Paulson: A Reg-u-lar Guy (Part 1)

I needed a day to digest the sweeping regulatory changes that were introduced by Treasury Secretary Henry Paulson before writing about it. With the benefit of a good night’s sleep (and a day of Florida sun) I am ready to say: Bring it on!

The changes put forth by Paulson, the former head of Goldman Sachs, intend to update rules that have been in place since the aftermath of the Great Depression. The current framework for financial regulation is based on a structure that includes:
o Five federal depository institution regulators in addition to state-based supervision
o One federal securities regulator and one futures regulator, with additional state-based supervision and self-regulatory organizations with broad regulatory powers
o Insurance regulation is almost wholly state-based, with over fifty different regulators

There is near universal consensus that the current system has not kept up with the pace of innovation of financial markets, but fixing it is not easy. That’s why as soon as Paulson spoke on Monday, the vultures were out, saying that (in particular order): the plan stinks, we don’t need more regulation; the plan is good theory, but can’t be put into place because political jousting won’t allow it. As soon as all of the negatives were swirling about, I started to think that maybe something good might come of this.

Paulson noted that the optimal regulatory structure needs to attract capital based on its effectiveness in promoting innovation, managing system-wide risks, and fostering consumer and investor confidence. The Treasury report presented a series of short, intermediate and long-term recommendations for reform of the US regulatory structure.

Nobody seems to dispute the short-term actionable items, the least controversial of which includes modernizing the President’s Working Group on Financial Markets (“PWG”)—this group was formed in the aftermath of the 1987 crash and includes heads of the Treasury, the Fed, the SEC and the CFTC. Another short-term idea that is likely to be supported is the creation of a new federal commission which will evaluate, rate and report on each state’s system for licensing and regulating the mortgage origination process. Tomorrow I will delve into the more controversial parts of the Paulson regulatory overhaul, which will take months, perhaps years to put into place.