Treasury Secretary Henry Paulson will confirm on Monday widely circulating weekend rumors that the Bush Administration is seeking a
sweeping overhaul of financial regulatory systems in the country.
The proposals would expand the oversight of the Federal Reserve while eliminating or merging several existing agencies and taking over the role of the states in some areas.
The Paulson plan would not necessarily increase regulation of the financial markets, but rather give the Executive Branch more power to administer existing rules. Its purview would not only be banks, investment banks, mortgage lenders, and hedge funds but also insurance companies.
Under the proposal, the Federal Reserve would be designated a "market stability regulator"
and as such would have the power to examine the books of any financial institution that might potentially destabilize the nation's financial systems. At the same time, it would take away the Fed's direct supervision of banks, turning it over to a new agency.
Since many of the institutions the Fed would be monitoring are currently regulated by the Securities and Exchange Commission it is likely that agency would ultimately disappear or be merged with the Commodities Futures Trading Commission. The proposal flat out states that the Office of Thrift Supervision would be eliminated, with its current function as regulator of the nation's savings and loans merged into the Comptroller of the Currency which already supervises national banks. A study will be done to determine whether the Federal Reserve or the Federal Deposit Insurance Company would have federal oversight over state-chartered banks.
The plan calls for the creation of a Mortgage Origination Commission which would evaluate the supervision of mortgage lending in each state. This, Paulson states, would give states an incentive to improve their regulation so that investors would not avoid mortgages originated in their states.
Many are calling the Paulson plan potentially the greatest reorganization of the regulatory system since the
Great Depression so there will be much rehashing of the details over the next 12 months. With the story, breaking as it did over the weekend, comments have been few and generally muted. But the release of the report Monday ' reportedly running some 200 pages ' will undoubtedly raise a lot of hackles both in Washington and in state capitals and it is unlikely that much progress will be made on implementing any of its proposals until after the election and until a new administration takes office. The Office of Thrift Supervision has already condemned the report and the Democratic response in Congress has been mixed but generally unfavorable with Chris Dodd (D-CT) saying it does little to address the currently housing and credit crises and Rep. Barney Frank (D-MA) calling it 'encouraging,' but that lawmakers need to concentrate at this time on dealing with the current problems rather than looking at long-range solutions.
The Wall Street Journal quoted Barbara Roper of the Consumer Federation of America as saying, "It takes a certain chutzpah to say the appropriate response to a financial crisis is to loosen regulation."