After nearly 30 years, Sen. Chris Dodd (D-Conn.) announced last Wednesday that he will not seek reelection for the U.S. Senate. Dodd is chairman of the Senate Banking Committee and the lead architect on the Senate's version of financial regulatory reform, a top priority for the Obama administration. His decision not to run could have implications for financial regulatory reform legislation in the Senate.

Senators unleashed
The financial industry could be looking at harsher regulation than initially proposed in the Senate, since Sen. Dodd is less likely to listen to his constituency of financial-services companies.

"He's not in any way beholden to that now," Andrew Busch, global currency and public policy strategist for BMO Capital markets, said in an interview. "...I think in some sense it allows him to speak his ... views more strongly without any implications for winning reelection.... So he's much more likely to take this bill and shape it into something that will be more like the House bill."

Perhaps one of the thorniest issues is the proposed Consumer Financial Protection Agency. The financial agency loathes the idea, which is included in the House version of the bill, because it believes the agency will squash "financial innovation." Such experimentation has generated huge profits for the industry in the last five years -- Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C) were able to churn out hefty profits thanks to exotic mortgage products they concocted. But it also triggered a severe recession for the U.S. economy. Former Federal Reserve Chairman Paul Volcker recently spoke out against financial innovation, stating that it does not create growth for the aggregate economy -- just bigger profits for banks.

Busch purports that Sens. Dodd and Richard Shelby (R-Ala.), ranking member of the Senate banking committee, will work together to create legislation that will strip out the Fed's role as a regulatory body. "Will you be able to have the regulatory bodies that are out there communicate in a meaningful manner to eliminate the risks of an AIG (NYSE:AIG) developing again?" asks Busch. He says he thinks the odds for the legislation's passage are rising.

Implications for the midterms
Dodd wasn't the only one who declared retirement this week. Long-serving Sen. Byron Dorgan (D-N.D.) also said he would not seek reelection. In light of Dorgan's departure, what are the implications for other legislation on deck? With major senators calling it quits, and Democrats in the House who are up for reelection this fall buckling under pressure from voters, members could shift their focus from the issues at stake toward the preservation of their own jobs.

Busch says he thinks we'll see more senators grow increasingly wary about following the Obama administration's proposals for legislation, including cap & trade and financial regulatory reform -- both of which the House has already passed.

Busch calls this the "Ben Nelson effect." Sen. Nelson (D-Neb.) is now backtracking on his support for the health-care reform bill, even after he convinced other senators to get the 49 other states to pay for Nebraska's increases in Medicare, in exchange for the crucial 60th vote needed to pass the health-care bill in the Senate. Poll numbers show that if Nelson votes against the current health care bill, more people are inclined to re-elect him than if he supports the bill. "He is already pulling back from his vote and said that he's rushed it," said Busch. "Now I don't know if that's going to lead to a breakdown in the health care bill."

Bob Doll, vice chairman and global CIO of equities at BlackRock (NYSE:BLK), said this week in his top 10 predictions for this year that he thinks Republicans will make noticeable gains in the House and Senate, but that Democrats will remain firmly in control of Congress. He also said he thinks the populist rhetoric surrounding the impending elections will lead to little legislation.

Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy.