Treasury Plan on Regulation Leaves Consumers in the Dark

The current mortgage melt down has Treasury Secretary Henry M. Paulson Jr. reacting in ways that on the one hand would be viewed by the White House as proactive, and by most in the financial and consumer communites as a little too late. Yesterday the Secretary laid out an ambitious plan to overhaul the regulatory apparatus that oversees the nation's financial system. A plan that could be viewed as dead on arrival in a presidential year comsidering tha it is being introduced by a Republican Administration that may be taken over by a Democratic Administration that is in no mood of repeating the Bush Administration mistakes.

While the plan promotes a long-term goal of reducing an alphabet soup of regulatory agencies, in the shorter run it may actually do the opposite. One of the blueprint’s few short-term goals is the creation of a mortgage commission that would set new minimum standards for mortgage brokers and otherwise unregulated financial institutions that sell mortgages. The new commission could be formed only by Congress, and some lawmakers predicted it might be adopted this year.

Officials said that, as part of the Paulson plan, President Bush was preparing to issue an executive order soon to expand the membership and reach of an interagency committee called the President’s Working Group on Financial Markets. The group was created after the stock market plummeted in 1987. The group is also expected to consider ways to broaden the authority of the Federal Reserve to lend money to nonbanks as needs arise.
The Working Group, headed by the Treasury Secretary, consists of the top officials from the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Under the proposal, it would be enlarged to include the heads of the three other agencies, including one, the Office of Thrift Supervision, that the plan proposes eventually to abolish.

Key lawmakers have signaled that they want to take their time in weighing ideas for broad changes. They are already hearing from state regulators and consumer groups who say that the proposal would do little to curb risky behavior by financial institutions, and from industry groups that say it goes too far.

The plan, produced by a lame-duck Republican administration facing a Democratic Congress, would drastically expand the authority of the Federal Reserve to oversee financial markets. It would consolidate federal agencies that regulate the nation’s securities and commodities futures markets. And it would allow insurance companies, which have long been regulated by the states, to choose instead to have a national charter and be supervised by a new federal agency under the Treasury Department.

Mr. Paulson said on Monday that he did not expect the bulk of the plan to be adopted during the current administration — and he said Congress should not even consider adopting most of it until after the current housing and credit crisis ended.

“Some may view these recommendations as a response to the circumstances of the day,” Mr. Paulson said. “That is not how they are intended.”

In a speech at the Treasury Department, Mr. Paulson disputed critics who have complained either that the plan was deregulatory or would impose greater regulation.

“Those who want to quickly label the blueprint as advocating ‘more’ or ‘less’ regulation are oversimplifying this critical and inevitable debate,” he said. “The blueprint is about structure and responsibilities — not the regulations each entity would write. The benefit of the structure we outline is the accountability that stems from having one agency responsible for each regulatory objective. Few, if any, will defend our current Balkanized system as optimal.”

But in fact, the fine print of the 218-page plan features both regulatory and deregulatory elements. The creation of a new mortgage origination commission, for instance, was expected to result in higher nationwide standards to encourage mortgage brokers not to promote unsuitable or abusive loans.

On the other hand, other elements of the plan are clearly deregulatory. The plan proposes, for instance, to reduce the enforcement authority of the S.E.C. in a variety of ways and hand that authority instead to industry groups. The plan recommends that investment advisers no longer be directly regulated by the commission, but instead be supervised by an industry regulatory organization.

The plan was sharply criticized by state regulators as being a big gift to the nation’s largest financial institutions.

Consumer groups also criticized it.

“Rolling out this plan in the middle of the current crisis is like telling Hurricane Katrina victims stranded on their rooftops in New Orleans, ‘Don’t worry, if you can hold for a few years, we’ve got a really great plan to restructure the federal emergency response system,’ ” said a statement issued by the Consumer Federation of America.

“This plan,” the group said, “had its genesis in Secretary Paulson’s conviction that overregulation and inefficient regulation were hurting the global competitiveness of U.S. markets. In fact, experience has repeatedly shown that regulatory failure, not overregulation, is the greatest threat to the health of our markets.”

Major elements of the plan face fierce resistance from powerful industry groups that prefer their current regulators.

The American Bankers Association attacked a provision to eliminate the Office of Thrift Supervision, although it applauded the proposal to create a new federal charter for insurance.
Dan Mica, president and chief executive of the Credit Union National Association, said he was “astonished and angered” by the plan, which he said would “add up to more choices for Wall Street and less for consumers — and turn credit unions into banks.”

Several features were also criticized by regulators appointed by the Bush administration.
John M. Reich, the director of the Office of Thrift Supervision, said that the savings and loan industry regulated by his agency remains vibrant in large part because of the effectiveness of regulators. In an e-mail message to agency employees, he said regulatory overhauls similar to the one made by Mr. Paulson have been floated throughout history, and been rejected.

Although none of these proposals became reality, many of you might be wondering whether financial services restructuring is an idea whose time has finally come,” Mr. Reich wrote. “I don’t think so, at least as it pertains to the four federal banking agencies.”

Some business groups hailed the plan. John J. Castellani, president of the Business Roundtable, which represents chief executives at many of the nation’s largest companies, said the plan “represents a timely response to the current state of our country’s aging regulatory system.”
And T. Timothy Ryan Jr., president of Wall Street’s biggest trade group, the Securities Industry and Financial Markets Association, said the plan was “thoughtful” and “very wise.”

“Our present regulatory framework was born of Depression-era events and is not well suited for today’s environment, where billions of dollars race across the globe with the click of a mouse,” said Mr. Ryan, who earlier in his career was a director of the Office of Thrift Supervision, an agency the Paulson plan proposes to eliminate.

No matter what proposals surface, the consumers should have a place at the table so that we can avoid that which happened with the bankruptcy law written by the banking industry where by the banks have the authority to randomly increase interest rates on credit cards despite a cardholder never being late on monthly payments.

(While the thoughts and editorial is of the writer, most of the information contained here was reproduced from the New York Times ariticle by Stephen Labaton)