Mark Winston Griffith

Paulson’s Plan: Blueprint for Financial Regulatory Deform?

The U.S. federal regulatory system for financial institutions is arguably one of the most complex features of American government. Hard core policy wonks are hard pressed to break down the Byzantine network of relationships between regulatory institutions -- The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Commodity Futures Trading Commission (CFTC), and U.S. Securities and Exchange Commission (SEC) -- and the institutions they regulate. Many of these regulatory bodies have in fact overlapping and dueling jurisdictions over the financial institutions they regulate. And this doesn't even begin to speak to the relationship between federal and state regulators.

That's why Treasury Secretary Paulson's recently unveiled Blueprint for Regulatory Reform is exciting in theory, but deeply disturbing in probable practice. Few would argue that the regulatory system, which was responsible for the current mortgage crisis, needs to be re-thought and re-engineered. The question is how?

There is little confidence that this effort will result in more consumer protections because it was generated from the administration of a president who, until recently, has taken a hands off policy towards intervention in the financial services industry and has been saboteur-in-chief of any efforts to establish fair lending standards. Perhaps the most hopeful aspect of the proposal is that given the transformative political effort and process needed to actually enact this plan, in this, an election year, Bush and Paulson will almost surely not be on hand to see it through.

The expressed intent of the blueprint is to make the current regulatory alphabet soup more streamlined and efficient. But the first troubling sign of Paulson's plan was his expressed intent to even further weaken state regulators, which, historically, have been more progressive minded than federal regulators. A new robust federal system would include an all powerful regulatory cop in the form of the Federal Reserve and offer financial institutions one of three charters: An FDIC charter for depository institutions; a charter from a newly created regulator of the insurance industry; or a charter from a newly created regulator of other types of financial institutions. Agencies like the OTS would be eliminated while the SEC and the CFTC would be merged into one. Institutions like investment banks would be more closely scrutinized.

Paulson's plan has short-term, intermediate and long-term features. But nowhere in this plan is any explicit assurance that the problem that precipitated this action in the first place -- the subprime mortgage and foreclosure crisis -- will be addressed head on. In the meantime, however, homeowners and consumers will have to wait for some evidence that someone in Washington is thinking about them

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Posted at 8:51 AM, Apr 02, 2008 in Economy
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