While this may not solve everything, I can't help but think that a shakeup, a reminder that sometimes actions (or inactions) do have consequences, would be an excellent idea for this agency:

May 20 (Bloomberg) -- The Obama administration may call for stripping the Securities and Exchange Commission of some of its powers under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said.

The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail. The Fed may inherit some SEC functions, with others going to other agencies, the people said. On the table: giving oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products, two people said.

The 75-year-old SEC, chartered to oversee Wall Street and safeguard investors, has seen its reputation tarnished as some lawmakers blamed it for missing the incipient financial crisis and failing to detect Bernard Madoff’s $65 billion Ponzi scheme. Any move to rein in the agency is likely to provoke a battle in Congress, which would need to approve the changes, and draw the ire of union pension funds and other advocates for shareholders.

“It would be a terrible mistake,” said Stanley Sporkin, a former federal judge and enforcement chief at the SEC. “Whatever the SEC has done or didn’t do, it is still the premier investor protection agency around.”

Yes, and it's been doing such a great job up until now, hasn't it?

SEC Chairman Mary Schapiro’s agency has been mostly absent from negotiations within the administration on the regulatory overhaul, and she has expressed frustration about not being consulted, according to people who have spoken with her. She has pledged to fight any attempt to diminish the SEC, they said.

Treasury Secretary Timothy Geithner was set to discuss proposals to change financial regulations at a dinner last night with National Economic Council Director Lawrence Summers, former Fed Chairman Paul Volcker, ex-SEC Chairman Arthur Levitt and Elizabeth Warren, the Harvard University law professor who heads the congressional watchdog group for the $700 billion Troubled Asset Relief Program.

It was my understanding that there were penalties for early repayment of TARP loans, but this Daily Beast story doesn't mention it. According to them, Goldman Sachs will soon be out from under government control:

Wall Street may have another reason to hate Goldman Sachs: The venerable firm with contacts throughout the federal government looks as though it may be the first financial institution to be allowed to repay government bailout money, The Daily Beast has learned. Repaying its TARP loan would free Goldman from various restrictions, including those on the compensation of key executives.

The decision as to which banks would be given the green light from banking regulators, most notably the Federal Reserve and the Treasury Department, could be made as early as next week, these people say. Goldman already has a tentative approval from the Treasury and is awaiting approval from the Federal Reserve, according to one person with knowledge of the matter.

JP Morgan feels comfortable they have convinced both the Treasury and Fed that they should be allowed to repay the money along with the first group of banks.

During the height of the financial crisis the federal government handed out billions in aid to the big banks in an effort to boost capital levels depleted by bad real estate loans and bonds. While the bailout money helped stabilized a spreading financial panic, it also led to massive government ownership of some of the nation's largest banks and controls on business practices and compensation.

As the financial crisis has abated, some banks, most notably Goldman Sachs, JP Morgan Chase, Bank of America, and Morgan Stanley have said they can now repay the money and get out from under federal control. The government must first approve the measure; last week it announced results of so-called stress tests to determine which banks have the most capital to withstand further erosion in business conditions. The government also announced two conditions to repay the money: The issuance of debt that is not backed by FDIC insurance and sufficient so-called "tier one" capital levels. Tier one capital is the strongest capital in the market.

Based on the stress tests, Goldman Sachs and JP Morgan were deemed to be among the strongest of the big banks; unlike Morgan Stanley, Bank of America and Citigroup, both Goldman and JP Morgan were not required by regulators to raise capital levels. Since that time, officials at Goldman and JP Morgan have been pressuring regulators to allow them to repay the bailout money that was granted from the Troubled Asset Relief Program or TARP.

Imagine. These statements are made by one of their biggest shareholders:

May 2 (Bloomberg) -- Berkshire Hathaway Inc. Vice Chairman Charles Munger, whose company is the largest private shareholder in Goldman Sachs Group Inc. and Wells Fargo & Co., said banks will use their “enormous political power” to prevent changes to the industry that would benefit society.

“This is an enormously influential group of people, and 90 percent of that influence is being spent to gain powers and practices that the world would be better off without,” Munger, 85, said yesterday in an interview with Bloomberg Television. “It will be very hard to accomplish the kind of surgery that would be desirable for the wider civilization.”

Munger said policy makers should seek to impose limits on banks that are deemed “too big to fail” after financial institutions worldwide suffered more than $1 trillion in losses. The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the recession.

“We need to remove from the investment banking and the commercial banking industries a lot of the practices and prerogatives that they have so lovingly possessed,” Munger said. “If they are too big to fail, they are too big to be allowed to be as gamey and venal as they’ve been -- and as stupid as they’ve been.”

Remember when your teachers would mark on the curve because they were afraid of how it would look to have the entire class fail? I suspect this is like that:

The results of the bank stress tests to be released by the Obama administration this week are expected to include more detailed information about individual banks — assessing specific parts of their loan portfolios — than many analysts have been expecting.

Using these results, the administration seems prepared to argue that, while a few banks may need additional money, the broad financial system is healthier than many investors fear.

At the core of the test will be a judgment about whether each of the country’s 19 biggest banks has enough money to withstand a deep recession and, if not, how much more capital it needs to be able to lend at a healthy pace, according to regulators. Unless regulators change course this week, the tests are also likely to forecast potential losses in individual slices of the credit markets, like residential mortgages, credit card loans and commercial loans, for each bank over the next two years.

The administration is expected to make the case that the needs of the troubled banks can be met with the bailout funds that Congress has already approved. That would be a departure from what administration officials were saying as recently as March and evidently reflects the recent improvement in banks’ conditions.

“None of these banks are insolvent,” said a senior government official, who did not want to be identified before the public release of the test results.

[...] On Thursday afternoon, regulators expect to publish an analysis of the banks’ assets, akin to a sprawling research report written by a Wall Street analyst but one that comes with the government’s imprimatur. In effect, Treasury Department and Federal Reserve regulators will be handing over information to investors so that they can decide which banks they want to invest in — and which will ultimately need more bailout money.

Uh, isn't this what Krugman and Stiglitz have been saying? It's why the two Nobel prize winners have been urging Obama to nationalize the banks:

WASHINGTON (Reuters) - Treasury secretary Timothy Geithner on Tuesday said difficulty in setting a value on banks' toxic assets was a continuing hindrance to their ability to lend and borrow.

In prepared testimony for delivery to the Congressional Oversight Panel that monitors Treasury's efforts to bail out troubled banks, Geithner said toxic assets were "congesting" the U.S. financial system and making it hard to get credit flowing normally again.

"Uncertainty about the value of legacy assets is constraining the ability of financial institutions to raise private capital," he said, adding that he hoped a public-private investment program will improve the ability to put a price on troubled mortgage and other assets.

I'd much rather see them err on the side of transparency, so this is good news:

WASHINGTON — The Obama administration is drawing up plans to disclose the conditions of the 19 biggest banks in the country, according to senior administration officials, as it tries to restore confidence in the financial system without unnerving investors.

The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest.

While all of the banks are expected to pass the tests, some are expected to be graded more highly than others. Officials have deliberately left murky just how much they intend to reveal — or to encourage the banks to reveal — about how well they would weather difficult economic conditions over the next two years.

As a result, indicating which banks are most vulnerable still runs some risk of doing what officials hope to avoid.

Oddly enough, banks that didn't receive TARP funds are charging less than they used to for these exact same services. Very strange, don't you think?

The committee overseeing federal banking-bailout programs is investigating the lending practices of institutions that received public funds, following a rash of complaints about increases in interest rates and fees.

Since the Troubled Asset Relief Program was launched last October, banks bolstered by capital infusions have boosted charges on a wide range of routine transactions, hiked rates on credit cards and continued making loans criticized as predatory by consumer advocates. The TARP funds are intended to open lending spigots and make it easier for people to borrow money.

Last week, for example, Bank of America Corp. told some customers that interest rates on their credit cards will nearly double to about 14%. The Charlotte, N.C., bank, which got $45 billion in capital from the U.S. government, also is imposing fees of least $10 on a wide range of credit-card transactions.

Citigroup Inc., another recipient of government cash, is trying to entice customers to borrow at high rates. "You could get $5,000 today," Citigroup's consumer-finance unit wrote in fliers mailed to customers. The ads don't disclose that the loans often carry annual interest rates of 30%.

The interest rates "compare competitively to similar offers in the market" and vary depending on the creditworthiness of borrowers, a Citigroup spokesman said. Citigroup has received $50 billion in capital from taxpayers, and the U.S. government will soon own as much as 36% of the company's common stock.

"To continue to offer competitive products and services and responsibly lend in this current environment, we must adjust our pricing," said a Bank of America spokeswoman about the company's new fees and interest rates.

The U.S. government's ownership stakes in hundreds of banks, as well as political ire stoked by lucrative pay and perks, are raising the specter of new regulation on basic banking practices. First-quarter results due starting this week will be scrutinized for signs of how much taxpayer-funded capital is being funneled into loans.

Elizabeth Warren, chairwoman of the Congressional Oversight Panel, the body named by Congress to oversee the federal bailout, said the panel is working on a report examining instances of potentially inappropriate lending by banks that got taxpayer capital. "The people who are subsidizing the activities of the banks through their tax dollars are the same people who are furnishing the high profits through consumer lending," Ms. Warren said in an interview. "In a sense, we're asking taxpayers to pay twice."

Sometimes I wonder if their parents ever said no to these bankers. They don't want to take any responsibility, they don't want to accept any restrictions, they reject the notion that there should be economic consequences to their own behavior - and they don't want us to know what they're doing with our money. Maybe we should get rid of Timothy Geitner and appoint Supernanny!

WASHINGTON — As the Obama administration completes its examinations of the nation’s largest banks, industry executives are bracing for fights with the government over repayment of bailout money and forced sales of bad mortgages.

President Obama emerged from a meeting with his senior economic advisers on Friday to say “what you’re starting to see is glimmers of hope across the economy.” But there were also signs of growing tensions between the White House and the nation’s banks over the next phase of the financial rescue.

Some of the healthier banks want to pay back their bailout loans to avoid executive pay and other restrictions that come with the money. But the banks are balking at the hefty premium they agreed to pay when they took the money.

Jamie Dimon, the chief executive of JPMorgan Chase, and two other executives of large banks raised the issue with Mr. Obama and the Treasury secretary, Timothy F. Geithner, at a meeting two weeks ago.

[...] Finally, there is increasing anxiety in the industry that the administration could use the stress tests of the 19 biggest banks, due to be completed in the next three weeks, to insist on management changes, just as it did with General Motors when officials forced the resignation of its chief executive after examining that company’s books.

[...] Even though the Treasury Department plans to subsidize the purchases of toxic assets by giving buyers low-cost loans to cover most of their upfront cost, a growing number of analysts warn that many if not most banks will remain reluctant to sell.

“The gap is still very wide,” said Frank Pallotta, a former mortgage trader at Morgan Stanley, now a consultant to institutional investors. “If every bank was forced to sell at the market-clearing price, you’d have only five banks left in the market.”

Kevin Drum raises some interesting questions about the banking stress tests. It really does sound like the "trophies for all!" mentality that pervades elementary education ("Best Smile," anyone?) but of course the consequences will be a bit more important:

This is a peculiar story from the New York Times:

For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.

[...] Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it.

[...] Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry.

So what have we learned here? First: all 19 banks will pass. Second: not all the banks can be winners. Third: the ones that pass — but aren't winners! — will be propped up by taxpayers. Fourth: no, they won't be propped up by taxpayers, they'll be forced to sell assets and raise private capital.

Huh? Which is it? If by "pass," regulators merely mean that a bank won't be instantly seized and its management defenestrated, then I guess this makes sense. Awards for all! On the other hand, the prospect of a bank getting a "needs improvement" grade and then successfully selling a big stock issue to raise private capital is just fanciful. Even banks that pass with flying colors will have trouble doing that.

Another part of the story is this:

WASHINGTON (Reuters) - The U.S. Treasury Department is asking banks not to mention the regulatory "stress tests" as part of their first-quarter earnings results, according to a source familiar with government discussions.

Many of the top 19 U.S. banks who are undergoing regulatory stress tests have already completed internal versions of the examinations, which are designed to determine their capital needs under more adverse economic conditions.

However, the banks do not yet know the results of the government's version of the assessment, the source said.

So for the past two days, I've been reading about Geithner's plan - and the responses in the economics blogosphere, which by a large majority are not only negative, but incredulous.

Like Naked Capitalism's Yves Smith, who had this to say on the Geithner plan:

If this isn't Newspeak, I don't know what is. Since when is someone who puts 3% of total funds and gets 20% of the equity a "partner"?

[...] So presumably, the point of a competitive process (assuming enough parties show up to produce that result at any particular auction) is to elicit a high enough price that it might reach the bank's reserve, which would be the value on the bank's books now.

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over.

But you know, I think the proposed Public Investment Corp. is much more than this. I think maybe we all missed the point. This plan is the economic equivalent of the ShamWow! It's like a chamois, it's like a towel, it's like a sponge! (And Geithner - isn't that a German name? You know the Germans always make good stuff!)

Toxic assets? Put it on that nasty spill, it all comes up - with no mildew underneath. Then simply rinse and wring! Bad paper? Without even putting on any pressure, just put it on the CDOs and they're gone! You'd be out of your mind not to own one of these!

All I can say is, "ShamWOW!"