Feds Trying to Save Market From Itself
Proposed plan would create more government oversight of investment firms.
WASHINGTON, March 29, 2008— -- Treasury Secretary Henry Paulson will announce a plan on Monday to give the Federal Reserve sweeping new powers, the Bush administration said today.
"Treasury will soon release a Blueprint for Regulatory Reform that proposes a financial regulatory framework which we believe will more effectively promote orderly markets and foster financial sector innovation and competitiveness," Paulson said earlier this week.
According to a summary of the plan obtained by ABC News, it would seek to stabilize the slumping housing and banking markets by:
giving the Fed broader oversight of investment banks and Wall Street institutions, comparable to what it now has for commercial banks;
creating for the first time a federal agency to regulate insurers, which is now overseen by the states;
and combining several regulatory agencies, including the Securities and Exchange Commission and the Commodities Futures Trading Commission.
"Under this new regulatory structure, the securities companies will have to provide the federal reserve with the same kind of information the banks do," University of Maryland School of Business professor Peter Morici said.
The government's oversight of the economy has come a long way since Alexander Hamilton headed the first Treasury Department, and administration officials acknowledge that changes this broad aren't likely to pass this year. That would leave it to the next president to decide just how far these changes go.
Paulson has been working on the plan for a year, but it responds to a housing crisis that has worsened deeply during that time. Up to 2 million homeowners are expected to go into foreclosure this year.
The plan also follows the near-collapse of Bear Stearns, once the nation's fifth-largest investment bank and one of the most storied investment firms on Wall Street, which required a federal rescue.
When the Fed bailed the company out earlier this month, regulators said the company's fall wasn't their fault because they had no power to monitor its finances or force it to make safer investments.
Critics -- including many Democrats in Congress -- say Paulson's plan doesn't go far enough.
"Commercial banks continue to be supervised closely, and are subject to a host of rules meant to limit systematic risk," Sen. Charles Schumer, D-N.Y., wrote in an op-ed piece that ran Friday in The Wall Street Journal. "But many other financial institutions, including investment banks and hedge funds, are regulated lightly, if at all."
Some want to forbid the kind of risky investments now threatening to push the economy into a recession.
"It's half a loaf," Morici said. "It's a good first step towards regulatory reform but it needs to be beefed up. In particular, the safeguards against abuses on Wall Street need to be beefed up."