Sure, the executive summary runs 20 pages long, but the core of the Treasury’s blueprint for Financial Regulatory Reform could have fit on a cocktail napkin: Deregulate, self-regulate, trim the ranks of regulators.
It’s taken a year to produce this ponderous and vague-on-the-details opus, this so-called modernization of the U.S. financial regulatory schema, but the thrust is clear—less government regulation, more self-policing, and some important-sounding “new” responsibilities for the Federal Reserve that strongly resemble the old responsibilities. The Commodity Futures Trading Commission would be rolled into the Securities and Exchange. The Office of Thrift Supervision disappears. On balance, there will be new, and possibly additional, acronyms to keep straight, and more studies afoot. And not even an “888” number to call for clarification.
Here’s a roundup of the highlights. The President’s Working Group on Financial Markets, aka PWG, formed after the breathtaking 1987 stock market dive, will be expanded. Today the PWG consists of Treasury, the Fed, the SEC and the CFTC. Under the blueprint, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the OTC would join the working group. Presumably the OTS would leave the room once the federal thrift charter is eliminated and the OTS is closed. This will happen as soon as the thrift charter is ‘transitioned’ into the national bank charter.
Certainly no reorganization would feel right without a Mortgage Origination Commission. This part of the package actually looks promising: MOC would develop uniform standards. But the states’ systems would remain, adding another layer of complexity to an already fragmented business. “The MOC would also evaluate, rate and report on the adequacy of each state’s system,” notes the executive summary of the blueprint. And then it would grade each state. Yet the “authority to draft regulations for national mortgage lending laws should continue to be the sole responsibility of the Federal Reserve.” There’s streamlining, Treasury-style! As to enforcement authority, well that “should clarified and enhanced.” Problem solved.
The blueprint similarly addresses the financial market stability issue. The document points out that the Fed “has used its authority for the first time since the 1930s to provide access to the discount window to non-depository institutions.” Treasury wants to make sure the “process is calibrated and transparent; appropriate conditions are attached to lending; and information that flows to the Federal Reserve through on-site examination or other means as determined by the Federal Reserve are adequate.” All of which the Fed has already been doing, by all accounts. But wait! The PWG should also “consider broader regulatory issues” tied to the investment banks lining up at the Fed’s window and sniffing the pie. Shouldn’t the working group already be thinking about such things?
Treasury takes on what it delicately calls “a number of inefficiencies associated with the state-based insurance regulatory system,” with an “optional federal charter for insurers within the current structure,” according to the blueprint. “An OFC structure should provide for a system of federal chartering, licensing, regulation and supervision” for industry participants. If they want to: It’s an opt-in. States would have no jurisdiction over those choosing the OFC way. But some state laws would apply no matter what. No confusion here!
The SEC would absorb not just the CFTC, but that body’s user-friendly self-regulatory organization culture, for a clear de-fanging of securities regs. After all, self-policing has been a great success, as indicated by the opening the of the Fed discount window to investment banks for the first time in six decades. Treasury “recommends statutory changes to harmonize the regulation of broker-dealers and investment advisers offering similar services to retail investors,” the blueprint says. “In that vein, the establishment of a self-regulatory framework for the investment advisory industry would enhance investor protection,” we learn.
That must explain the long-term plan to appoint the Fed as the market-stability regulator. As part of this coveted role, the Fed gets to know everything about financial-market participants and “deal with systemic risk.” But since “it is impossible to fully eliminate instability through regulation,” all the Fed gets to do is gather information, examine everybody, and open the window.
In case the brainy financial engineers are worried, Secretary of Treasury Paulson, in his formal remarks, promises that his “first and most urgent priority is working through this capital market turmoil and housing downturn, and that will be our priority until this situation is resolved.” Happy April 1st!
