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Treasury chief Henry Paulson's plan a financial fixer-upper

Treasury Secretary Henry Paulson's plan for the most sweeping overhaul of financial regulation since the Great Depression could mean big changes in the way brokers, banks and insurance companies do business. But don't look for it to happen overnight — if ever.

The plan revealed over the weekend and formally introduced Monday has already triggered a debate that's expected to go on for years, as Paulson himself acknowledged.

"Our current regulatory structure was not built to address the modern financial system," Paulson said Monday. It developed, he said, in "a pattern of creating regulators as a response to market innovations or to market stress."

His new blueprint, as he calls it, is for a streamlined model with some controversial changes, including shifting power away from the states to the federal government. Ultimately, he wants to consolidate federal financial regulation within three powerful agencies, with nearer-term steps such as the merger of securities and futures regulation.

"There's no question that things need to be revamped," said Thomas James, chairman of Raymond James Financial Inc. in St. Petersburg, which encompasses both brokerage firms and a bank. "This is a workable solution to a number of the problems. That doesn't mean it's the only solution or necessarily the best solution in all cases."

James said the most important need is for a regulator with an overall view "from 30,000 feet up," working to ensure the financial system is prepared to handle current and future challenges.

"There is no doubt that we need to have centralized risk management," he said.

Raymond James Bank has a thrift charter and would become a national bank under Paulson's plan. James said the thrift model, developed to promote mortgage lending, is outdated.

University of Central Florida economist Sean Snaith said an overhaul of the nation's financial regulatory system is overdue. "In a lot of ways, the regulatory system is a mish-mash of agencies that are in some ways a bit of an anachronism."

But Paulson's plan has plenty of critics.

"It's a political ploy," said Dick Bove, a Lutz-based bank analyst for Punk Ziegel & Co., a New York brokerage firm. The Bush administration is just trying to reassure consumers that it has the current financial mess under control, he said. "All he's doing is moving the deck chairs."

Bill Newton, executive director of the Florida Consumer Action Network, said "it doesn't matter because none of that's going to happen because Democrats aren't going to do what Bush wants. That's the political reality."

He said he is concerned the plan would end up loosening restrictions on banks. "We're sick and tired of bailing out banks," Newton said. "We want our regulators to watch them."

The plan would greatly expand the role of the Fed, created in 1913 after a series of bank panics, to oversee the entire financial system including commercial banks, investment banks, insurance companies, hedge funds, private-equity firms and others.

Rather than checking on the health of a particular organization, the Fed's focus would be on whether a firm's or industry's practices pose a danger to overall financial stability, said Paulson, the former head of investment giant Goldman Sachs.

"It will have broad powers and the necessary corrective authorities to deal with deficiencies," Paulson said. But Lyle Gramley, former Fed official and now senior economic adviser at the Stanford Washington Research Group, believes the plan isn't clear about the Fed's corrective powers. "If you create a police force and don't give them any weapons, it is going to be useless," Gramley warned.

Others expressed concern about concentrating too much power at the Fed while also streamlining or consolidating the duties of other regulators. They feared that a safety net of checks and balances could be lost.

"The cataclysmic mistake is that if you eliminate so many 'eyes' that monitor the markets, and the single eye, no matter how super, misses something, then, catastrophe," said Anthony Sabino, a professor of law and business at St. John's University.

Times staff writer Asjylyn Loder and the Associated Press contributed to this report. Helen Huntley can be reached at [email protected] or (727) 893-8230.

Paulson's proposals

Set federal licensing standards and disclosure requirements for mortgage companies and mortgage brokers. Create a federal commission to evaluate state mortgage regulation.
Give the Federal Reserve broader powers to stabilize markets, including authority to review private pools of capital such as hedge funds.
Convert thrifts to national banks regulated by the Office of the Comptroller of the Currency, eliminating the Office of Thrift Supervision. Eventually consolidate all federal bank regulators.
Let insurance companies choose whether they want to be regulated by a new federal Office of National Insurance or stay under state jurisdiction.
Merge the Securities and Exchange Commission and the Commodity Futures Trading Commission. Eventually consolidate consumer protection and enforcement across all financial services.

Treasury chief Henry Paulson's plan a financial fixer-upper 03/31/08 [Last modified: Tuesday, April 1, 2008 11:28am]
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