The Washington Post
Tuesday 01 April 2008
Senior Treasury officials identified three immediate targets yesterday for their plan to overhaul the nation's financial regulatory structure, including streamlining the approval process for securities that contributed to the crisis now roiling Wall Street. But their hopes for a few quick changes are running into mounting opposition from interest groups and officials elsewhere in the Bush administration.
In formally releasing the blueprint yesterday, Treasury Secretary Henry M. Paulson Jr. said he also plans to ask Congress this year to set up a new agency to oversee mortgage lending and take action to enhance his department's role as the chief regulator of financial markets.
The Treasury's initiatives seek to sweep away the current patchwork of regulation over the coming decade in favor of three more powerful agencies to oversee banking, market stability, and consumer and investor protection. The plan's authors have argued that such changes are needed because government oversight has not kept up with the pace of financial innovation.
Paulson acknowledged that the recommendations would not prevent future crises but said that they would make government more nimble in addressing them. "We should and can have a structure that is designed for the world we live in," he said in a speech at the Treasury. "Few, if any, will defend our current balkanized system."
Critics said the Treasury's plan is almost too big to succeed. Longtime Washington institutions would undergo wholesale changes or shut down altogether. Few leaders of these agencies - and the associations that work with them - welcomed such radical transformation.
Interest groups took particular issue with the proposal to create a single regulator to replace the many agencies that now oversee various types of financial firms. Banks could lose their latitude to pick and choose among state and federal regulators. Thrifts could be forced to become banks, which are more regulated.
"Dismantling the thrift charter and crippling state banking charters will weaken banking in America," said Edward Yingling, president of the American Bankers Association. "We must be careful not to let regulatory boxes substitute for real improvement."
Credit union lobbyists also oppose the plan because it could eliminate their unique niche in the banking system and impose new regulations. Dan Mica, chief executive of the Credit Union National Association, said his group was "astonished and angered" by the proposal to phase out the National Credit Union Administration. The Treasury's proposal makes "no sense" for consumers, who would "pay more and get less in return," he said.
Many top federal officials, including some who are normally allies of Paulson, said they were disturbed to learn that the Treasury was proposing to strip their agencies of power. Several of them said they did not see any of the 218-page document until the executive summary was published by the media Friday night.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., expressed concern about the Treasury's idea to take away her agency's oversight of state-run chartered banks, which would be folded into a new banking regulator.
"The FDIC has been a highly successful model for 75 years," she said in a statement. "During this time, no one has lost a single penny of insured deposits and public confidence in our banking system has remained high. Any long-term structural changes to the financial regulatory framework must be carefully weighed against the FDIC's strong record and the fact that it serves as a model for developing countries around the world."
While many agencies would lose their oversight of the markets, the Treasury would enhance its status as the financial market's top regulatory general. Paulson said he would immediately push to include all financial regulators in the President's Working Group on Financial Markets, a committee that he chairs.
Another one of the blueprint's immediate goals is to ease how the Securities and Exchange Commission approves securities, such as mortgage-backed bonds, so financial firms do not try to elude the agency's oversight. Treasury officials said this change would make it simpler for the SEC to eventually merge with its rival, the Commodity Futures Trading Commission.
Before the plan takes hold, however, lawmakers would have to sign off. This would be a challenge given that the CFTC and the SEC report to two different congressional committees, setting up the prospect of a turf battle on Capitol Hill.
Influential investor groups called the change unnecessary, and leaders of the CFTC were openly hostile.
"We shouldn't be about trying to cure what isn't sick - there is enough on the table, right now, that needs healing," said CFTC Commissioner Bart Chilton. "What I don't hear is a call from the countryside for moving boxes around in Washington, D.C., or the need for some omnipresent super-regulator."
Lawyers and analysts familiar with the oversight of securities said Paulson's plan had elements long proposed by the financial industry, which has often chafed under SEC regulation. The blueprint could greatly weaken the SEC's role and shift its authority to the Federal Reserve. Under the plan, the SEC's inspections team would cede its examinations to the Fed. The unit has been criticized by industry and Republican commissioners.
Duke University law professor James D. Cox, a Democrat, said it remains to be seen whether the SEC's traditional emphasis on policing improper stock trades and accounting practices would emerge unscathed in the regulatory shake-up. He said the CFTC has favored an open-ended, free market approach, while the SEC a more prescriptive, tougher hand.
"I don't see the SEC regulatory culture being the one that emerges out of this [blueprint]," Cox said. "It will be diluted by being matched up with the CFTC, and the political winds are going the other way."
Irving M. Pollack, a prominent former SEC staff member, said he would be concerned if the SEC lost some of its power, especially in light of recent abuses in mortgage lending. The virtue of any change will depend on the details, he said. "I don't know whether this is an attempt to rein in the regulatory and enforcement functions of the SEC," he said. "That would be not bright."
Several business lobbies whose members would be directly affected by the changes applauded them. Richard H. Baker, president of the Managed Funds Association, the lobby for hedge funds, said his group was in "full support."
Meanwhile, the Securities Industry and Financial Markets Association called the restructuring plan "thoughtful," adding that the current regulatory regiment is not well suited for today's environment.
But some critics said the Treasury had erred in trying to make U.S. markets more competitive by easing the regulation of securities.
"This blueprint will not serve as a substitute for the need to do something about the current crisis. We have homeowners and neighborhoods that are drastically impacted," said Gail Hillebrand, an attorney at Consumers Union. "The proposals so far haven't made a dent in that."
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Staff writers Carrie Johnson and Steven Mufson contributed to this report.
Paulson Calls for Broad but Limited Regulatory Change
By Peter G. Gosselin
The Los Angeles Times
Tuesday 01 April 2008
Sweeping blueprint for restructuring financial oversight stirs criticism for providing no aid for mortgage crisis and economic downturn.
Washington - Treasury Secretary Henry M. Paulson Jr.'s blueprint for regulatory reform, officially unveiled Monday, sets the stage for a confrontation with Congress by offering no relief for troubled homeowners and in many instances advocating less, not more, federal supervision of the nation's financial system.
Paulson proposed the broadest restructuring of federal regulatory institutions in 75 years with a call to merge agencies and redraw lines of authority that in some cases go back to the Great Depression. But the plan would put off for years any attempt to create new regulations for the streamlined system to enforce.
As a result, even if the new structure were eventually adopted, it would do little to prevent a repeat of the current crisis or something similar, the Treasury secretary acknowledged.
The limits of the administration's approach drew immediate criticism from Democrats as well as some analysts.
"In a different time, the administration's proposal would be a welcome start to a needed debate about modernizing the financial services regulatory system," said Ellen Seidman of the New America Foundation, a centrist think tank in Washington. "But this proposal does not deal with the root causes of our current crisis."
Paulson said that upheavals have become a regular, if unfortunate, part of the financial system's operation.
"I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years," the Treasury chief said Monday while unveiling the 218-page plan.
House Speaker Nancy Pelosi (D-San Francisco) called Paulson's plan a "step in the right direction" but said, "We need to go further."
"We must take steps now to provide help to families who are hurting" because of mortgage foreclosures and job losses, she said in a statement.
Paulson's proposal reflects both the Bush administration's aversion to government intervention in the economy and his own experience on Wall Street.
"He's taking advantage of the current crisis to push a regulatory restructuring plan that would otherwise attract no interest," said Robert Litan, a senior fellow at the nonpartisan Brookings Institution in Washington.
Paulson, the former chairman and chief executive of investment giant Goldman Sachs Group Inc., described Washington's regulatory apparatus as utterly outmoded and outflanked by market innovations such as sub-prime mortgages and mortgage-backed securities.
He said that financial innovation was racing ahead at such a feverish pace, the best the federal government could hope to do was define the broad outlines of a system that could be altered as new financial products, opportunities and threats emerged.
"We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change," he said.
Much of the nation's regulatory apparatus is now focused on making certain that traditional banks are run safely and soundly.
But bankers have watched their importance diminish in recent decades as financial players such as mortgage brokers, hedge funds, consumer finance companies and others have taken on bigger roles.
The current crisis started last summer, when many sub-prime borrowers - those with flawed credit histories - began failing to make their monthly mortgage payments, raising doubts about the value of their mortgages and setting off a rash of foreclosures. Similar doubts then cascaded throughout the financial system.
In his speech, Paulson singled out sub-prime mortgages as an example of an innovation that had benefited society. Among other things, he said, they provided people who had previously been denied credit plentiful financing to buy homes.
But the new loans were outside the normal purview of Washington's bank regulators, so the mortgages went almost entirely unregulated until they had seeped into nearly every corner of the financial system in the form of mortgage-backed securities.
Paulson's proposal envisions creating a mortgage origination commission that would include federal bank regulators and state officials. The commission would propose licensing requirements for mortgage brokers and a method for revoking those licenses in cases of bad behavior.
But the commission's only clout would be the threat of giving states that do not adopt the regulations a bad grade on a regularly issued report card.
"It was regulators' mindless belief that the market is always right that made them deaf to warnings that the sub-prime market was trouble," said Barbara Roper, investor protection director for the Consumer Federation of America. "Until you change that attitude and the reluctance to regulate, consumers and investors aren't going to see any benefit."
The administration faces a number of larger problems in pushing its plan.
First, the core of the plan was devised more than a year ago to reflect Paulson's - and the president's - conviction that the U.S. must lighten regulations on its financial industry or risk losing business to foreign financial centers such as London and Hong Kong.
But the proposal is being unveiled after the sub-prime mess, the housing meltdown and sliding financial markets left tens of millions of people poorer and more pessimistic.
It is also subject to the judgment of a Democratic-controlled Congress in no mood to give financial firms more leeway.
"We must restore the trust and confidence of investors and consumers," Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) said in a statement. "That trust has been shattered - not because regulators did too much, but because they did too little."
Second, the plan has already revived a series of nasty spats among interest groups that scuttled previous bids to restructure financial oversight.
For example, the administration's call to give insurance companies - overseen by state regulators for more than a century - the option of adopting a federal charter and being federally regulated has raised the hackles of state officials.
In many states, including California, officials saw the overhaul plan as treading on their turf and said that, unless changes were made, they would fight it.
"The Bush administration's colossal expansion of federal powers ... must not come at the expense of states, many of whom have led the way in strong regulatory financial reforms," said Ted Lieu (D-Torrance), chairman of the California Assembly's Banking and Finance Committee. "The Treasury Department's current proposals will cut us off at the knees."
Similarly, the administration's proposal to consolidate the Securities and Exchange Commission, which regulates most stocks, and the Commodity Futures Trading Commission, which regulates complex futures contracts, has provoked pointed objections from the agencies themselves as well as the chairmen of their congressional oversight committees.
Walter Lukken, acting chairman of the Commodity Futures Trading Commission, warned in a statement that combining the two agencies could "jeopardize" the commission's "market expertise, manageable size, problem-solving culture and global outlook."
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