Last week Tim Geithner dropped multiple F-bombs in a meeting with regulators unenthusiastic about his plan to concentrate oversight of the financial system at the Fed. Sheila Bair was one of his targets, but today she held her ground. In testimony before the Senate Banking Committee this morning, she had this to say about concentrating regulatory power at the Fed:

…we do not see merit or wisdom in consolidating federal supervision of national and state banking charters into a single regulator for the simple reason that the ability to choose between federal and state regulatory regimes played no significant role in the current crisis. One of the important causes of the current financial difficulties was the exploitation of the regulatory gaps that existed between banks and the non-bank shadow financial system, and the virtual non-existence of regulation of over-the-counter (OTC) derivative contracts. These gaps permitted lightly regulated or, in some cases, unregulated financial firms to engage in highly risky practices and offer toxic derivatives and other products that eventually infected the financial system…

She hits back at the administration pretty hard:

In light of these significant [regulatory] failings, it is difficult to see why so much effort should be expended to create a single regulator when political capital could be better spent on more important and fundamental issues which brought about the current crisis and the economic harm it has done.

She makes great points throughout.

But we can’t let Sheila and FDIC off too easy, though. They’ve been undercharging for deposit insurance for years, which meant they didn’t have the resources necessary to resolve too-big-to-fail financials when they collapsed last fall. Instead FDIC was forced to delay the reckoning, offering big banks a federal guarantee for their debts.

But at least Bair recognizes the terrible precedent that has been set, and wants to move decisively to reverse it.

John Dugan over at OCC also questions the wisdom of concentrating too much power at the Fed, though he and Sheila clearly have their disagreements when it comes to the proposed Consumer Financial Protection Agency. She’s a big fan of existing proposals. He’s got qualms with it.

Incidentally, I agree with my colleague Matt Goldstein that it’s good to see Tim Geithner get mad for a change. A little anger is certainly appropriate. I also agree with him that Geithner’s anger seems misdirected.