(Corrects contribution amount in the 16th paragraph.)

April 7 (Bloomberg) -- It was a gala event, with the nation's top regulators submitting to questions from the nation's top overseers on Capitol Hill.

Who oversees the overseers? No one, which is too bad because their oversight often seems to blow with the business cycle, not to mention their major campaign contributors -- er, I mean, constituents.

The Senate Banking Committee, chaired by Connecticut Democrat Christopher Dodd, held the first of what are sure to be many hearings last week on the government's role in connection with the near-collapse and ultimate acquisition of Bear Stearns Cos. by JPMorgan Chase & Co.

The Committee elicited from witnesses, including representatives from the Federal Reserve, U.S. Treasury, Securities and Exchange Commission and Wall Street, a timeline of events as they unfolded on March 13-16, starting with a run on Bear Stearns by its short-term lenders and culminating with its purchase by JPMorgan, a deal sealed by a $30 billion loan from the Fed.

In Congress's eternal quest to ensure that the last crisis doesn't repeat itself, lawmakers tried to ascertain what the regulators knew (too little) and when they knew it (too late).

Someone should have asked our elected officials the same questions. Ever since the passage of Sarbanes-Oxley in 2002, enacted after the last bubble burst to reveal accounting irregularities, the trend has been toward easing the regulatory burden on public companies.

Remember Overregulation?

It was something of an out-of-body experience to watch Democratic Senators Chuck Schumer of New York and Dodd of Connecticut, representatives of two states with large financial constituencies -- financial services and hedge funds, respectively -- go on the offensive.

``Where were the regulators?'' Schumer asked. ``Was someone asleep at the switch? Or is it that our regulatory structure doesn't work?''

Where were the regulators, you ask? Why, they were poring over a study you commissioned last year on the loss of New York's competitiveness as a financial center. You, senator, had a hand in hitting the snooze button.

Among the disincentives to doing business in New York, according to the report, is ``a complex and sometimes unresponsive regulatory framework'' that has kept foreign firms out of U.S. markets and chased some U.S. firms overseas because of ``the complexity and cost of doing business in U.S. financial markets.''

A-List Contributors

Former New York governor Eliot Spitzer was even on board with the findings, once he was in a position to extract revenue (taxes) legally from the financial industry rather than forcibly in the court of public opinion as attorney general.

Maybe, Senator, it was the $12.8 million you received from the finance, insurance and real estate companies over the last two decades -- three times larger than the second-largest contributor (lawyers and lobbyists) -- that influenced your prior push for lighter regulation. Your top contributors read like an A-list of Wall Street firms, including Goldman Sachs Group Inc., Citigroup Inc., Morgan Stanley, JPMorgan and Bear Stearns.

It was to protect these same constituents that you opposed legislation last year that would have raised taxes on hedge funds and private-equity partnerships. You didn't want your loyal, multimillionaire backers singled out for unfair tax treatment unless the same rates applied to oil-and-gas, venture-capital and real-estate partnerships.

Senator Flip-Flop

Even your colleagues on the Banking Committee remarked on the inconsistency of your positions: You opposed taxing ``carried interest,'' or the partners' share of the profits, as ordinary income rather than at the more favorable capital gains rate (15 percent), yet you advocate a tax code that treats everyone equally.

As for Dodd, he's no piker when it comes to raking it in from the financial industry. Finance, insurance and real estate companies chipped in $13 million in campaign contributions since 1989, according to the Center for Responsive Politics.

As a group, members of the Banking Committee received a total of $29.3 million in the 2003-2008 election cycle from those industries and related political action committees.

Isn't there an inherent conflict of interest? Congress has oversight responsibility for financial regulatory agencies. At the same time, the members represent business constituencies dedicated to opposing rules and regulations that get in the way of their profits. They pay good money to help Congress see things their way.

Super Cop

Once a crisis hits, politicians try to look like they are doing something to help. The current overlapping system of regulation is largely a result of Depression-era fixes.

Clearly if the Fed is lending money directly to investment banks, the central bank needs to have access to the books. Which begs the question of how highly regulated commercial banks got into so much trouble, forcing them to write down tens of billions of dollars in bad loans and to raise tens of billions of new capital.

Maybe we need better, smarter regulation, not more. Among the ideas floated by Treasury Secretary Hank Paulson last week in his blueprint for regulatory reform was for the Fed to become a kind of uber-cop, sniffing out financial instability wherever it lurks and making surgical strikes where necessary.

``Rather than focus on the health of a particular organization, it will focus on whether a firm's or industry's practices threaten overall financial stability,'' Paulson said.

That sounds nice, but if Fed policy makers can't identify an asset bubble until after it has burst (by their own account), how can they anticipate the next threat to the financial system?

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

Last Updated: April 7, 2008 10:39 EDT