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The FT ran a front-page story this morning on the feds' role in the resignation of former Citi CFO Ned Kelly in July. I am a bit surprised that it is a revelation that US regulators are intimately involved in Citi's management and strategy.

Nowhere does the paper imply that this was inappropriate or overbearing. But the story speaks to a larger sentiment within the financial services industry against reregulation and government intervention in the day-to-day strategy and management of TARP recipients. This is a curious sentiment indeed, and demonstrates the short-term memory of some of the biggest recipients of taxpayer dollars.

As the firms largest shareholder and financial backstop, why wouldn't US regulators exert authority over the woefully mismanaged firm? We crossed the threshold of moral hazard/government intervention long ago; moves like this should be applauded as an important step towards restoring credibility and competence to Citi and maximizing the return to US taxpayers.

I subscribe to Kenneth Rogoff's view that wholesale reregulation is needed, and it is increasingly clear that the Obama administration has missed the boat on financial sector reform. The financial crisis has largely subsided, some of the largest bailout recipients have payed back the taxpayer, and profitability has generally returned to the sector. The industry is more self-confident and increasingly hostile to government intervention.

Further, the congressional agenda is now overwhelmed by the debate over health care reform, to be followed by energy/climate change reforms ahead of the Copenhagen summit. This ambitious and controversial agenda leaves little room for substantive financial sector reform in 2009. Small measures on derivatives are likely because those are the easy ones. Giving the Fed systemic powers? Much, much harder, and it is unlikely the Obama administration will have the political time or capital to push through reforms of this magnitude. If it bungles health care, which at this moment seems likely, the Obama presidency will shrink, the democratic party will fracture, and the administration's financial sector reform agenda will be downsized.

Reformers from South Korea to Slovakia have understood that you should 'never waste a good crisis.' Unfortunately, the Obama adminstration might have done just that.