Chris Dodd and Bob Corker have apparently agreed on a draft bill to reform the financial system, which they will introduce next week. Steven Pearlstein offered a preview today. First, they’ve apparently come up with an odd duck of a compromise on the Consumer Financial Protection Agency, which consumer advocates and even the White House have deemed crucial to reform, but which lobbyists for the banking industry have excoriated:

The compromise hammered out between Dodd and Corker would establish a single regulator of federally chartered banks with a dual mission and an independent source of funding, based on my conversations with several key players. One division would promulgate and enforce rules to protect consumers; the other would fulfill the traditional role of supervising banks for safety and soundness. Supervisors from both divisions would participate in the periodic reviews of bank operations, and any conflicts between the two would be resolved by the head of the agency.

Not exactly what the White House has sought, but my working assumption is that they’ll leap at it. The fear here is that safety and soundness will take precedence over consumer protection every time, so there would need to be assurances that the two missions had an equal footing.

The second major aspect of the Dodd/Corker proposal concerns unwinding too big to fail banks:

A more interesting and ultimately important issue concerns bank bailouts and the treatment of financial institutions considered too big or too interconnected to fail. Both the Bush and Obama administrations argued that these institutions should be identified ahead of time and regulated exclusively by the Federal Reserve, with higher capital requirements and an obligation to contribute to a bailout fund.

Although the House adopted that approach, senators are balking. Republican senators in particular are dissatisfied with the Fed and want to strip it of all responsibility for bank supervision. And a number of senators from both parties, unhappy about the recent bailouts, reject the idea that the government should protect any institution from going under, no matter how big or interconnected.

Dodd, Corker and Democratic Sen. Mark Warner of Virginia are putting the finishing touches on a plan reflecting these judgments. As they envision it, any time a big financial institution is threatened with insolvency, the government would be authorized to take it over and close it down in a bankruptcy-like process. The government could provide temporary loans to ensure an orderly liquidation process and prevent financial panic, but only to the extent that the loan would be repaid from proceeds of the sale of the bank’s assets. Although insured depositors would be protected, creditors, counterparties and investors would all suffer losses.

The devil’s in the details here, and those “temporary loans” could easily grow into another bailout. FWIW, Simon Johnson likens this resolution authority to a unicorn – “a mythical beast with magical properties, but not actually useful in the real world.” Nevertheless, he does argue that the Dodd/Corker proposal offers “limited change.” (I smell a bumper sticker!)

If you’re missing the Volcker rule in these discussions, that’s because it’s stalled out.

But after resistance from lawmakers from both parties, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and other legislators are expected to introduce a plan next week that would give regulators more discretion to limit and potentially ban risky trading at banks, especially if it poses a risk to the broader economy. The measure would stop short of banning such trading outright.

The Senate bill is expected to direct regulators to pay particular attention to “proprietary trading”—whereby a bank trades stocks, bonds or other financial instruments with its own money—which the White House wants to ban at commercial banks. Under the proposal, regulators would examine banks on a case-by-case basis and would be able to direct them to limit or halt certain activities they felt were a systemic risk. Such activities were banned under Depression-era laws requiring the separation of commercial and retail banking activities but those rules were rolled back in the 1990s.

The Obama Administration, while continuing to talk the talk about the Volcker rule, has been undercut by their own Treasury Secretary, whose proposal to give regulators discretion over defining and banning proprietary trading mirrors the Dodd/Corker proposal. Yves Smith remarks that the Volcker rule has been “whittled back to meaninglessness.”