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In the final season of Lost, the main characters live in two universes and, for some reason, frequently gaze in mirrors. One guy saw his reflection in a glass microwave door, which made me wonder what Lewis Carroll might have dreamed up if he’d had a microwave.

At least we know that Lost will soon be over so we can resume our normal lives. Not so for financial reform, although we now have both an actual House bill (passed back in December) and Chris Dodd’s newly proposed Senate bill. And according to Barney Frank, the two bills are “more alike than they are different,” something we can’t yet say about the parallel lives of Sawyer, Jack and the other Losties. So who knows, maybe the big regulatory do-over will come to pass this year. (If you're one of the three people who still has patience for the political stuff, a great source is Politico's Morning Money.)

As I said here, gosh, over a year ago, it’s a given that any do-over will involve some government body looking out for systemic risk. The current bills would give this job to a new "Financial Stability Oversight Council" (FSOC) made up of the top financial regulators, who would meet to share cheese Danishes at least once a quarter.*

The FSOC would have power to do more than just yak, gather data and recommend stuff. If 6 of its 9 members think some financial firms are looking Too Big To Fail-ish, it could put them under Fed regulation, and if things start getting scary, make them sell assets or quit certain lines of business. (There would be a different process, outside the Council, for quickie liquidations of future AIGs.)

I’m not totally hating the council idea. As long as we lack the will to change the basic structure of financial regulation – i.e., It Takes A Confusing Village of Agencies - then by all means let’s force our regulators to sit regularly in one room and focus on the stuff they forgot about before, like leverage, risk management, and credit exposure. Even if you’re completely cynical, you can say that at least this makes it harder for them to blame each other and/or claim ignorance when the next disaster happens. If you’re slightly less cynical, you can say that it’s far better to have some kind of systemic risk watchdog than not to have one at all, and that the FSOC might shake up the regulatory status quo and force people to think more broadly.

If the FSOC becomes reality, its value will depend largely on resources, staffing, and, yeah, politics. Also, it must be able to find out if market players are in trouble without tipping off the Street, creating systemic panic, and causing potentially viable institutions to suffer Sudden Death By Collateral Call. Which is, interestingly, one of the few fates not yet experienced by any character on Lost.

*In Dodd’s version, the folks consuming Danishes at FSOC meetings would be the heads of the SEC, CFTC, FDIC and OCC, the Fed chairman, the chief of the consumer protection bureau that Dodd wants to insert into the Fed, the director of the Federal Housing Finance Agency, and some as yet unnamed person who knows something about the insurance business. Oh, and also the Treasury Secretary, who would chair the whole thing. Everyone gets one vote. The head of a new Office of Financial Research at Treasury would attend and presumably be entitled to a Danish, though not a vote.

Disclosure: No positions

Source: Systemic Risk Watchdog: Maybe It Takes a Village of Agencies