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Treasury Wants to Reshape Regulation

Overhaul Would Include New Agencies, Powers

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Washington Post Staff Writer
Saturday, March 29, 2008; Page A01

The Treasury Department on Monday will propose a far-reaching overhaul of the nation's financial regulatory structure that would reshape the relationship between Wall Street and Washington and redefine the responsibilities of some of the federal government's most powerful agencies, according to administration officials.

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The initiative calls for some long-standing government agencies to combine and others to disappear. Major players at the core of the nation's financial system, including banks, securities firms, insurance companies, commodity investors, and mortgage firms and brokers, may have to submit to increased oversight.

The Federal Reserve would gain the power to investigate any aspect of financial institutions that threatens the stability of the entire system, gathering information and taking action to combat risks to the financial system as a whole.

The Securities and Exchange Commission would lose some of its authority in the restructuring and be combined with the Commodity Futures Trading Commission, which regulates the trading of natural gas, oil and other goods.

Most of the plan, which Treasury officials call a "regulatory blueprint" for the coming years, will require congressional action. While getting bills passed appeared to be a remote possibility a year ago when work on the initiative began, the credit crisis and the near-collapse of the 85-year-old firm Bear Stearns have changed the political environment on Capitol Hill. Now even some Republicans, who normally oppose government intervention, are conceding that Washington needs to keep a closer eye on Wall Street.

The blueprint is necessary because regulation has not kept up with the pace of financial innovation, Treasury officials have said. Recent market inventions, including exotic mortgage securities and derivatives, have caused losses at major financial firms and triggered a credit crunch that has roiled Wall Street and is threatening the economy.

Aspects of the plan have leaked to various news outlets in recent days, and last night the New York Times posted the executive summary on its Web site.

Under the blueprint, the current patchwork of financial regulation would be removed in favor of a system led by fewer but more powerful regulators.

One of those, called the Prudential Financial Regulator, would regulate banks, which currently answer to five separate federal agencies. This new body would get rid of overlapping banking regulators, such as the Office of Thrift Supervision. A second major regulator would oversee consumer protection and business practices.

The Fed, meanwhile, would act as a "free safety," as one Treasury official put it, with broad but somewhat undefined powers to roam the entire playing field of Wall Street's activities. The central bank's primary mission would be to ensure financial market stability. "The Federal Reserve's responsibilities would be broad, important, and difficult to undertake," said the executive summary.

This, the plan argues, would offer the best hope of minimizing major risks to the financial system. For example, the Fed would be given the authority to order investment firms to improve their systems for monitoring risk. However, the Fed would also give up some power under this proposal. It would no longer be the primary regulator of the safety and soundness of state-run banks or bank holding companies. That responsibility would be shifted to the prudential financial regulator.

Treasury officials hope at least one proposal, the creation of a mortgage origination commission that would oversee the home-lending business and establish national standards for mortgage brokers, could be created this year. The plan also calls for a federal regulator to be established in the coming years to oversee insurance companies, an industry that currently falls under the jurisdiction of state governments.

While some of the proposals call for heavier scrutiny, others actually lighten the amount of regulation. Under one, the Securities and Exchange Commission would give stock markets greater freedom to police themselves and streamline the process for approving new financial products, such as complex futures contracts. Right now, many financial firms simply try to 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.

It is unclear how long it will take to implement all of the proposals, with some Treasury officials estimating it may take more than five years. At least one Democrat hinted at the battle to come over the plan, saying that Treasury's blueprint did not go far enough.

"In broad outlines, we agree with large parts of [Treasury] Secretary Paulson's plan. He is on the money when he calls for a more unified regulatory structure," Sen. Charles E. Schumer (D-N.Y.), chair of the Joint Economic Committee, said in an e-mailed statement. "However, very complex financial instruments have evolved in recent years, like CDOs [collateralized debt obligations] and credit default swaps, which pose potential problems in terms of systemic risk. The Treasury Department should address these issues as well."

Staff writer Neil Irwin contributed to this report.


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