S. home lender that was acquired by Bank of America in 2008. Countrywide was widely criticized for its subprime mortgage business.

Critics said the loans represented a conflict of interest since Dodd's committee oversees mortgage lenders. A Senate ethics investigation followed. Dodd later refinanced the two loans, said he regretted doing business with Countrywide and made public related documents. The investigation ended.

Dodd also has long-standing ties to Wall Street, having raised millions of dollars over the years from employees of firms such as Goldman Sachs and Citigroup, many of whom go home to Connecticut from New York City every night.

Dodd was further injured politically by his role in a controversy over bonuses for executives at bailed-out former mega-insurer American International Group.

He made a brief run for the 2008 Democratic presidential nomination, but withdrew after winning few votes.

(Additional reporting by Thomas Ferraro, Karey Wutkowski, Richard Cowan; Editing by Andrew Hay)