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Financial Reform Effort in Danger of Splintering

Sure was entertaining to see the nation's top financial regulators clashing over turf on Friday like hyenas scrapping over a bone. More seriously, it shows the cracks appearing in the Obama administration's campaign for financial reform.

Testifying Friday before the House Financial Services Committee, Treasury Secretary Tim Geithner, Federal Reserve boss Ben Bernanke, FDIC head Sheila Bair, OCC chief John Dugan and OTS Director John Bowman variously defended and challenged parts of the reform package. At issue is the government's plan to increase the Fed's power to regulate financial firms and to set up a consumer protection agency to oversee mortgage loans and credit cards, among other moves to stiffen regulation.

The consumer protection plan is proving especially contentious. Bernanke offers lip service to the idea, which Geithner endorses, while questioning whether the Fed should cede the authority of supervising credit cards and mortgages to the new agency. In other disputes, Bair favors forming a council of regulators to oversee financial services, rather than souping up the Fed. Dugan agrees, saying the plan goes "too far."

None of this is surprising. Federal regulators never willingly concede authority. Nor is it unexpected that most congressional Republicans and industry trade groups have aligned with financial firms against the proposed regulatory overhaul. More ominous for the plan is that some Democrats are beginning to question parts of the reform initiative. Already, the timetable for a financial reform bill is slipping. Rep. Barney Frank, D.-Mass., chairman of the House Financial Services panel, said Friday he would delay a vote on the consumer protection agency until September.

Is the reform effort dead? Not at all. But some observers think that mounting opposition may require advocates of regulatory restructuring to shift tactics. That could mean aiming to pass a series of smaller, more targeted measures rather pressing for the government's Big Bang agenda. For example, Congress could decide to kick consumer protection down the legislative road and instead focus on, say, tightening regulation of derivatives.

"The derivatives bill is perfect for lawmakers, who can tell voters that they have banned the complex financial products that caused the mess," said Jaret Seiberg, an analyst with investment advisory firm Concept Capital, in a note to clients today (no link available).

What's clear is that the President's drive to strengthen financial regulation, like his goal of revamping health care insurance, has a long ways to go.

Image courtesy of Flickr user ideal4investors.