It promises to be controversial and even politically dicey.
In fact, the administration is already shelving one idea, because it's just too messy.
Treasury Secretary Tim Geithner has spoken of the need to consolidate agencies in the patchwork world of financial regulations to prevent companies from shopping for the easiest overseers. But the Obama administration has now decided to keep separate two similar regulatory agencies whose duties often overlap.
Both the Securities and Exchange Commission and the Commodity Futures Trading Commission regulate complicated financial products. Many experts have long argued that their consolidation would result in stronger oversight.
But combining them could have created a power struggle between their congressional overseers, pitting farm state lawmakers who speak the language of pork bellies and corn bushels against East Coast senators who talk stocks and bonds.
By sidestepping the merger issue, the administration avoids a political turf war that threatened to slow efforts to regulate the kind of financial products that caused the collapse of American International Group (AIG, Fortune 500).
However, the decision provides a window into the kinds of fights and compromises to come with bigger tougher turf wars between regulators like the Federal Reserve and the Federal Deposit Insurance Corp.
Both the Fed and FDIC stand to gain or lose power as officials grapple with which gets new powers to decide when the government needs to shut down or prune troubled companies that threaten the greater financial system.
"This becomes a big political dance," said Robert Litan, an economist and attorney at the Brookings Institution. "It's very difficult to merge these activities, because some people gain power and some people lose power. But if you don't do it now, you are probably never going to do it."
A tale of two regulators0:00/2:53The derivatives disasterThe division of labor between the SEC and CFTC works like this: The SEC oversees securities -- which include shares of companies, like stocks and bonds, that can be invested or traded. The CFTC oversees trading of bets made on the future price of things like oil or corn and even currencies.
But there's still a lot of overlap between the two, especially with new kinds of financial products that could fall into either category.
For example, it took years to figure out who should keep an eye on a product called a "single stock future," which is a contract that allows traders to bet on the future position of a stock without actually owning it. (Both agencies regulate single stock futures.)
Such overlap is why former Treasury Secretary Henry Paulson suggested combining the two regulators in his March 2008 blueprint for "modernized regulatory structure." He warned that globalization and "market linkages" make maintaining two separate agencies "potentially harmful and inefficient."
A lot of people agree with that idea. Among them: SEC Chairwoman Mary Schapiro, who told lawmakers on Tuesday that "there is a logic and an efficiency that can be achieved through the merger of the two agencies."
But politics comes into play when you look beyond the two agencies and consider the congressional committees that control and fund them.
The SEC answers to the House Financial Services and Senate Banking committees.
The CFTC, originally created to regulate agricultural financial products, answers to the agricultural committees on Capitol Hill -- even though agricultural futures are less than 15% of what the CFTC now deals with.
Most veteran congressional watchers say a merger would give the banking committees more power, while the agricultural committees would lose power. The agricultural panels don't like that idea much.Their chiefs have espoused the importance of maintaining the CFTC, saying its expertise would get lost at the SEC. They've even filed bills that bulk up the CFTC's power to regulate.
In addition, lawmakers who lose jurisdiction over the CFTC could lose lucrative campaign contributions from banks and investment firms.
During the 2008 election cycle, House agricultural committee members collected $8.6 million and Senate agricultural committee members collected $28.4 million from the financial services sector, according to the Center for Responsive Politics.
What's next?For the past few weeks, Geithner has been talking more and more about streamlining and combining agencies without giving any details as to how he planned to do it.
During a dinner Wednesday for key lawmakers who sit on both the banking and agricultural committees, Geithner indicated he would not pursue a merger of CFTC and SEC, according to an industry official familiar with the conversation.
On Thursday, newly-appointed CFTC Chairman Gary Gensler told the Senate Agricultural Committee that a "merger for merger's sake" wouldn't address any of the "lessons learned from the crisis."
"While it will always be out there in the ether, and will be debated and discussed," Gensler said, "we have an heavy agenda here for Congress. I don't see it really in the lead here."
House Financial Services Chairman Barney Frank, D-Mass., had never been a vocal proponent of such a merger and has recently said he's more interested in "filling in the gaps in the financial regulatory structure" rather than "moving boxes," spokesman Steven Adamaske said.
Frank's committee has begun trying to figure out what full-blown regulatory reform should look like, starting with oversight of the kinds of products that the CFTC currently doesn't oversee. Gensler suggested that the SEC and CFTC should share such oversight.
