Volcker Rule Looks DOA

In a setback for the current administration, key members of Congress are expected to block President Barack Obama's proposal to prohibit financial institutions from risky trading activities and to put a cap on the size and scope of the biggest U.S. banks.

The proposal, called the "Volcker rule" named for former Federal Reserve Chairman Paul Volcker, would have placed heavy restrictions on prop trading on banks that have federally insured deposits.

The Volcker rule has faced opposition from members of both parties since being introduced.

In response, Senate Banking Committee Chairman Christopher Dodd is expected, along with other legislators, to introduce a new plan next week that would fall short of stopping banks from conducting risky trading, but would give the government the ability to stop activity by financial institutions that put the broader economy at risk.

Under the new proposal the government would be able to examine banks on a case-by-case basis and regulate or stop certain practices that appear to put the financial system at risk.

The White House and administration say that the original presentation of the proposal is what they are standing behind.

"As an administration, we're as committed to the rule as the day the president announced it," David Axelrod, White House senior advisor said. "It was presented as a solution to address a problem that the president perceived. There’s no diminution of concern about the problem."

Other lawmakers such as Democratic Representative Paul Kanjorski of Pennsylvania believe that there needs to be clear delineation on how the new powers of government will be administered.

Analysts at FBR Capital said they expect Senator Dodd's financial reform bill to largely focus on giving resolution authority to the FDIC, and expect the Volcker Rule and the Obama Bank Tax to be set aside for the time being. They believe Senator Dodd's window of opportunity to pass the financial reform bill is this summer.

Related Stocks:
JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corporation (NYSE: BAC), Citigroup, Inc. (NYSE: C), Goldman Sachs Group Inc. (NYSE: GS), and Morgan Stanley (NYSE: MS).

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