West Palm Beach (HedgeCo.Net) – On Monday, the Bush Administration outlined what could be the biggest restructuring of financial regulation since the Great Depression.
The 218 page “Blueprint for Regulatory Reform” presented by Treasury Secretary Henry Paulson comes amidst the current credit crisis and the subprime mortgage mess that cost banks and investors billions of dollars.
The restructuring would have several major features. The Federal Reserve would sit at the top of this new plan, serving as the “market stability regulator” and taking on new responsibilities. The Fed would then have more power to protect the stability of the entire financial system by granting them access to otherwise private areas. This may include probing into hedge funds, commercial banks, investment banks, insurance companies, and commodity-pool operators.
“The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability,” said Paulson. “Rather than focus on the health of the particular organization, it will focus on whether a firm’s or industry’s practices threaten overall financial stability.”
In addition, one super agency would be created that would be in charge of business conduct and consumer protection and would essentially perform many of the functions of the Securities and Exchange Commission.
The Commodity Futures Trading Commission would be merged with the SEC and the office of Thrift Supervision would be eliminated. The plan would also establish a Federal Mortgage Origination Commission to set minimum licensing standards for mortgage brokers, since many operate outside of federal regulation. In addition, the five agencies that regulate day-to-day bank supervision would be merged into one.
The pressure has been intense on the government from those who wish for tighter regulation and want to point the finger for the current turmoil in the marketplace.
“Despite the fact that there will be a temptation to view this through a lens of what is happening now in credit markets, this has been a process that has been going on for a year,” said David Nason, Treasury’s assistant secretary for domestic finance. “These are very complex issues that require a serious amount of debate.”
And debate is exactly what it is sparking.
Calling the plan a “wild pitch,” Chris Dodd, democratic chairman of the Senate Banking, Housing and Urban Affairs Committee, says it “would do little if anything to alleviate the current crisis.” Others fear that Congress will rush haphazardly to pass the plan in hopes of creating a quick fix to the current economic situation.
“The effect of US Regulatory intrusion by this quasi-government body would cause dislocation in the US Financial markets and would do nothing to stem systematic risk as the Fed and other regulatory bodies work in a slowly responsive environment,” says Peter J. DeMarigny of DITMo Capital Management.
Despite the criticism, Paulson stands by the plan, asserting that it has little to do with the country’s current financial situation.
“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, one that will allow us to more effectively deal with inevitable market disruptions, one that will better protect investors and consumers,” Paulson said.
Because the blueprint will have to make its way through Congress, its unlikely the Bush Administration will oversee its completion. Paulson has said that Bush will focus on getting Americans out of the current credit crisis, leaving the plan to be carried out by the next President.
Julie Scuderi
Senior Editor for HedgeCo.Net
Email: [email protected]
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