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Just two weeks ago, I pooh-poohed the idea of getting an optional federal charter approved anytime soon as probably a pipe dream. So, how do I feel now in the wake of the shocking endorsement of an OFC today by the Treasury Department as part of a comprehensive financial services regulatory overhaul? Read on to find out, and feel free to weigh in on this startling development.

(To read all about the Treasury's proposal, click here.)

I still think an OFC is a pipe dreamat least for this year. There is no way the lame duck Bush administration will be able to convince Congress to swallow such a sweeping reorganization, especially in an election year.

And given the industrys split over OFCs, I cant see Congress having the overwhelming sense of urgency necessary to pass it on a stand-alone basis.

I also dont see Congress approving the creation of a vast, new federal bureaucracy at a time of soaring deficits, especially lacking a compelling reason to do so. Do you really think the failure of bond insurers to do their due diligence in signing off on subprime mortgage-backed securities will be enough to put OFC over the top? I doubt it.

In fact, you could easily make the case that insuranceout of all the financial servicesis the least in need of federal intervention.

Yes, state regulation remains somewhat inefficient–definitely duplicative and most certainly in need of logistical reform. But when it come to the regulatory bottom lineprotecting consumers and maintaining solvencystate insurance commissioners need not apologize or explain themselves to anyone.

Indeed, as reported by Matt Brady on March 28, Standard and Poors found not only that the number of insurers put under state supervision fell to its lowest point in a decade, but also that the number of insolvencies has declined steadily among insurance companies in recent years

S&P cited 19 insolvencies in 2004 across all lines, 16 in 2005, 11 in 2006 and only 10 last year. The S&P report also noted that those insolvencies that did occur in 2007 were happening to companies of a much smaller scale. (Click here for the full story on the S&P report.)

Sounds like a pretty good track record to me. And when it comes to market conduct, state insurance regulators do not take a back seat to Uncle Sam, which has allowed the securities industry to run wild, only to bail out the worst offenders with taxpayer funds. Thats where their reform efforts should be focused.

The draft of Treasury's plan leaked on Saturday would create an Office of Insurance Oversight as an interim step. The transition federal regulator would coordinate with state officials on pressing insurance oversight issues such as reinsurance collateral, while advising the Treasury secretary on major domestic and international policy issues.

That certainly sounds like a recipe for disaster. If you think insurance regulation is confusing now, imagine when federal officials are allowed to poke their noses into regulatory debates as they see fit.

The Treasury plan threw the states some bonesallowing them to continue to levy premium taxes, and require carriers to take part in guaranty funds and residual market mechanisms. But that wont be nearly enough to sell state regulators or their backers on this historic shift, especially since the fate of local market conduct oversight is less clear.

I second the conclusion of Brian Kennedy, president of the National Conference of Insurance Legislators. The Rhode Island Democrat shrugged off the Bush administrations 11th-hour initiative, noting that in less than a year, we will have a new Treasury secretary and all of this will be forgotten.

I say, stick with passing federal regulatory benchmarks for states to implement on surplus lines, reinsurance and licensing, and everyone will be happy. (Click here for my last column on this subject.)

What do you folks think?

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