Treasury Secretary Henry Paulson will reveal in full sweeping new plans on Monday for streamlining a hodgepodge of regulation faulted for permitting the US mortgage crisis to balloon into a full-blown economic threat.
Keenly aware of the political debate already mounting as soaring home foreclosures push the economy toward recession, the Bush administration allowed the veil to be lifted on key measures before Paulson's announcement at 10am local time.
The regulatory blueprint proposes vesting new powers as a "market stability regulator" in the Federal Reserve -- effectively formalising a role it already has been performing by providing liquidity to investment banks and lowering official interest rates.
It would give the US 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 behaviour.
Since problems surfaced last August with rising failure rates on subprime 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.
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.
Among changes, Treasury wants to merge the Securities and Exchange Commission, the US markets watchdog, with the Commodity Futures Trading Commission that is charged with overseeing the activities of the nation's futures market.
It also recommends getting rid of a Depression-era charter for thrifts that was intended to make it easier to obtain mortgage loans, saying it is no longer necessary. That would mean closing the Office of Thrift Supervision and transferring its duties to the Office of the Comptroller of the Currency that oversees national banks.
In one important change to try to clamp down on mortgage brokers, Treasury is urging the establishment of a "Mortgage Origination Commission" made up of regulatory agency representatives that would be able to set licensing standards for mortgage brokers.
That would boost consumer protection by increasing scrutiny of the personal conduct, disciplinary history and educational qualifications of the people who are frequently on the lending front lines.
For a variety of reasons, none Treasury's proposals faces an easy future, as the director of Office of Thrift Supervision made clear in a message to employees on the weekend.
"Many of you might be wondering whether financial markets restructuring is an idea whose time has finally come," John Reich told OTS employees. "I don't think so, at least as it pertains to the four federal banking agencies."
Paulson, a 30-year veteran of Wall Street who initiated the regulatory study a year ago, has warned against dampening "innovation" by applying too many rules to the financial services sector and his stance will raise questions.
A draft of a speech Paulson planned for Monday said it was not ‘fair or accurate’ to blame lax regulation for the current turmoil. Indeed, Treasury started studying regulation in response to financial industry complaints that it was so regulated it was losing business to capital markets in Europe.
Democratic presidential candidate Sen. Barack Obama has pointedly noted that he saw "no call for increased capital reserve requirements and liquidity requirements on investment banks" similar to those of commercial banks, despite the fact the Fed is now lending to investment banks.
A spokesman for Sen. John McCain, who has secured the Republican nomination for November's election, said only that he "looks forward to a healthy debate," effectively saying that any substantive rules change will be slow to come. (Reuters)
US Treasury set to announce regulatory overhaul