BC-FINANCIAL-REGULATION/MASSACHUSETTS

SNAP ANALYSIS-Financial reform push shaken as Obama, Dodd confer

WASHINGTON (Reuters) - As Massachusetts voters handed Democrats a stunning setback, President Barack Obama and U.S. Senate Banking Committee Chairman Christopher Dodd met Tuesday to discuss the future of financial regulation reform.

It will now be more difficult than ever for Democrats to win Senate passage of their proposals to tighten bank and capital market oversight due to the upset victory of Republican Scott Brown in a special Senate election.

Dodd, whose committee is holding closed-door negotiations among members over a financial regulation bill, met with the president as Massachusetts voters went to the polls.

"They talked about the path forward on financial reform," Dodd spokeswoman Kirstin Brost told Reuters.

Obama and the Democrats want to overhaul financial regulations to prevent a repeat of the 2008 capital market crisis and the recession and bank bailouts that followed.

Here's a look at what the election result could mean:

+ The "path forward" will likely be much more difficult as Brown's defeat of Democratic rival Martha Coakley stripped Democrats of the crucial 60th Senate vote they need to overcome procedural hurdles routinely used by Republicans.

+ Brown's election raises new doubts about the outlook for Obama's most high-profile initiative -- healthcare reform -- and in doing so likely means further delays for other issues, including the financial regulation overhaul.

Dodd has been deeply involved in healthcare reform. Now he will likely have to devote even more of his time to it, even as he heads toward retirement at the end of the year.

+ The House of Representatives on Dec. 11 approved a financial reform bill, but only by a close 223-202 vote. All of the chamber's Republicans and 27 Democrats voted against bill, which bank and Wall Street lobbyists fought for months.

With congressional elections ahead in November, and Democrats suddenly anxious about them, lobbyists and Republicans will likely be less willing than before to compromise, having found electoral success in their strategy of obstruction and delay.

"The next year is going to be one of gridlock in Congress," said Jeffrey Berry, a political science professor at Tufts University.

+ If Democrats decide that frustration with the economy was another theme in Massachusetts, they may double-down on their increasingly harsh rhetoric criticizing banks and banker pay, perhaps making the financial regulation debate more divisive.

By early February, "we should get a sense of whether the attacks on the banks -- and the legislative threats -- will accelerate or abate," said financial services policy analyst Jaret Seiberg at investment advisory firm Concept Capital.

+ If the bank rhetoric heats up, it could be more difficult to achieve compromises on actual legislation, with Republicans dug in firmly in opposition to many Democratic proposals.

+ On the other hand, Democrats might decide after Massachusetts that they need to show quickly that they can produce results ahead of the November elections.

That could lead to a new willingness to give ground on controversial issues, such as Obama's proposal to create a financial consumer watchdog agency or Dodd's initiative to create a new super-cop for the banking industry. (Reporting by Kevin Drawbaugh; editing by Mohammad Zargham)

REUTERS