BREAKING NEWS: Paulson Officially Unveils New Regulatory Overhaul Plans
This morning Treasury Secretary Henry Paulson revealed new plans for the eventual creation of three regulatory agencies.
The plan designates the Fed as a "market stability regulator" and gives it the power to examine the books of any financial institution, not just banks, that might pose a threat to the stability of the financial system. It effectively formalizing a role it already has been performing by providing liquidity to investment banks and lowering official interest rates. It would give the U.S. central bank authority to demand that all financial system participants supply it with full information on their activities and grant the Fed a right to collaborate with other regulators in setting rules for their behavior.
In addition to the Fed as a "market stability regulator," the plan creates a "prudential financial regulator" for the nation's banks, thrifts and credit unions, in place of the five agencies that perform that task now. The third new agency would regulate business conduct and consumer protection, taking over many of the functions of the Securities and Exchange Commission.
Since problems surfaced last August with rising failure rates on sub-prime mortgage loans to less credit-worthy borrowers, credit markets have come near seizure several times. And public anger has mounted at what was perceived as slack enforcement of existing rules.
Many mortgage loans were made without basic fact-checking. Some did not even verify whether borrowers actually earned the incomes they claimed or whether they were steered into inappropriate loans with low initial "teaser" rates that soon reset at higher rates requiring much larger monthly payments.
The Treasury acknowledged in draft proposals that the current regulatory system is full of "regulatory gaps as well as redundancies." It sets out an ambitious schedule for modifying and simplifying it -- one that has little chance of being enacted in President George W. Bush's remaining 10 months.
Published on March 31, 2008
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