By STEPHEN LABATON
WASHINGTON — As Treasury Secretary Henry M. Paulson Jr. on Monday formally laid out an ambitious plan to overhaul the regulatory apparatus that oversees the country’s financial system, senior lawmakers and lobbyists from industries opposed to the plan predicted that most of it would be dead on arrival.
The plan, produced by a lame-duck Republican administration facing a Democratic Congress, would significantly expand the authority of the Federal Reserve to oversee financial markets. It would consolidate federal agencies that regulate the securities and commodities futures markets and eliminate a third agency, the Office of Thrift Supervision, which was created during the savings and loan debacle of the late 1980s.
Insurance companies, which have long been regulated by the states, would be allowed to choose to have a national charter and be supervised by a new agency under the Treasury Department.
Mr. Paulson said on Monday that he did not expect the bulk of the plan to be adopted during the current administration — and he recommended that Congress not even consider adopting most of it until after the housing and credit crises ended. That could take many months, perhaps not until Congress all but shuts down for the elections in the fall.
“Some may view these recommendations as a response to the circumstances of the day,” Mr. Paulson said. “That is not how they are intended.”
While the plan promotes a long-term goal of reducing the alphabet soup of agencies that regulate financial institutions, in the shorter run it may achieve the opposite effect.
The blueprint listed as one short-term goal the creation of a mortgage commission led by top regulators to set new minimum licensing standards for mortgage brokers and otherwise unregulated financial institutions. That proposal would require legislation, and some lawmakers predicted it could be adopted this year.
Officials said that, as part of the plan, President Bush was preparing an executive order to expand the membership and the reach of an interagency committee called the President’s Working Group on Financial Markets.
The group was created in 1988 after the stock market plummeted a year earlier. The group is also expected to consider ways to broaden the authority of the Federal Reserve to lend money to nonbanks as needs arise.
But other than those relatively modest proposals, most elements are not likely to be adopted anytime soon, if at all. Senior lawmakers, while praising the administration for raising important issues for discussion, said the odds were long for a major overhaul in the remaining days of the Congressional session.
“Since this is opening day in baseball, I might as well make a baseball metaphor,” said Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking committee. “This is a wild pitch. It is not even close to the strike zone.”
Mr. Dodd and Senator Harry Reid of Nevada, the majority leader, said in a telephone conference call that overhauling the regulatory structure was not a priority. Instead, they said, they were hoping to quickly move legislation that would help homeowners facing higher mortgage rates and foreclosure.
“In time, we will hold hearings on reorganizing the regulatory structure,” Mr. Dodd said. But he also said that many members of his committee “have serious concern” about expanding the authority of the Federal Reserve by letting investment banks have access to cheaper borrowing at the Fed’s discount window.
He said that at a hearing later this week, he planned to sharply question the decisions by the Fed as it went about forcing the sale of Bear Stearns to JP Morgan Chase in March.
In a speech in the historic cash room at the Treasury Department, Mr. Paulson disputed critics who have complained either that the plan was deregulatory or would impose greater regulation.
“Those who want to quickly label the blueprint as advocating ‘more’ or ‘less’ regulation are oversimplifying this critical and inevitable debate,” he said. “The blueprint is about structure and responsibilities — not the regulations each entity would write. The benefit of the structure we outline is the accountability that stems from having one agency responsible for each regulatory objective. Few, if any, will defend our current balkanized system as optimal.”
But, in fact, the fine print of the 218-page plan features both regulatory and deregulatory elements. The creation of a mortgage origination commission, for instance, was expected to impose new and higher nationwide standards to encourage mortgage brokers not to promote unsuitable or abusive loans. Such a move would require new regulations or laws.
Other elements of the plan are clearly deregulatory. The plan proposes, for instance, to reduce the enforcement authority of the Securities and Exchange Commission in several ways and hand that authority to industry groups. It also recommends that investment advisers no longer be directly regulated by the S.E.C., but instead be supervised by an industry regulatory organization.
Major elements face fierce resistance from powerful industry groups that like their current regulators, and have over past decades defeated similar proposals.
The American Bankers Association attacked a provision to eliminate the Office of Thrift Supervision.
Daniel A. Mica, president and chief executive of the Credit Union National Association, said he was “astonished and angered” by the plan, which he said would add up to more choices for Wall Street and less for consumers — and turn credit unions into banks.
Several features were criticized by regulators appointed by the Bush administration.
John M. Reich, the director of the Office of Thrift Supervision, said that the savings and loan industry regulated by his agency remains vibrant in large part because of the effectiveness of regulators. In an e-mail message to agency employees, he said proposals similar to the one made by Mr. Paulson are floated all the time — and typically rejected.
“Although none of these proposals became reality, many of you might be wondering whether financial services restructuring is an idea whose time has finally come,” Mr. Reich wrote. “I don’t think so, at least as it pertains to the four federal banking agencies, and I am writing to tell you why.”
Some business groups hailed the plan.
John J. Castellani, president of the Business Roundtable, which represents chief executives at many large companies, said the plan “represents a timely response to the current state of our country’s aging regulatory system.”
“We believe the plan as outlined will increase the competitiveness of our financial markets, provide greater efficiencies for our companies, and therefore increase shareholder value,” Mr. Castellani said.
T. Timothy Ryan Jr., president of Wall Street’s biggest trade group, the Securities Industry and Financial Markets Association, said the plan was “thoughtful” and “very wise.”
“Our present regulatory framework was born of Depression-era events and is not well suited for today’s environment where billions of dollars race across the globe with the click of a mouse,” said Mr. Ryan, who earlier in his career was a director of the Office of Thrift Supervision, an agency the Paulson plan proposes to eliminate.
Copyright 2008 The New York Times Company
http://www.nytimes.com/2008/03/31/business/31cnd-regulate.html?_r=1&exprod=myyahoo&pagewanted=print&oref=slogin
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