Opposition To Treasury's Blueprint Gains Steam

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Secretary Paulson Proposes Financial Overhaul

The Bush administration Monday proposed the most far-ranging overhaul of the financial regulatory system since the stock market crash of 1929 and the ensuing Great Depression.

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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."

Staff writers Carrie Johnson and Steven Mufson contributed to this report.