By David Cho, Neil Irwin and Carrie Johnson
Washington Post Staff Writers
Sunday, March 30, 2008
Lawmakers and regulators said yesterday that an ambitious plan by the Treasury Department to revamp the nation's decades-old financial regulatory structure could require congressional action stretching over several years and would not help the economy out of its current credit crisis.
Battle lines are already forming over Treasury's major proposals even though top officials have just begun to digest the 200-page regulatory blueprint, which was released to them late Friday night.
Some Democrats and consumer groups criticized the plan for serving the needs of financial markets but not consumers. Former and current regulators hinted at a likely fight over proposals to strip authority from agencies such as the Securities and Exchange Commission, and the head of another imperiled body, the Office of Thrift Supervision, was dismissive of the Treasury blueprint in an e-mail Friday to his employees. Other officials worried whether the effort to streamline financial oversight would lead to a massive disruption and elimination of positions across the federal government.
Though recent upheaval on Wall Street has put Treasury's efforts in the spotlight, work on the blueprint began a year ago before the downturn in credit markets, and the plan was never envisioned to be an emergency cure for the ills now threatening the economy. The proposed changes to the regulatory system were instead meant to prevent financial crises like today's from recurring.
The plan, which is scheduled to be officially unveiled tomorrow by Treasury Secretary Henry M. Paulson Jr., got a mixed reception on Capitol Hill with differences of opinion emerging within the ranks of Democrats and Republicans.
Some Democrats in Congress praised the blueprint, saying it charts a clear course for broader regulation of the nation's financial markets. While some elements don't go as far as many Democrats would like, they said the proposal changes the terms of the discussion over whether to increase government oversight on Wall Street.
"The debate now is: We have this wholly new financial system, we need much better regulation, how do we do it?" said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. "I mean, you've got the secretary of the Treasury, the former head of Goldman Sachs, acknowledging that regulation is good for financial markets and it's not going to kill them. That's very significant."
But Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, declined to give the administration credit for the proposals, saying its earlier inaction was responsible for the financial problems. "Regrettably, the Administration's blueprint, while deserving of careful consideration, would do little if anything to alleviate the current crisis -- which was brought on by a failure of will," Dodd said in a statement.
Some key Republicans cheered the plan. "I commend the administration and Secretary Paulson for regulatory restructuring and reform that is very comprehensive in its potential impact," said Rep. Spencer Bachus (Ala.), who is the ranking Republican on the Financial Services Committee. He called for swift congressional action to implement several reforms. But it was unclear whether Republicans would approve proposals recommending that agencies, such as the Federal Reserve, gain sweeping powers over Wall Street. Several influential Republicans, including Sen. Richard C. Shelby (Ala.), ranking member of the Senate Banking Committee, declined to comment on the initiatives.
Treasury officials hope Congress will this year pass at least one proposal, the creation of a Mortgage Origination Commission. But even if this effort succeeds at establishing tough, uniform standards for mortgage brokers and lenders, it would do little to help people who were exploited by unsavory or incompetent mortgage brokers during 2005 or 2006.
"This is not primarily a plan to deal with the current credit crisis, and it shows," said Barbara Roper, director of investor protection at the Consumer Federation of America. "The real focus here is on structural issues that have nothing to offer the millions of Americans currently facing foreclosure or nervously eyeing the effects of the market's recent roller-coaster performance on their retirement accounts."
Treasury's plan calls for a complete reworking of how Washington watches Wall Street. It sweeps away the patchwork of regulation that oversees financial firms and instead proposes the creation of three new regulators. One would regulate banks, which now answer to five agencies. This body would get rid of overlapping regulators, such as the Office of Thrift Supervision. A second regulator would oversee consumer protection and business practices. The Fed would have broad but somewhat undefined powers to regulate any aspect of the financial markets to ensure financial market stability.
A significant loser in the blueprint appears to be the SEC, which would be combined with the Commodity Futures Trading Commission. It would be asked to give financial markets greater freedom to police themselves and streamline the process for approving financial products such as complex futures contracts. Right now, many financial firms and hedge funds get such products approved by other market regulators or trade them on foreign markets because of the bureaucracy of the SEC, Treasury officials have said.
SEC Chairman Christopher Cox said the regulatory system needs to be streamlined.
"Recent events have provided further evidence, if more were needed, that financial services regulation in the United States needs to be better integrated among fewer agencies, with clearer lines of responsibility," Cox said in a statement yesterday. "The proposed consolidation of responsibility for investor protection and the regulation of financial products deserves serious consideration as a way to better address the realities of today's markets."
Former SEC chairman Harvey L. Pitt, a Republican who resigned in 2002, said the blueprint offered a common-sense approach.
"The SEC's style of regulation -- mostly after-the-fact enforcement action -- no longer makes sense, if it ever did," Pitt said. "The existence of separate agencies to monitor different entities that all perform the same functions is no longer workable."
The SEC's inspections team could be stripped of much of its power if it ends up ceding its examinations to the Fed. The unit, known as the Office of Compliance Inspections and Examinations, has been targeted in recent months by industry and has been the focus of criticism from Republican commissioners.
While the SEC would lose some of its authority, the Fed would gain almost unprecedented power.
Yesterday, the Fed indicated openness to the Treasury Department's plan, without endorsing its specifics. A spokeswoman for the central bank called it a "timely and thoughtful analysis" and an "important first step in the complex task of modernizing our financial and regulatory architecture."
John M. Reich, director of the Office of Thrift Supervision, discounted the importance of the blueprint, which calls for his agency to be merged with the Office of the Comptroller of the Currency to streamline the regulation of similar types of financial firms. In an e-mail to his employees, which was obtained by The Washington Post, Reich wrote that "you might be wondering whether financial services restructuring is an idea whose time has finally come. I don't think so."
Reich suggested that the current arrangement, of multiple banking regulators, offers important checks and balances. "When the Treasury Department issues its recommendations, expect to see news stories and renewed questions about what the future will hold," Reich wrote. "Take note of the fanfare, then look back to [past failed efforts to restructure financial regulation] and resume the important work that you continue to do so well."
Staff writer Lori Montgomery contributed to this report.