His Republican partner, Sen. Richard Shelby, may lose an unprecedented opportunity to dismantle the regulator he blames most for the crisis — the Federal Reserve Board.
The Alabama Republican is intent on cutting the central bank down to size, arguing it failed to stop the financial crisis and should be stripped of its supervisory powers.
Initially a radical notion, the idea has gained substantial traction in the Senate — and observers agree Shelby has a unique chance to accomplish his goal.
"Because the Fed is in its weakest spot ever, there is an advantage for Shelby to strike now," said Mark Calabria, a former Shelby aide who is the director of financial regulation studies at the Cato Institute. "It's hard to imagine the Fed getting much weaker. One thing that is an advantage to him now is that Dodd, for different reasons, shares Shelby's Fed skepticism."
But negotiations between Shelby and Dodd broke down last week, and Dodd said Thursday he instead will now craft a bill with Tennessee Republican Sen. Bob Corker.
Until 2007, the Fed had massive clout on Capitol Hill, and lawmakers wanted chairmen like Ben Bernanke and Alan Greenspan to support their priorities. The financial crisis upended that situation, so much so that Bernanke's renomination received less support in the Senate than any previous Fed chairman.
Ernest Patrikis, a lawyer at White & Case LLP who spent 30 years at the Federal Reserve Bank of New York, said the agency's stature is at an all-time low.
"The Fed has never been bashed like this," he said. "In the worst inflation, the public was really bashing the Fed, but there was enough political support to sustain the Fed. … I don't think the Fed has a lot of friends on either side of the aisle."
Observers said the Senate is very likely to support provisions in the reg reform bill that would strip the central bank of power — but that door won't be open long. As the memory of the financial crisis fades, the political power of the Fed is likely to increase.
"If you have a goal of modifying the Fed's charter, taking away its regulatory power, changing the way the Fed governors are selected, there is no better time to pursue those objectives than when the Fed might be perceived to be politically weaker, and it's fair to say that this is such an opportunity," said former Sen. John Sununu, a New Hampshire Republican who served on the Banking Committee. "If someone wanted to take a wholesale run at the Fed, I think that this is about as good an opportunity as you are going to have."
Shelby has repeatedly made clear that's exactly what he wants to do.
Though Shelby listed myriad problems with Dodd's initial reform bill, he did support provisions that would diminish the role of the Fed. (The original bill would have removed the Fed from banking supervision, leaving only its monetary policy powers intact.)
"We agree that the Federal Reserve should have a limited range of responsibilities and that its main focus should be on conducting monetary policy," Shelby said in November.
At a Dec. 3 hearing on Bernanke's reappointment, Shelby expanded on his views.
"The last few years have provided us with ample evidence to conclude that the current regulatory structure that we have — one in which the Fed serves as the preeminent regulatory body — requires considerable restructuring," he said. The reg reform bill provides "a chance to develop a better, more accountable regulatory structure and enhance the real and perceived independence of the Federal Reserve as a monetary policy-setting entity. But to achieve these ends, I think the Fed would have to give up some of the regulatory authority."
Shelby said the Fed's steady rate cuts fueled the housing bubble, and he criticized its use of emergency stabilization measures, which vastly expanded the Fed's balance sheet.
"Some Fed actions were taken in concert with the Treasury — blurring the distinction between fiscal policy functions of the Congress and Treasury and the central bank's monetary policy and lender of last resort functions," he said. "The Fed's balance sheet has ballooned from a precrisis level of around $800 billion, to more than $2.2 trillion, through credit extensions and purchases of risky private assets, GSE debt and U.S. Treasury debt."