Agencies that want to formalize their cooperation with one another don't conclude treaties, and they don't pass regs.  They sign Memoranda of Understanding (MOUs).  MOUs don't require all that pesky process and reflect an increasingly interconnected regulatory enterprise.  What's more, the SEC likes them.  It has concluded MOUs with many foreign security regulators, and now the agency is on a domestic tear.  It just did a deal with the Fed.  Not the fanciest deal, to be sure:

Under the MOU between the two agencies, the SEC and the Board would share information and cooperate across a number of important areas of common interest including anti-money laundering, bank brokerage activities under the Gramm-Leach-Bliley Act, clearance and settlement in the banking and securities industries, and the regulation of transfer agents. The MOU specifically covers bank holding companies and so-called Consolidated Supervised Entities that own securities firms. It builds on and formalizes the long-standing cooperative arrangements between the SEC and the Board, as well as the more recent cooperation on matters including banking and investment banking capital and liquidity following the Board's emergency opening of credit facilities to primary dealers.

With the President's Working Group coordinating policy, with Paulson's blueprint proposing to merge regulatory responsibilities, and with these MOUs, it is fair to say that there's a new mood about coordination afoot in Washington.  How much of a mood?  Consider this:

The SEC recently entered into a similar MOU with the Commodity Futures Trading Commission. An agreement between the SEC and the Department of Labor is anticipated later this summer.

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Have you seen Dan Ernst's excellent series of posts on the evolution of American bureaucracy at the Legal History blog?  Here's an overview and a primer on Dan Carpenter's approach to bureaucratic history.  Here's a great primary source on the downside of price controls during WWII.  Here's a pedagogical take on the case that might have precipitated the NLRA ("Debs decisively resolved lingering doubts about whether the equitable remedy of injunction was available in labor dispute," Ernst says).  And finally, here's a heap of 1930s realism, e.g., how international law is bunk (to Jerome Franck, at least), and double e.g., about how corporate law is bunk (to James Dill, at least).  Well worth reading, if you like your history. 

Okay, just a couple more: this is why Harvard men are so great, at least as far as the Department of Agriculture was concerned.

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The Basel Committee on Banking Supervision released for comment its latest set of principles for managing big banks.  It's all very European and quite hands-off. 

• A taste of the European (that is, principles, not rules): "Supervisors should assess the adequacy of both a bank's liquidity risk management framework and its liquidity position and should take prompt action if a bank is deficient in either area in order to protect depositors and to limit potential damage to the financial system." (that's principle 1, and sometimes I wonder if the principles afficianadoes in America would really want agencies like the SEC taking "prompt action" upon finding delicts in "management frameworks")

• The hands off: "While some supervisors may find it useful to issue quantitative standards (eg limits or ratios) for liquidity risk management, where these standards exist they should not be understood as a substitute for banks’ own measurement and active management of liquidity risk." (that's the guidance to principle 14, and a rebuke to the 8% of the first capital accord)

• Perhaps best of all, at least for those banking supervisors fond of Swiss hospitality, is the need for supervisors to meet regularly: "Regular dialogue and cooperation among relevant stakeholders during normal times helps to build working relationships that allow more effective communication and cooperation during times of firm-specific or market-wide stress." (that's the guidance to principle 17)

Two interesting things about the communication imperative: 1. it distinguishes between supervisors and central bankers, something that the current regulatory system in the US doesn't really do, and 2. it lauds the value of supervisors and central bankers being in close touch, which the Paulson Blueprint for American regulatory reform recommends.

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Complying with those regulations in the war on terror designed to cut of financing to the bad guys has proved to be really quite burdensome for both the banks who have to investigate all of their customers and the Treasury Department, which now receives millions of forms a year detailing possibly - albeit not probably - suspicious transactions.  The new workload hasn't generally deterred Treasury, which has embraced its rather implausible repurposing as a front line defense against the terrorists.  Elena Baylis and I wrote a piece about the problems with this regulatory innovation here. 

But Treasury just lost a round in its terrorism efforts.  A court reviewing a denial of reimbursement to a contracting party with an alleged bad guy recently decided that Treasury's OFAC agency had failed to explain what it was doing when it seized money, had failed to distinguish between the statutory authority given it to effect those seizures, and that, moreover, it wasn't doing a great job of explaining what it was doing with the money it sequestered and why it had the legal authority to do anything with it: "any explanation by OFAC that protecting the rights of any potential and unknown creditors has any connection to the aims of the Kingpin act is so implausible that it could not be ascribed to a difference in view or a product of agency expertise." (unavailable online, but check Case No.: 07-CIV-20398 in the Southern District of Florida if you are interested)

Ouch.  Given that the explanation OFAC did submit in the case came from its smart and wise (and former co-worker of your author) director, I'd expect an appeal.  And bemoan the customary difficulties in obtaining published federal opinions reversing agency conduct in the meantime.

HT: Steve Vladeck, tipping me from the land of rain and smoked herring

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Treasury Secretary Henry Paulson's blueprint for reorganizing the financial regulators, which we've been looking at recently, seems to esteem the Basel Committee on Banking Supervision.  On the one hand, fights over who represents the US in Basel slowed down the implementation of that international institution's diktats.  The "prolonged process surrounding the development of U.S. Basel II capital rules" is an example of a "recent inter-agency dispute[]" thus confirms the need for a reorg.

On the other, Basel, as Treasury sees it anyway, is one of the things that ameliorates the pain of that reorg, specifically, the pain of guaranteeing the assets of investment banks:

While the presence of explicit government guarantees limits market discipline, efforts to reverse this trend within the prudential regulatory framework should continue as a way to impact behavior and provide useful market information to supervisors. For example, the Pillar 3 portion of the Basel Accord requires enhanced public disclosures in an effort to increase market discipline.

We wouldn't say the blueprint is obsessed with Basel and other international institutions like it - it is more worried about the effect of globalization on regulated industry, rather than the opportunities of globalization for regulators themselves.  But it does show that you can talk systematically about American financial regulation without talking about Basel.

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We're still keeping an eye on the pace of the reorganization of the financial regulatory structure over here, and I thought it might be interesting to take a quick look at the tenor of the arguments for regulatory reform.  Interestingly, the Paulson blueprint doesn't spend a lot of time on the current financial crisis, although that surely played a role in the timing of its release.  Instead, it spends plenty of time outlining the patchwork history of financial regulation, with an aim to show that the current regime is more a product of path dependent happenstance than considered reflection.

But why regulate now, given that the system was just as patchworky a decade and two decades ago?  The blueprint also seems animated by a fear of globalization, and a sense that agencies ought to provide a regulatory environment in which American markets can compete successfully with foreign ones:

Globalization of the capital markets is a significant development. Foreign economies are maturing into market-based economies, contributing to global economic growth and stability and providing a deep and liquid source of capital outside the United States. Unlike the United States, these markets often benefit from recently created or newly developing regulatory structures, more adaptive to the complexity and increasing pace of innovation. At the same time, the increasing interconnectedness of the global capital markets poses new challenges: an event in one jurisdiction may ripple through to other jurisdictions.
...
These developments are pressuring the U.S. regulatory structure, exposing regulatory gaps as well as redundancies, and compelling market participants to do business in other jurisdictions with more efficient regulation. The U.S. regulatory structure reflects a system, much of it created over seventy years ago, grappling to keep pace with market evolutions and, facing increasing difficulties, at times, in preventing and anticipating financial crises.
Largely incompatible with these market developments is the current system of functional regulation, which maintains separate regulatory agencies across segregated functional lines of financial services, such as banking, insurance, securities, and futures.

(emphasis added).  There's no doubt, as I've written before, that globalization is exposing regulators to unprecedented challenges, and in some ways I'd expect to see it invoked in any argument for change.  But I note that in the Blueprint, globalization is presented not as a "bring it on" opportunity for further American financial triumphs, but as the cause of American financial problems.

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We've blogged a bit about CFIUS here - it is the committee process that vets deals for national security implications.  The takeaway has been, in part, that this process is becoming an anti-takeover tool that is part of the fabric of the way M&A increasingly works, given that this is a global world, etc.  But don't take my word for it.  Consider the way this analyst looks a the possibility that EADS might buy the US defense indutry contractor DFS:

"It may that DRS is too big a bite for EADS. The deal is likely to be CFIUS-sensitive and it might be expensive to get over the break-up fee," said JP Morgan analyst Harry Breach.

So that's the idea.  CFIUS is like break-up fees.  Just part of the process.  We've told you about the new regulations under consideration by the committee; here is the Wall Street Journal and Skadden Arps with more.

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We've told you that the Basel Committee is the standard setter on bank capital adequacy, and an international institution that could just be called a club of 12 central bankers.  It certainly wasn't created by a treaty.  Now Basel has proposed some reforms of its members' regulatory structure in the wake of the current unpleasantness.  Two notable proposals:

the Committee will ... establish higher capital requirements for certain complex structured credit products, such as so-called "resecuritisations" or CDOs of ABS, which have produced the majority of losses during the recent market turbulence. It will strengthen the capital treatment of liquidity facilities extended to support off-balance sheet vehicles such as ABCP conduits. ....

The Committee will strengthen the capital requirements in the trading book. Global banks' trading assets have grown at double digit rates in recent years, and in some cases represent the majority of a bank's assets. The proportion of complex, less liquid credit products held in the trading book has likewise increased rapidly. The current value-at-risk based treatment for assessing capital for trading book risk does not capture extraordinary events that can affect many such exposures. The Committee, in cooperation with the International Organization of Securities Commissions (IOSCO), therefore is extending the scope of its existing proposed guidelines for "incremental default risk" to include other potential event risks in the trading book. Until this event risk charge is in place (planned for 2010), an interim treatment will be applied for complex securitisations held in the trading book.

So international problems, international solutions.  My imprecise thoughts: it isn't so surprising that banks will have to keep more capital on hand if they want to deal in complex structured products and increase their leverage.  It's is a bit more surprising that it looks like Basel will be the institution that requires it.

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The Times profiles Robert Steel, mid-level Treasury bureaucrat, and Paulson’s point man on regulatory reform, and it puts the question pretty bluntly: what, exactly, does a former Goldman Sachs executive and US Chamber of Commerce appointee want out of financial regulation?

One does wonder, but the story doesn't really give us the answer. Steel is the guy who told Congress that Treasury wanted the Bear bailout to be at a super-low price.  Both Steel and Paulson get portrayed as technocrats, rather than the representatives of Wall Street, and, if you’re keeping score at home, the Times notes that Barney Frank supports regulatory reform (“we need to regulate risk in ways that we haven’t”) and that the AFL-CIO is against it (quoting a labor lawyer “who is a critic of the blueprint”).

But while Steel tries to gin up support for Paulson’s reorg, he’s keeping busy in other ways. Here’s what’s coming from Treasury: a voluntary code of conduct for hedge funds and advice from Calpers to pension funds like it:

On Tuesday, Mr. Steel’s office will bless the release of two reports that examine the issues of hedge funds, risk and investor protection. In one, Eric Mindich, a former Goldman executive who now runs the hedge fund Eton Park, will — with a group of supporting funds — propose nonbinding steps that hedge funds should take. They include publishing audited financial statements like public companies do, the establishment of conflict committees and disclosing on a quarterly basis the extent of their hard-to-value assets.

The other report, directed by Russell Read, the chief investment officer of Calpers, the California state pension fund, will address the question of applicability of such funds to different classes of investors.

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I've been wondering about what, exactly, the law enforced by CFIUS is, Paul has been wondering about sovereign wealth fund regulation.  It all seemed like an opportune time to attend a panel on CFIUS at the American Society of International Law's annual meeting.  The panel was a very good one, including well-spoken reps from Treasury, Homeland Security, USTR, a Barney Frank staffer, and a lobbyist.   You don't always get clarity from political operatives.  Here's some of the stuff we got:

• CFIUS reviews matters now more intensively than they ever did before.  Sayeth Homeland Security: "There is no doubt that we have a much more searching inqiury than we did 3 or 4 years ago."  Note that 3 or 4 years ago is 3 or 4 years after 9/11.

• One panelist explained why there will never be a CFIUS treatise.  The proceedings involve the proprietary information of the American business, national security purposes, an inter-agency process (which takes it out of FOIA), and intelligence reports.  Will this ever be open to public scrutiny?  The constituency for that sort of openness lies mostly with foreign sovereign acquirers.  It remains to be seen whether they have the pull with Congress or Treasury to get the transparency that we expect in other administrative action.

• Homeland Security was asked to define "critical infrastructure," which is the type of asset that CFIUS might conclude should not be sold to a foreign government.  What is critical infrastructure?  A farm?  A cement firm?  Given fears about foot in mouth style biological attacks, and, you know, buildings, Homeland Security thought that requests to define that term would be "unproductive."
  

• What about minority investments?  How little is too little? Chinese government-owned Hulawei, after all, got dinged for proposing to acquire 16% of 3Com. Treasury suggested that there might be some clarity in the impending next round of CFIUS regs. Could 10% be the number?  We will wait with baited breath.

• Oddly, the political dynamic at stake in these cases: left wingers skeptical of job-killing M&A, free marketers skeptical of CFIUS regulation, seems to be mirrored in the agencies involved in the inter-agency process, where DOD and Homeland Security are likely to worry about foreign sovereign acquisitions, while Treasury and USTR might be more pro-investment.  As far as I can recall, this "guns and unions" relationship is rather unique.

• As the trade rep noted, CFIUS is, of course, a potential avenue for protectionism.  How to avoid overpreventing foreign acquisitions?  We got a soundbite: the hope that CFIUS would try to protect "national security, not economic security."

• I've told you that CFIUS's secrecy makes its rulings on whether foreign sovereigns can acquire domestic firms (or even stakes in those firms) totally unpredictable - at least, without the assistance of high-paid Washington legal talent.  Will the post-Dubai Portsworld amendments help?  Maybe, as one panelist noted.  Said amendments require an annual report, which may offer the best practices guidance that the currently unavailable decisions do not.

• As USTR noted, CFIUS matters for BITs.  The BRIC countries are going to be unwilling to submit investment disputes to non-national arbitration without some sort of assurance that CFIUS decisions will either be disciplined by the BIT or be otherwise predictable.

• What about Sovereign Wealth Funds?  Nothing new, says Treasury, which has been "dealing with [that form of investment] since 1989."

• What does this mean in practice?  Deal makers are going to the Hill as well as to the investment banks and to CFIUS when a foreign sovereign (or SWF) is interested in a domestic acquisition.

• Beyond CFIUS: one panelist warned that Congress might look into foreign sovereign ownership of financial institutions, like when a Saudi prince bails out a bulge bracket bank.  "Are they being held to a lower standard" than domestic acquirers when they do this?  Wait for the Congressional hearings, apparently.

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With the investments of sovereign wealth funds in the United States being big news, it is worth spending a little bit of time thinking about the processes that currently exist to keep those funds out. One principal means of doing so – it came up during the CNOOC-Unocal-Chevron mess, during the Dubai Ports World fiasco, and in the cratering of the Bain Capital/Hulawei merger with 3Com - is through the Committee on Foreign Investment in the United States, or CFIUS. CFIUS was created by executive order, and later blessed by Congress: it reviews acquisitions of American assets that raises national security implications. How does it work?  

CFIUS says that its protective mandate, the term “US national security” will be “interpreted broadly and without regard for particular industries,” its scope lying wholly “within the president's discretion.” Would be acquirers submit their deals for evaluation over a 30 day, and, if CFIUS is worried, a subsequent 45 day window. And CFIUS usually doesn't get in the way of foreign acquisitions. According to the Congressional Research Service (GAO-02-736) it has launched in-depth reviews of acquisitions in 25 of the over 1500 filings made to it since 1988. Of these 25 cases the mere announcement of intense review led to a withdrawal of the application, and presumably to an end to the acquisition, 13 times. In 12 other cases CFIUS submitted a letter to the president, leading to a modification of the transaction in some cases. Only once has the president denied clearance of a deal after CFIUS review: in the 1990 acquisition of the US aerospace manufacturer by a Chinese firm. 

I wanted to have a look at these matters to see if there were any opinions that could establish in more detail what criteria CFIUS used when evaluating foreign acquisitions. Unfortunately it is not to be. A Treasury Department employee told me that CFIUS does not publish anything, and interprets itself not to be subject to FOIA. 

This does not, of course, mean that CFIUS exists in a world outside of law. To the contrary, Washington firms have developed CFIUS practices, and because those practices involve the use of information that is not publicly available, I’m guessing that they could be prosperous ones. However, all the secrecy is not such good news for those who'd like to know what precisely the law of foreign acquisition is.  Maybe the pending  round of CFIUS regulations will help clarify that law.

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Last Sunday's NYT reported on an idea that regulators and legislators have been kicking around to keep people in their homes and save the housing markets--negative equity certificates.  (Also see an earlier WaPo story).  These certificates would be available to existing mortgage lenders willing to refinance upside-down mortgages--loans whose outstanding balance exceeds the current value of the home.  Under the plan, a government-insured refinancing would reduce the outstanding mortgage balance to the current home value.  The original lender, in addition to getting paid the current value of its collateral from the refinancing, would receive a negative equity certificate.  This certificate would entitle the holder to any appreciation in home value realized when the the owner sells--up to the amount of the original loan.  In effect, the old lender gets any prospective upside in exchange for stripping its loan down to the current market value of the home.  Proponents anticipate that a trading market would develop for these certificates.

According to NYT, Treasury Secretary Henry Paulson's latest pronouncement would limit the plan to homeowners who are paying on their mortgages pre-reset, but who may be otherwise be tempted to abandon their homes once their interest rates jump.

At first blush, it seems like an interesting idea.  The borrower gets to stay in her house without taking the credit hit of foreclosure.  The original lender gets potential upside--which might be tradeable--without having to incur the costs of foreclosure, resale, and interim maintenance.  And it's better than getting stripped down in bankruptcy--a prospective modification to the Bankruptcy Code that was (until recently) working its way through Congress--where the lender gets no upside.  But several problems come to mind:

1. Valuation.  How do we decide the market value of the home at refinance time?  I know, we can get an appraisal!  Just like the last time we got a mortgage on this house . . . .

2.  Loan servicers.  I thought one of the original precipitators of the mortgage meltdown was that for mortgages sold and bundled into pools for purposes of securitization, the servicers did not have clear authority to commit to workouts.  So foreclosure was the only readily available option.  If this is still true, then it's unclear how this latest proposal will help.

3.  Homeowner incentives.  With all the potential home appreciation captured in the negative equity certificate, the homeowner is basically a renter, with all that that implies.  The homeowner has no more incentive to invest in maintenance than renter.  In fact, the homeowner is worse off than a renter, since she can't call the landlord to fix the plumbing.  Perhaps the terms of the certificate could be modified to give the homeowner some piece of the upside to counter this problem.  Law scholars (e.g., Lee Fennell) have suggested the possibility of separating home-specific risk from market risk, leaving home-specific risk to the owner and selling market risk to investors.  But the mechanics for implementing this idea seem pretty complicated.  In any event, it's hard to figure how a simple split of the upside could be large enough to incentivize the homeowner and still small enough to be acceptable to the lender, who could own all the upside (net of attendant costs) through foreclosure.

4.  Screening for sham sale.  Presumably, the negative equity certificate covers only the first sale post-refinance.  This would give homeowners some incentive to engage in sham sales to shed the overhang of the negative equity certificate in order to own the upside.  Lenders will balk without some mechanism to police for this.

5.  Tax and accounting consequences.  I hesitate to offer any opinion on tax and accounting issues, except to raise the possibility that lenders may have to take a write down either when they do the refinance or sell the negative equity certificate (which might not be different from the foreclosure scenario either).

6.  Irony.  Let's solve a (somewhat) derivatives-driven crisis with . . . another derivative!  We could bundle them, get an investment-grade rating from one of the big rating agencies, and sell NECBSs (Negative-Equity-Certificate-Backed Securities) to institutional investors!

For a thorough vetting of the proposal, check out Calculated Risk, especially the comments.

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We'll be interested to see how the Fed and New York Fed chairs handle inquiries about Bear Stearns during two days of testimony on the Hill.  They may not be able to avoid saying something substantive about the bailout, but if the SEC is any guide, they'll opine inscrutably about the wisdom of the regulatory reform proposals that followed it.  SEC Commissioner Atkins said yesterday

Treasury is proposing .... the unification of the SEC and CFTC and a shift towards principles-based regulation. The latter would require radical adjustments by regulators and industry alike. The SEC would have to depart from its often very prescriptive approach to rulemaking. The financial industry would have to be weaned from its tendency to seek the protection that specific rules afford from later second-guessing and — if the rules serve as barriers to competition — from would-be competitors.

As to a possible merger between the SEC and the CFTC, ...[i]t is not surprising, then, that calls for a consolidation of the agencies have increased. Whether a merger ought to happen is a question for Congress and the Administration — it is certainly beyond my power as a Commissioner.

Hmmmm.  It's not exactly a bottom line, but it is not uninteresting, particularly because of Atkins' view on the low-cost merits of principles-based regulation.  Does principles-based regulation has lower barriers to entry than does rules-based regulation?  Much depends on how it is done.  The former can be administered in quite a clubby, exclusive way, after all, and affords regulators a lot of discretion as to who they pick on.   I'd be interested to know if, say, the German financial industry thinks that its regulators have helped to create open and vigorous competition in Frankfurt through their principles approach.

For its part, SIFMA sounded vaguely supportive of the reorg, calling it a "thoughtful and sweeping plan which should provoke intense discussion, debate and potential legislative changes." Christopher Dodd, chair of the relevant Senate regulatory committee, called it a "wild pitch."  So which is it?  Expect Bernanke, if he says anything about the plan, to veer towards the former account.

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The Washington Post reports on opposition to the big financial institution reorganization.  Is this thing already dead?

Maybe, but the jury is still out.  As we told you yesterday, bureaucratic reorganizations turn on the ability of affected agencies to mobilize the lobbyists of regulated industry and, to a lesser extent, the chairs of affected congressional committees.  Today, the Post says that "[f]ew leaders of these agencies -- and the associations that work with them -- welcomed such radical transformation."  (It also says that "[b]efore the plan takes hold, however, lawmakers would have to sign off. This would be a challenge given that the CFTC and the SEC report to two different congressional committees, setting up the prospect of a turf battle.")  But other than the American Bankers Association, no industry group was willing to go on record opposing the plan - even though regulators from the CFTC, FDIC, and NCUA did.   In fact, the hedge fund and securities industry lobbyists expressed cautious support for it.

We disclaim political expertise at the Glom, but to our untrained eyes, much of the fate this plan depends on whether it means the end of the credit union.  Thrifts, especially now that they look exactly like banks, fine.  State-chartered banks, ditto, okay.  But credit unions?  Consumers, voters, and unaligned Congresspeople love their credit unions.

The Fed, by the way, is telling the Post that it would be sharing just a bit of the reorg pain, giving up its banking supervisors to the new financial institutions supervision agency.

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Following Gordon's post on the long term vision of the Paulson proposal, one of my rules of administrative law thumb is that new regulatory schemes tend to be born in crises and in a hurry.  But the corollary to that rule is that the much of a new scheme's content will have been around for a while.  The Treasury Department's new effort, to be announced later this morning, appears to follow both rules.  We've pointed you to the long term vision, the AP has seen an overview of the mechanics, Treasury wants to:

-Expand the role of the President's Working Group on Financial Markets to include the entire financial sector rather than just financial markets.

-Create a federal commission, the Mortgage Origination Commission, to develop uniform, minimum licensing standards for mortgage market participants.

-Close the Office of Thrift Supervision, which regulates thrift institutions, and move those functions to the Office of the Comptroller of the Currency, which regulates banks.

-Merge the functions of the Commodity Futures Trading Commission into the Securities and Exchange Commission to create one agency to provide unified oversight of the futures and securities industries.

-Establish an Office of National Insurance within the Treasury Department to regulate those in the insurance industry who want to operate under an optional federal charter.

-Work to establish as a long-term goal three major regulators: the Federal Reserve as a "market stability regulator"; a "prudential financial regulator" to take over the functions of five separate banking regulators; and a "business conduct regulator" to regulate business conduct and consumer protection.

Merging the CFTC and SEC certainly isn't new.  Nor, as the US has increasingly been called on to harmonize its practices of insurance supervision with foreign regulators, is the idea of moving that supervision from the states to the federal government altogether surprising (not, of course, that it has anything to do with the current crisis).  In addition to the AP summary, it appears that the SEC's ex post regulation of financial products would change, and the Fed and Treasury would get way more authority over non-commercial bank financial institutions.

If turf is your thing, then you should conclude that the Fed and the Treasury Department would, if these proposals were enacted, get massive new responsibilities, while the SEC, OTS, CFTC, and FDIC would lose authority.  My final rule of thumb is that when agencies are pitted against each other in a legislative fight, their constituencies tend not to be individual congressmen, though the chairs of committee charged with overseeing regulators may not want to see those regulators disappear.  Rather, the foot soldiers in these fights tend to be the lobbyists for regulated industries themselves.  So you have the policy arguments (shouldn't we, after all, merge the CFTC and SEC?) and the question about whether the Securities Industry Association will care about the reorg, or fear the power of the Fed.  I think we can assume that the hedge fund and derivatives industry lobbyists will oppose much more regulation, though they may welcome the idea that the putative regulator at least would not be the SEC.

The Washington Post is where you turn for legislative prospects Kremlinology; it puts the chances at passage, at least as things currently stand, as pretty low.  Check out the amusingly dismissive take by the head of the Office of Thrift Supervision, the S&L regulator which, somewhat mysteriously, has always been separate from the OCC, which regulates banks:

John M. Reich, director of the Office of Thrift Supervision, discounted the importance of the blueprint, which calls for his agency to be merged with the Office of the Comptroller of the Currency to streamline the regulation of similar types of financial firms. In an e-mail to his employees, which was obtained by The Washington Post, Reich wrote that "you might be wondering whether financial services restructuring is an idea whose time has finally come. I don't think so."

Reich suggested that the current arrangement, of multiple banking regulators, offers important checks and balances. "When the Treasury Department issues its recommendations, expect to see news stories and renewed questions about what the future will hold," Reich wrote. "Take note of the fanfare, then look back to [past failed efforts to restructure financial regulation] and resume the important work that you continue to do so well."

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