As some of you know, I recently moved to the Washington, D.C. area. And from time to time, I move in circles where I hear good quality insider stuff. Here’s what A Reliable Source whispered in my ear last evening: Mary Schapiro‘s nomination as SEC chairman is likely to become extremely controversial very soon. It may well come unstuck even before her confirmation hearings.

Last week, Robert Kuttner had an article on The American Prospect where he argued Schapiro is a poor choice, especially in view of the reforms that are desperately needed at the SEC:

She is the kind of Democratic appointment that allows Wall Street to breathe a huge sigh of relief.

And of course, her appointment is no accident. There were much tougher, more public minded appointees for SEC chair on the short list, but they were blocked by fierce industry lobbying warning that tough regulators would be divisive or controversial — which they indeed would, if they did their jobs. Wall Street fundraisers for Obama used their ample access to resist a tough appointee. People in other power centers, like the Treasury and the White House, did not want a tough and independent SEC.

That’s not what rumor says will bring her down, though. Rather, it’s questions about what FINRA (Financial Services Regulatory Authority, which Schapiro currently heads, which is responsible for regulating the NASDAQ market) was doing while Madoff made off with his investors’ billions. Its not just the SEC that was asleep at the switch and ignoring all kinds of warnings. FINRA too, apparently, had ample reason to investigate Madoff but didn’t.