Simon Johnson: Dropping the Ball on Financial Regulation With regard to financial reform, the outcome of the November election seems straightforward. At the presidential level, the too-big-to-fail banks bet heavily on Mitt Romney and lost; President Obama received relatively few contributions from the financial sector, in contrast to 2008. In Senate races, Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio demonstrated that it was possible to win not just without Wall Street money but against Wall Street money. More broadly, this political shift coincides with and matches a significant change of views within the regulatory community. To pick these up, you need to listen carefully, but the signs are unmistakable. The Federal Deposit Insurance Corporation is firmly in the hands of sensible people. The Federal Reserve governor Daniel Tarullo is making all the right noises, including about the need for a cap on the nondeposit liabilities of our largest banks. Even Bill Dudley, the president of the New York Fed and a former Goldman Sachs executive, now acknowledges that too-big-to-fail is still with us. If the New York Fed is getting past denial, we are making progress. At the Treasury Department, however, the tone and the content of messages on financial reform sound increasingly discordant. Recent signals suggest that appeasing powerful players within the financial sector is still high on the agenda for Treasury Secretary Timothy Geithner. See, for example, the recent decision to exempt foreign-exchange swaps and forwards from the rules that will apply to most other over-the-counter derivative transactions. Read the response by Dennis Kelleher of Better Markets; he is exactly on target, as usual. I join him in recommending the reporting by Silla Brush of Bloomberg News on the issue. The highest-profile issue remains the process to appoint a new chairman at the Securities and Exchange Commission. As anticipated in my post two weeks ago, Mary Schapiro announced on Monday that she would step down as chairwoman. Elisse Walter, already an S.E.C. commissioner, was immediately named as interim chairwoman - a step that many reformers saw as reasonable. This means that the president has some time to get a new chairman lined up; there is no need for a rushed decision. The Treasury Department appears to have backed away from its earlier support for Mary Miller, and she is now reported to have withdrawn. She would have been a weak and inappropriate candidate, as I explained in my post last week. The Treasury's new candidate is Sallie Krawcheck, a former executive in the financial services industry. The campaign to appoint Ms. Krawcheck is already in full swing, and she is currently visiting people on Capitol Hill. Ms. Krawcheck is known to be good on the need to reform money markets - a key issue for the S.E.C. going forward. She has also been critical of management in some of our largest banks, at least in what she says on Twitter. This week she supported Charles Schwab's reform proposal for money market funds. It's surprising that a potential nominee for such a prominent policy position is allowed to tweet. But perhaps it is also helpful, as we know very little about what she would do as S.E.C. chairwoman. Ms. Krawcheck, who held senior positions at Bank of America and Citigroup, is on the advisory board of Gold Bullion International - a company that makes it easy for investors to own gold and other precious metals. Perhaps her experience and current position mean she has a healthy skepticism about the debt and equity currently on offer from very large banks. But does she really understand how our financial system became so dangerous and what it would take to better protect investors? Ms. Krawcheck would be placed in charge of our principal markets regulator and made responsible for setting its agenda and answering to Congress. Yet she has never been a regulator or prosecutor; she has never sought to craft rules or dealt with Congress. What about her purely industry-based background suggests that she would be capable of marshaling the S.E.C.'s formidable staff to follow through on her tweets? More broadly, what is Ms. Krawcheck's view on the reform agenda put forward in early October by Mr. Tarullo? Aside from her tweets and short comments, I have not seen any clear statement on policy priorities from her. Nor does her track record suggest which way she would go. And whom would she hire as head of enforcement? The S.E.C. needs to get its game back. This organization is a distinguished safeguard of public interest that has fallen on hard times - mostly through deregulation, underfunding, industry capture and a revolving door. Continuing the turnaround begun under Ms. Schapiro will require expert skills and a strong vision. No one can be above the law - including the country's most powerful and best connected executives. There is a huge political risk in this appointment. In terms of high-profile positions dealing with financial regulatory issues, the head of the S.E.C. ranks behind only the Fed chairman and the Treasury secretary. Does President Obama want to make the same mistake at the S.E.C. that President George W. Bush made at the Federal Emergency Management Agency before Hurricane Katrina? Do his advisers want to wake up every morning worrying if an S.E.C. scandal or breakdown in competence or inappropriate wording will become what the second Obama term is remembered for? Anyone genuinely seeking to protect the president should want the strongest possible candidate - on his or her merits - for this position. Ms. Schapiro helped stabilize the situation, but a great deal of work remains. Ms. Krawcheck's nomination would mostly be a way to make prominent people in the financial sector happy. Perhaps she would surprise them - and us - with real reform. But why play such games? Some distinguished Americans are available to take the job of leading the S.E.C. I've written before about Neil Barofsky, Dennis Kelleher and Gary Gensler, the chairman of the Commodity Futures Trading Commission. I also heartily recommend Harvey J. Goldschmid, a former S.E.C. commissioner with an outstanding résumé on many fronts. Disclosure: Mr. Goldschmid and I both serve in unpaid positions on the systemic risk council, founded by Sheila Bair. Ms. Bair would also be outstanding at the S.E.C. - although the country would be well served if she were to become our next Treasury secretary. For a president serious about financial reform - including responsible policy and effective enforcement - the choice is simple. Nominate Ms. Bair as Treasury secretary and Mr. Barofsky, Mr. Goldschmid, Mr. Gensler or Mr. Kelleher as head of the S.E.C. We need to restore confidence in all dimensions of our public markets. Financial markets are far too important to be left to the financiers.