Treasury's Paulson times a market (crisis)

Treasury Secretary Henry Paulson announces the biggest overhaul of financial regulations since the Great Depression, Monday, March 31, 2008, during a speech at the Treasury Department in Washington. (AP Photo/J. Scott Applewhite)

by Frank James

A lot of words to peruse in today's media coverage of Treasury Secretary Henry Paulson's new plan to modernize the regulation of the nation's financial markets. Be ready for an advanced case of eyestrain.

As has been widely reported, Paulson rolled out what he called his "blueprint" yesterday in the aptly named Cash Room in the U.S. Treasury building right next to the White House.

One of the best explanations of what appears to be going on was in Peter Gosselin's Los Angeles Times story:

"He's taking advantage of the current crisis to push a regulatory restructuring plan that would otherwise attract no interest," said Robert Litan, a senior fellow at the nonpartisan Brookings Institution in Washington.

That pretty much sums it up. I don't know how Paulson, a former Goldman Sachs chief executive, feels about trying to time the market, but he certainly has a good feel for how to time an initiative by the bureaucracy to attract the greatest attention.

As Paulson himself admitted, many of the ideas he unveiled for streamlining and updating the financial regulatory system were in play before the sub-prime meltdown became a fact of life.

So when Democratic lawmakers on Capitol Hill fault Paulson for not offering anything that would assuage the pain of millions of homeowners now facing foreclosure, that's almost beside the point. That really wasn't what Paulson was going after.

Of course, because of the mortgage-induced credit crisis which nearly led to the bankruptcy of venerable investment banking firm Bear Stearns, Paulson couldn't avoid including something in his plan to address some of the weaknesses in oversight exposed by the sub-prime problem.

For instance, he proposed that there be a new mortgage origination commission to grade each state's oversight of mortgage brokers.

But much of what he proposed appears geared towards simplifying the lives of global financial players, modernizing a regulatory structure with some 19th century footings, and perhaps, along the way, making the U.S. more competitive.

For instance, he proposed an optional federal charter for insurance companies whose purpose would appear to allow large players in that industry to mostly avoid state regulation. There are few things officials at international companies hate more than to have to contend with the hodge-podge of regulations in 50 states and additional non-state jurisdictions.

He also proposed a bunch of mergers within the bureaucracy. The five regulatory agencies that currently oversee what most people understand a bank to be, would be merged into one.

The Fed would become a larger big foot in the financial markets, able to roam into any part of the system to try and stabilize the markets when they get out of whack. Some people are calling it a "super cop" role.

Meanwhile, he would also merge the Securities and Exchange Commission and the Commodities Futures Trading Commission. That also sounds like a dream come true for Wall Street firms who now chafe having to deal with two agencies.

True, his plan would open up investment banks, "non-depository institutions," that borrow from the Federal Reserve to the central bank's scrutiny. But that seems like the very least taxpayers should expect. After all, if these firms are gaining liquidity by using Fed money, the central bank has a right to know how these firms are managing their risks etc.

Of course, there are a lot of interest groups gearing up to fight Paulson's ideas. State regulators don't want to be cut out of the regulatory loop where they play an important role today.

Meanwhile, officials at small banks and credit unions don't like the notion of bank regulators being rolled into one federal regulator. Even the bureaucrats in the agencies Paulson would like to see merged are voicing sounds of resistance.

The consensus in much of the reporting seems to be Paulson's vision won't likely be implemented anytime soon but that it kicks off a long overdue national discussion about regulatory modernization.

The hope has to be that this debate once it gets raging won't distract attention from the credit crisis at hand.