Though the Supreme Court case garnering the most headlines today will be the Ricci v. DeStefano employment discrimination case, a second decision came down with important implications for the future of financial regulation. In a 5-4 decision in Cuomo v. The Clearing House Association, the Court decided that states are allowed to investigate national banks for discrimination and violating state fair-lending laws, which reverses (in part) a 2nd U.S. Circuit Court of Appeals ruling from 2007.

The Clearing House argument was that only the federal government (in this case, the Office of the Comptroller of the Currency) has the ability to investigate national banks. Justice Antonin Scalia joined the four liberal justices in disagreeing with this argument:

The foregoing cases all involve enforcement of state law. But if the Comptroller’s exclusive exercise of visitorial powers precluded law enforcement by the States, it would also preclude law enforcement by federal agencies. Of course it does not…In sum, the unmistakable and utterly consistent teaching of our jurisprudence, both before and after enactment of the National Bank Act, is that a sovereign’s “visitorial powers” and its power to enforce the law are two different things. There is not a credible argument to the contrary.

This case began when Eliot Spitzer, then New York’s attorney general, wanted to discover “whether minorities were being charged higher interest rates on home mortgage loans.” But at the time, the courts ruled that Spitzer was barred from investigating whether national banks were engaging in such practices, leaving the job to ineffectual federal regulators. Current New York AG Andrew Cuomo called the Supreme Court’s reversal of this decision “a huge win for consumers across the nation.”

As Adam Levitan added at Credit Slips, “hopefully this opinion, combined with the emphasis in the Obama financial restructuring plan on ending federal preemption of state consumer protection laws (federal law will be a floor, not a ceiling), marks a turning point in the long march of federal preemption of state consumer protection laws in financial services.” Indeed, Obama has taken positive steps to ensure that states can enforce consumer protections within their own borders, despite pressure from the mortgage and insurance industries.

In the grander scheme of things, this was an attempt by the banking and mortgage industries to grab a piece of the immunity from state law already enjoyed by the health insurance and medical device industries (as outlined by Ian Milhiser here). Hopefully this case will blunt the charge by others, including the restaurant industry, to avoid state law.

Today, the Wall Street Journal provided a good dissection of how efforts to rid banks of the toxic assets clogging their balance sheets have “sputtered repeatedly“:

[T]hat initiative — called the Public-Private Investment Program, or PPIP — has lost momentum. Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits. The program’s problems threaten to stymie efforts by struggling smaller banks, in particular, to clean up their balance sheets.

The PPIP, much discussed and debated upon its release, has definitely faded from view. But just because we’re successfully ignoring the toxic assets doesn’t mean that the problem has gone away.

In fact, today, the Bank for International Settlements (BIS) — which The Guardian calls “one of the few bodies consistently sounding the alarm about the build-up of risky financial assets and under-capitalised banks in the run-up to the credit crisis” — warned that “taxpayers around the world still face potentially large losses because governments have failed to act quickly enough to remove toxic assets from the balance sheets of key banks.” And the BIS’ prime example is the U.S.:

Progress on problem assets has been slowed by the complexity of the securities affected, legal constraints and, above all, the limited political will to commit public funds to the clean-up effort. The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy. The lack of progress on removing troubled assets from the banks’ balance sheets and recognising the associated losses is illustrated by the US experience.

Federal officials reportedly told the Journal that the “because a dozen or so big banks recently succeeded in raising capital,” there is less pressure to get the PPIP off the ground. But even if those few banks are healthy (and that’s a big if), what of every other institution, particularly small and mid-sized, grappling with toxic portfolios? The financial system is not repaired simply because Bank of America can raise capital.

For all the talk of “green shoots,” toxic assets and housing still seem to have bedeviled the administration, and unfortunately, those are two areas (along with rising gas prices) that can stop an economic recovery right in its tracks.