By Kevin Drawbaugh
WASHINGTON (Reuters) - President-elect Barack Obama and Democrats in Congress will take over the government this month with big plans to overhaul U.S. financial regulation and a surge of momentum behind them.
From the mortgage meltdown to the Bernard Madoff scandal, the financial system is in crisis. Critics are hammering the federal bureaucrats who are supposed to manage the economy, police Wall Street and protect investors.
Some of the agencies under fire have familiar names -- the Fed, Treasury, SEC, FDIC; some less so -- CFTC, OCC, OTS.
All are under scrutiny by reformers who are talking about shutdowns, combinations and reshaping basic missions.
"We're going to have a significant shake-up," said Norman Ornstein, a resident scholar at the American Enterprise Institute, a Washington, D.C., policy think tank.
Obama, who will be sworn in on January 20, has moved quickly in nominating a new Treasury secretary and chiefs for the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
He has called for adoption of "new common-sense rules of the road that will protect investors, consumers and our entire economy from fraud and manipulation by an irresponsible few."
The early signals point to "a very new and different and activist era," Ornstein said.
Of course, Obama is not the first president to target this issue. The streets of Washington are littered with bold blueprints to reform the financial oversight bureaucracy.
Past efforts have crumpled, victims of agency turf battles and attacks from industry lobbyists defending the status quo.
Even 2002's post-Enron Sarbanes-Oxley reforms mainly confined to limited corporate governance and auditing issues. This time around, more basic changes look likely.
YEARS OF SCANDALS
Americans dealing with a deep recession are looking back on years of business scandals and soaring pay packages for a corporate elite that seems detached from economic reality.
The government is greatly expanding its role in the economy. By bailing out the billionaire financiers who drove the financial system to the edge of disaster, the Bush administration and Congress are giving all taxpayers a stake in the financial services industry and its supervision.
Banking giants once emblematic of free-wheeling capitalism, such as Goldman Sachs, are now voluntarily seeking to become more tightly regulated bank holding companies.
Over just a few months in 2008, the balance of power at the economy's financial heights seemed to shift away from New York's plutocrats and to Washington's politicians.
If that lasts, Obama and the Democrats just might push through meaningful reforms, say some policy analysts.
More than 15,000 federal employees, scattered across seven primary agencies, regulate the banks, the economy, financial markets and corporations, often with limited success.
The White House is at the system's center, but presidents historically delegate much responsibility to agency heads.
Banks are supervised by a patchwork of agencies including the Treasury Department and two of its units -- the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) -- as well as the Federal Reserve, the Federal Deposit Insurance Corp and state governments.
The government also regulates markets for stocks, bonds, commodities, futures and options. These jobs are done chiefly by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
TORN AT SEAMS
The patchwork quilt of oversight represented by these seven agencies and a few smaller ones is badly torn at the seams where duties have been unclear and abuses have accumulated.
From subprime mortgage-backed securities to collateralized debt obligations, the financial system innovated and exploded in size in recent years amid political zeal for deregulation.
Reform attempts have frequently focused on centralizing oversight. Some have suggested steps such as merging the SEC and CFTC, and closing the OTS.
Vital to any new approach will be the Fed. Months ago, Treasury Secretary Henry Paulson proposed transforming the Fed from a monetary policy center into a kind of super-guardian against "systemic risk" in the economy.
Since then, the Fed has nearly become just that. In trying to fix the markets, it has extended billions of dollars in credit to banks and businesses, making it the lender of last resort for large swathes of the entire economy.
Dealing with the Fed's expanding scope will be key to any reform. Chances are good that more bank oversight will centralize under the Fed now that Obama has tapped New York Fed President Timothy Geithner to replace Paulson at Treasury.
Other issues are what to do about mortgage market giants Fannie Mae and Freddie Mac, both now under government control, and the outlook for insurers and credit card companies.
On Monday, the House of Representatives Financial Services Committee will hold a hearing on the Madoff scandal and how the SEC missed it, with two more hearings later in the week on the ongoing financial bailout program and on mortgage brokers.
(Reporting by Kevin Drawbaugh, Glenn Somerville, Alister Bull, David Lawder, Christopher Doering, Karey Wutkowski, Rachelle Younglai and Diane Bartz; Editing by Steve Orlofsky )
