UPDATE 1-Bank plan highlights Volcker's new clout

(Refiles to add dropped letter, paragraph 16)

* Geithner, Summers seen still wielding huge influence

* Volcker had been outspoken on "too big to fail" concern

* Ex-Fed chief consulting about bank plan with lawmakers (Adds Summers quote, paragraph 24)

By Caren Bohan

WASHINGTON, Jan 22 (Reuters) - When U.S. President Barack Obama launched a fight with Wall Street by announcing a new plan to limit banks' size, the man standing at his side was former Federal Reserve Chairman Paul Volcker.

Volcker's clout on the White House economic team was on full display as the 6-foot-7-inch longtime adviser took the choice spot next to Obama, who named his proposal to restrict bank trading activities "the Volcker Rule."

The 6-foot-1 Obama referred to Volcker as "this tall guy behind me."

U.S. Treasury Secretary Timothy Geithner and senior economic adviser Lawrence Summers -- who attended the announcement but at a greater distance from the president -- still wield a tremendous amount of power.

Volcker, who commands respect on Wall Street and among both Democrats and Republicans, is seeing a resurgence of his influence after venting frustrations to friends that he had been left out in the cold when it came to economic decision-making at the White House.

The 82-year-old Volcker was one of Obama's most influential advisers during his 2008 presidential campaign and now chairs a panel of outside economic advisers to the White House.

He had rarely been seen in Washington since the start of the Obama administration and made no secret of a difference in opinion with the White House over how to deal with the problem of "too big to fail" financial firms.

Volcker's fear, shared by some other economists, is that newly consolidated U.S. banks might engage in reckless behavior on the belief that the government would never allow them to fail because of their sheer size. Such risky activity could leave the financial system vulnerable to another crisis, these economists say.

CLOUT

Asked by the New York Times in October about reports he was losing sway with the Obama White House, Volcker retorted that he "did not have influence to start with."

That made Volcker's presence at the announcement all the more significant to showing Obama's resolve to push the new regulatory approach that Wall Street appears set to fiercely oppose.

"Volcker being there was huge," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund.

The bank announcement elated many of Obama's liberal supporters, who have welcomed his tougher rhetoric in recent weeks toward the banking executives he referred to in December as "fat cats."

Geithner and Summers, veterans of the Treasury Department in the Clinton administration, have been criticized by some liberal supporters of Obama who view them as too cozy with Wall Street. Legislation in 1999 tearing down the Depression-era Glass-Steagall law separating commercial and investment banking passed under their watch.

Obama's new bank rules would not bring back Glass-Steagall but would revive its spirit.

Volcker, who has been consulting on Capitol Hill about Obama's bank proposal, could be an asset to the administration in selling the proposal, said Johnson. He shared Volcker's frustrations that the White House had not moved earlier to limit the size of banks, which get an implicit subsidy in the form of federal deposit insurance.

"Volcker carries a cachet that is unparalleled," said Johnson, noting the former central banker's role in breaking the back of double-digit inflation in the early 1980s -- a victory that came despite a huge popular backlash against the economic pain brought on by his interest-rate increases.

RIFT WITH GEITHNER?

In an indication of a possible rift, financial industry sources told Reuters on Thursday of some reservations Geithner had expressed behind the scenes about the new bank plan, which was not included in the original plan on financial regulatory reform that the administration unveiled last June.

Administration officials, while noting the importance of Volcker's role, insisted the decision to go forward with the plan was unanimous.

Geithner and Summers worked closely with Volcker late last year on it and had largely finalized it by late December. They put the finishing touches on it on Jan. 13.

Aides said Obama personally felt strongly about moving ahead on curbs on the banks, in part because of concerns about risk-taking by banks after they returned to profitability in the wake of the 2008-2009 financial meltdown.

White House officials played down any talk of Geithner and Summers losing influence.

A trademark of Obama's management style, which was apparent during the deliberations over his Afghanistan strategy, is to encourage the airing of dissenting views and then to work with his advisers to arrive at a consensus.

"He is concerned to make sure that he's exposed to all points of view," Summers told a small group of reporters in a briefing last week when asked to describe Obama's decision-making process. "So he wants to hear disagreement with things that he has said or advisers who have different perspectives to share those differing perspectives."

Interviewed on CNBC on Thursday night, Summers defended the bank proposal against industry representatives who pointed out that proprietary trading by banks was not central to the last crisis. "What's important is to not be like the generals who fight the last war. What's important is to think about the potential sources of risk in the future," Summers said.

Obama's proposals could bar institutions from proprietary trading operations, which are unrelated to serving customers, for their own profit. Proprietary trading involves firms making bets on markets with their own money and has been the source of much of banks' bumper profits.

Also emerging as a bigger player in shaping economic policy is Vice President Joseph Biden, who devoted much of his time last year to helping to oversee the $787 billion stimulus program that Obama signed into law last February.

Biden feels "passionately about the same set of problems" of firms becoming too big to fail and helped to shape the proposal on banks, said one White House official.

(Editing by Howard Goller and Will Dunham)