Now or never for financial watchdogs shake-up

By Kevin Drawbaugh - Analysis

WASHINGTON (Reuters) - If the banking crisis of 2008 fails to do the trick, then there is little hope Washington will ever summon the will to reorganize its creaking, disjointed system of financial regulation.

After years of failed attempts to modernize how the government oversees Wall Street and the banks, and with the U.S. election just days away, financial industry lobbyists and legislative aides were saying 2009 will likely be the year.

No matter who wins the White House, Congress is expected to make a serious run at a top-to-bottom restructuring of the government's seven big financial oversight agencies and their more than 15,000 employees, said lobbyists and aides.

Starting in the House of Representatives Financial Services Committee chaired by Massachusetts Democratic Rep. Barney Frank, the agencies will face pressure to justify their roles amid accusations that they once again failed to detect and prevent a major financial debacle.

"There will be a significant push for regulatory reform," Martin Baily, former chairman of the Council of Economic Advisers in the Clinton administration, said in an interview.

"We've learned that the way we've had things didn't work very well," said Baily, a senior fellow at the Brookings Institution, a Washington, D.C. think tank.

The $700-billion bank bailout program approved earlier this month ordered a report to Congress by April 30 from the Treasury secretary -- presumably whoever replaces Henry Paulson -- on market conditions and the financial regulatory system.

That report will follow an earlier reform blueprint put forth seven months ago by Paulson that Senate Banking Committee Chairman Christopher Dodd at the time called "a wild pitch ... not even close to the strike zone."

Paulson recommended formalizing and expanding the President's Working Group on Financial Markets, which is now only an informal inter-agency committee; giving the Federal Reserve more power to manage "systemic risk" in the economy; and setting up a national insurance regulator.

He also called for merging two bank regulators -- the Office of Thrift Supervision, and the Office of the Comptroller of the Currency -- as well as merging two market regulators -- the Commodity Futures Trading Commission (CFTC), and the Securities and Exchange Commission (SEC).

UPHILL STRUGGLE

Potential moves like these are still alive as Congress looks ahead. The Democratic candidate for president, Barack Obama, and Republican candidate John McCain, have talked about shaking up the financial regulatory system, while offering few specifics.

If Democrats make big gains in Congress, as is widely expected, they will probably claim "authority to do something major on regulation," Baily said. "Frank is going to hold some hearings ... This will be a priority."

But some experts warned that pulling off real change in the federal bureaucracy is not as easy as it sounds.

"The politics of Congress and the agencies themselves tend to fortify inertia," said Joel Seligman, an expert on the history of financial regulation and president of the University of Rochester, at a congressional hearing last week.