Political observers are gearing up for the battle over repealing health care, which could lead to a government shutdown. And we all know that cap and trade is dead, and whatever progress gets made on energy in the next two years will happen on the nuclear/clean coal/natural gas side of the ledger.

But what about financial reform? Spencer Bachus (R-AL) is the likely new chair of the House Financial Services Committee, replacing Barney Frank (Ed Royce of California may take a run at the job too, but he’s no better). And today, Bachus basically told the regulators to stand down.

Spencer Bachus, a potential Republican chairman of the House financial services committee, has fired the first salvo in a battle with regulators – warning them against harming US banks by curbing their trading activity.

In a letter sent to the Financial Stability Oversight Council, Mr Bachus says that a ban on proprietary trading – known as the Volcker rule – that was included in the new Dodd-Frank financial reform law will “impose substantial costs on the American economy and market participants” with “doubtful” benefits. “Depending on how US regulators choose to implement it, the Volcker rule may spark a mass exodus of clients from US banks to banks based abroad,” he said in the letter obtained by the Financial Times. He highlighted UK-based institutions as possible beneficiaries.

Bachus understands well that the Dodd-Frank bill wasn’t a law, but a promise to write a law in the future. The regulators will have substantial latitude to shape the regulations, and Bachus has taken direct aim at the Volcker rule. He’s clearly on the side of big bank shareholders on this one, and considering that his top PAC contributors are Bank of America and Wells Fargo, that should be no surprise.

Bachus also wants to liquidate the GSEs. The future of Fannie and Freddie has yet to be decided, and the loss of Paul Kanjorski is a pretty big blow to those efforts. The White House plans to submit a proposal on dealing with Fannie and Freddie by January, and they’d look to replace the GSEs with some kind of allowance for affordable housing. I don’t think that’s what Bachus has in mind. There doesn’t seem to be any room to maneuver here.

In a recent interview with CNBC, [Bachus] said that the loss of government subsidies for mortgages might be painful for borrowers but was necessary. “Right now there is an addiction to government funding and we have to break that addiction,” Mr. Bachus said in the interview. “With any addiction there is a long withdrawal process, but you have to start and you have to start now.”

Some analysts doubt Republicans will sustain this hard line. Powerful constituencies, including the national associations of real estate agents and home builders, have publicly called for the government to maintain a role in housing finance. So have many leading figures in the mortgage industry.

Without a doubt, another item on the agenda would be defunding whatever regulatory apparatus got birthed by Dodd-Frank, in particular the Consumer Financial Protection Bureau. Jed Hensarling, who will possibly be in the House leadership, doesn’t want the CFPB writing rules on anything. I think in order to defund CFPB you’d have to defund the Federal Reserve, but let me remind you that Ron Paul runs the Fed subcommittee at this point.

The scariest thing about all of this is that Bachus will probably have some help on the Senate Banking Committee, where South Dakota’s Tim Johnson could get handed the gavel.

In the Senate, retiring Banking Committee Chairman Christopher J. Dodd (D-Conn.) is likely to be replaced by Sen. Tim Johnson (D-S.D.). South Dakota is home to Citigroup Inc.’s credit card operation, and Johnson is viewed as more friendly to the industry than Dodd was.

Johnson said Wednesday that lawmakers should wait to see the specific derivatives rules proposed by regulators before seeking revisions.

“I am willing to consider changes where there is consensus, but I don’t see the votes in place for any wide-ranging repeal or reductions in transparency of this critically important market,” Johnson said.

I think Johnson will be much more of an ally than an enemy to the Republican project. He also is coming off an aneurysm back in 2007, and may not be the right head of any Senate committee.

Anyhoo, just be aware that we’ve moved from Dodd-Frank to Bachus-Johnson. I don’t think that’s a step forward.