The White House reform proposal is remarkably detailed and specific in many
respects, but it tried a bit of sleight of hand on one critical question:  what to do
with the FRB as a central bank if it also becomes a systemic-risk regulator.  
Secretary Geithner did commit to some hard thought on this darn fast once the
Fed is given the hammer.  Congress won’t, though, buy the FRB’s new
assignment on spec.  If the Board becomes mongo regulator – as we think it will
after hard slogging – this will come with considerable conditions and
restructuring built in from the get-go.   
The FRB of course is being royally chastised for sins it committed and those
resulting from guilt by association.  Still, we think the Fed will end up as
systemic regulator.  Why?  There really isn’t anyone else to charge with this task,
including the council proposed instead of the Fed.   
Advocates of a council cite all the various regulators – FDIC, SEC and even the
FRB – that they think do well as multi-member councils.  However, in each of
these, there’s a clear head and other members play distant second fiddle.  In a
systemic-risk council on which senior regulators with competing interests – not
to mention often incompatible personalities – sit nose to nose, confusion would
almost surely reign.  If it didn’t, then regulation would often be set by the lowest-
common denominator, as has been all too evident in every rule the agencies in
recent years have tried to pass by committee.  Non-traditional mortgage
guidance, anyone?
Congress will ultimately and reluctantly concede to Treasury’s view that there’s
no council senior or diverse enough that could also be accountable and quick off
the mark.  This will lead to the next decision:  give systemic risk to the FRB or try
to create a new agency.  Again, we think Congress will grumpily go with the
Obama plan and give the task to the FRB.  It will, though, try to make the Fed’s
systemic-risk regulatory function as distinct within the Board as it can to bring it
as close as possible to a freestanding, transparent and answerable agency.   
To do this, Congress will take the Fed apart even as it adds the new systemic-risk
piece.  All of this will be an iterative, not to mention contentious, debate, but we
already see several clear options.  One will be to house systemic risk in the Fed
but move it to a separate division with a head who is appointed by the President,
confirmed by the Senate and independent of the central bank monetary-policy
and payments function.  Think of how the OCC is housed within Treasury and
take it from there.