By David Cho and Jeffrey H. Birnbaum
Washington Post Staff Writers
Tuesday, April 1, 2008
Senior Treasury officials identified three immediate targets yesterday for their plan to overhaul the nation's financial regulatory structure, including streamlining the approval process for securities that contributed to the crisis now roiling Wall Street. But their hopes for a few quick changes are running into mounting opposition from interest groups and officials elsewhere in the Bush administration.
In formally releasing the blueprint yesterday, Treasury Secretary Henry M. Paulson Jr. said he also plans to ask Congress this year to set up a new agency to oversee mortgage lending and take action to enhance his department's role as the chief regulator of financial markets.
The Treasury's initiatives seek to sweep away the current patchwork of regulation over the coming decade in favor of three more powerful agencies to oversee banking, market stability, and consumer and investor protection. The plan's authors have argued that such changes are needed because government oversight has not kept up with the pace of financial innovation.
Paulson acknowledged that the recommendations would not prevent future crises but said that they would make government more nimble in addressing them. "We should and can have a structure that is designed for the world we live in," he said in a speech at the Treasury. "Few, if any, will defend our current balkanized system."
Critics said the Treasury's plan is almost too big to succeed. Longtime Washington institutions would undergo wholesale changes or shut down altogether. Few leaders of these agencies -- and the associations that work with them -- welcomed such radical transformation.
Interest groups took particular issue with the proposal to create a single regulator to replace the many agencies that now oversee various types of financial firms. Banks could lose their latitude to pick and choose among state and federal regulators. Thrifts could be forced to become banks, which are more regulated.
"Dismantling the thrift charter and crippling state banking charters will weaken banking in America," said Edward Yingling, president of the American Bankers Association. "We must be careful not to let regulatory boxes substitute for real improvement."
Credit union lobbyists also oppose the plan because it could eliminate their unique niche in the banking system and impose new regulations. Dan Mica, chief executive of the Credit Union National Association, said his group was "astonished and angered" by the proposal to phase out the National Credit Union Administration. The Treasury's proposal makes "no sense" for consumers, who would "pay more and get less in return," he said.
Many top federal officials, including some who are normally allies of Paulson, said they were disturbed to learn that the Treasury was proposing to strip their agencies of power. Several of them said they did not see any of the 218-page document until the executive summary was published by the media Friday night.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., expressed concern about the Treasury's idea to take away her agency's oversight of state-run chartered banks, which would be folded into a new banking regulator.
"The FDIC has been a highly successful model for 75 years," she said in a statement. "During this time, no one has lost a single penny of insured deposits and public confidence in our banking system has remained high. Any long-term structural changes to the financial regulatory framework must be carefully weighed against the FDIC's strong record and the fact that it serves as a model for developing countries around the world."
While many agencies would lose their oversight of the markets, the Treasury would enhance its status as the financial market's top regulatory general. Paulson said he would immediately push to include all financial regulators in the President's Working Group on Financial Markets, a committee that he chairs.
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.