Paulson Suggests Massive Oversight Changes

Proposal would be the largest overhaul of regulators since the Great Depression.


March 31, 2008&#151; -- Treasury Secretary Henry Paulson announced today a sweeping plan to restructure the hodgepodge of federal agencies and regulators who oversee the nation's financial networks.

But don't expect to see any changes soon — or any relief out of this plan for Americans struggling to pay their bills.

Paulson's plan is not aimed at fixing the current economic crisis, but at preventing future meltdowns in the market.

The proposal would give the Federal Reserve more power at the expense of several other agencies, most notably the Securities and Exchange Commission. Other agencies would be folded into other existing or new agencies.

And with presidential and congressional elections just a few months away, it is highly doubtful that any changes outlined here will be implemented before the Bush administration leaves Washington.

"These long-term ideas require thoughtful discussion and will not be resolved this month or even this year," Paulson said.

Stocks on Wall Street saw modest gains today as a dismal first quarter finally came to a close. Investors for the most part were unmoved by Paulson's speech this morning and the release of his 218-page plan. Details of the treasury secretary's plan have been available for days.

Also moving the market today was a better than expected report on regional manufacturing. Overall volume on Wall Street was very low today.

The Dow Jones Industrial Average closed up about 49 points and the NASAQ saw a gain of nearly 18 points.

Paulson's so-called restructuring blueprint has been in the works for nearly a year. Paulson, the former CEO of Wall Street investment bank Goldman Sachs, has long called for a more efficient system for oversight, saying that the current regulatory structure was not built to address the modern financial system.

"Much of our current regulatory system was developed after the Great Depression and it has developed through reaction," said Paulson, who started crafting the plan last March.

"When we announced that we would work on such a Blueprint, other than some enthusiastic academics, few noticed," he added. "Today, of course, capital markets and financial regulation are on everyone's mind."

Paulson acknowledged that this overhaul is not and should not be the top priority of lawmakers in Washington. He says the administration will not seek to implement the regulatory changes until Washington comes up with a solution for the economic crisis that appears on the edge of — if not already in — a recession.

"Our first and most urgent priority is working through this capital market turmoil and housing downturn, and that will be our priority until this situation is resolved," Paulson said. "With a few exceptions, the recommendations in this blueprint should not and will not be implemented until after the present market difficulties are past."

The Federal Reserve today is chartered with overseeing the banking industry. Under Paulson's plan, the Fed would be a "marker stability regulator" and would be able to look at the books of any financial institution — including Wall Street investment banks — that might pose a threat to the stability of the financial markets.

The Securities and Exchange Commission would lose a lot of its powers and many of its duties would be merged with those of the Commodity Futures Trading Commission, which itself could fall into a new government agency.

There would also be a "prudential financial regulator" for the nation's banks, thrifts and credit unions, in place of the five agencies that perform that task now.

The Office of Thrift Supervision, which oversees savings-and-loan banks, would be shut down and folded into the Office of the Comptroller of the Currency, which oversees the nation's banks.

Like just about everything else in an election year, politics will likely have a large part to play in what the ultimate plan looks like.

Republicans have traditionally sought less government oversight, saying that the economy should be left up to free market forces. Democrats, on the other hand, have sought stronger oversight and more government intervention. Those themes are being played out today in the halls of Congress and on the presidential campaign trail.

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, was already attacking the plan this morning, saying it would do "little if anything to alleviate the current crisis."

House Financial Services Committee Chairman Barney Frank, D-Mass., is working on his own plan to reshape the regulatory maze in Washington. While he said it was a "constructive step forward" he raised some doubts.

CNBC stock picker and host of "Mad Money," Jim Cramer summed up the feelings of some this morning saying: "We all know it's completely meaningless."

But Rep. Vito Fossella, New York Republican who plans to introduce legislation on oversight, said in a statement that Paulson's plan "is a solid blueprint offered at a critical time."

"The blueprint recognizes that to protect investors and provide stability to the markets requires us to modernize and reform the entire system of financial services regulation. We cannot offer stop-gap, Band-Aid fixes," he said. "The only question now is whether Congress will choose to act wisely or veer off towards overregulation."

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