Dramatic regulatory overhaul coming
"Mr. Paulson's plan calls for changes in three distinct phases -- over the short, intermediate and long-term.
"Among the short-term recommendations, he advocates the creation of a Mortgage Origination Commission, which would monitor the adequacy of each state's supervision of mortgage lending. He argues that this could give states the incentive to improve oversight, as investors would avoid securities backed by mortgages from poorly regulated areas.
"Over the intermediate-term, the proposal recommends merging the SEC with the Commodity Futures Trading Commission, reflecting the blurred lines between securities and commodities. While the agencies cover very similar terrain, they also represent extremely territorial and powerful constituencies. Commissioner Bart Chilton of the CFTC is already cautioning against any hasty moves.
"I think most Americans would prefer that government do our jobs and that means doing everything possible to cauterize the subprime mess before performing major surgery on a regulatory system, parts of which are still very healthy," he said.
"Over the long term, Mr. Paulson advocates a new, and instantly controversial, role for the Federal Reserve. Mr. Paulson sees the central bank eventually taking on the role of a "market stability" sheriff. This would move the Fed away from direct bank supervision, something the central bank has always argued is vitally important. A new entity would take that over. Instead, the Fed would use a broad authority to monitor any company or any business line that could destabilize financial markets.
"They would have broad powers so they could go anywhere in the system they needed to go," Mr. Paulson said. That would detract from the SEC, which is supposed to perform part of that role today. Indeed, in the Treasury's dream scenario, the SEC is effectively eliminated and its responsibilities divided up between a series of new agencies.
"A roving oversight role could ultimately leave the Fed as sole supervisor of nothing while being potentially liable for everything. Fed officials are in a delicate position over the plan. They do not want to explicitly endorse a report with which they have some important misgivings. They have argued they needed the authority, if they found a firm or firms acting in a way that endangered the system, to take firm measures to correct it, such as imposing a capital surcharge. The report does not explicitly give the Fed that power, but it does give it the power to take "corrective actions" in consultation with the other regulators."
You can read a more detailed summary of the report (PDF link) at the Treasury Department's web site, if you're so inclined.