Not guilty

The Obama administration officials are out defending their proposals for reforming the system for regulating financial institutions. The centerpiece of the plan, of course, is a mechanism allowing all the relevant agencies to cooperate in ensuring that none them is ever blamed for allowing the global economy to collapse.

The critical nature of this aspect of the plan is evident when one examines the history of financial regulation before and after financial catastrophes. For example, after the Rome stock market crash in the fourth century, the Imperial Securities Commission was unable to avoid culpability for the recession that followed. Ultimately, the ISC was disbanded when its five members were fed to the lions. The resulting power vacuum emboldened the Visigoths, who ravaged the empire's housing market with barbaric interest-only mortgages. In quick succession, Rome fell and the Visigoths plunged all of Europe into the Dark Ages by imposing a continent-wide value-added tax on the sale of indulgences.

So blame avoidance is crucial. But there are many other facets to the administration's proposal, most of which have escaped the notice of the financial press. For example, Treasury officials want to make it illegal for banks to "act all snippy" when regulators ask to see their records. Apparently, many investigations that could have unearthed the practices at the root of the financial crisis were thwarted when bank executives "got bent out of shape" because government examiners tried to examine their books.

The "Drop That 'Tude Act" of 2009 would require C-suite executives at big banks to "chill" whenever an investigator demands access to documents. Banking lobbyists, though, are fighting the measure, and want Congress to add language requiring government investigators to "be cool" and "not go totally medieval" when approaching executives. Several senators have already agreed to co-sponsor the banks' proposed "Would It Kill You to Ask Nicely?" amendment.

Another major component of the administration's plan revolves around the issue of whether some banks are "too big to fail." Since this question involves a definitional problem, it has taken some time to work out. Not surprisingly, officials have spent a great deal of time working on the issue, and most of the negotiations have taken place behind closed doors. But according to people familiar with the talks, Congress and the administration have agreed on the meaning of "to" and may be near a deal on the definition of "too." Right now, all of the understandings are oral, and reducing them to paper will be the responsibility of the White House Office of Homonym Affairs. The meanings of "big" and "fail" will likely be left for the market to decide.

Congress and the administration are also near an agreement on how the government will identify systemic risks. While the Federal Reserve will play a significant role in this effort, the real work will be done elsewhere. The process will work like this: The Fed will survey the financial landscape and, when it spots a systemic risk, will issue a Systemic Risk Warning. At this point, a Council of Regulators will swing into action, alerting all relevant agencies that a systemic risk has been identified. Representatives of the relevant agencies will then confer in an attempt to determine the nature of the risk and whether it is, indeed, systemic. The crucial inquiry at this point becomes, why should anyone listen to the Fed?

Seriously. Like, what's Bernanke going to do, force everyone to buy a crummy investment bank?

In any event, the point is simply to identify the systemic risk, not to actually do anything about it. Once the risk has been identified, any resulting calamities will be obscured from public scrutiny due to Jon and Kate's divorce.

The most sensitive components of the plan are those proposals for dealing with overseas regulators. Diplomacy is always tricky, and when the subject is global finance, the negotiations are always difficult. But thus far the administration has successfully rallied France, the U.K., Spain, Italy, Switzerland, Denmark and Sweden behind a plan to make sure everyone knows that it's all the Visigoths' fault.