Paulson: A Reg-u-lar Guy (Part 2)

Treasury Secretary Henry Paulson is making a splash with his proposals to overhaul the nation’s financial regulatory system. He was immediately attacked by some, lauded by others. Before passing judgment, it’s time to understand exactly what is being considered.

The most controversial part of the plan is the escalation of the Federal Reserve into a “super-cop”, charged with identifying and avoiding a crisis in advance, with the overall goal of keeping the financial system stable. After the Fed’s participation in the Bear Stearns deal, it is now clear that the central bank has de facto changed its role in the financial system. With the shift from commercial banks to investment banks, Mr. Paulson's notes that the new agency “would have broad powers so they could go anywhere in the system they needed to go to preserve that authority.”

The next area of the Paulson plan that is causing turf battles is the call for a combination of market oversight between the Commodity Futures Trading Commission (CFTC), which regulates futures, and the Securities and Exchange Commission (SEC), which regulates securities such as stocks and bonds. This is a thorny proposal, because the SEC is "rules based," which means that it sets regulations that institutions must follow, while the CFTC is "principles based," setting broad parameters under which the regulated entities try to operate. It looks like Paulson favors the CFTC approach to enhance global competition, but this idea ran into criticism almost immediately, as officials from both agencies will be unwilling to cede power or control.

On the banking side, Paulson would like to eliminate various bank regulators, by shutting down the Office of Thrift Supervision, which has oversight of savings-and-loan institutions, and folding those responsibilities into the Office of Comptroller of Currency, which has oversight of national banks. Additionally, the Treasury wants to study whether the Federal Reserve or FDIC should have oversight of state-chartered banks. Again, any proposal to shutter or reduce the responsibilities of an agency will be met with howls.

Finally, Paulson wants to overhaul the insurance industry to create a federal regulator over the insurance industry, which has to deal with 50 different state regulators with 50 different sets of rules. Many are unwilling to strip states of power and the lobbyists from consumer groups are already claiming that states do a better job. This one is likely to face a major uphill battle.

In the end, who knows what portions of this plan will actually turn into lasting changes in the financial regulatory environment? That being said, at least the conversations are starting and for that, Paulson deserves some credit as a reg-u-lar guy!