The Bush administration Monday proposed the most far-ranging overhaul of the financial regulatory system since the stock market crash of 1929 and the ensuing Great Depression.
The plan would change how the government regulates thousands of businesses from the nation’s biggest banks and investment houses down to the local insurance agent and mortgage broker.
Treasury Secretary Henry Paulson unveiled the 218-page plan in a speech in Treasury’s ornate Cash Room, declaring, “A strong financial system is vitally important — not for Wall Street, not for bankers, but for working Americans.”
The administration’s plan drew criticism, however, from Democrats who said it did not go far enough to deal with abuses in mortgage lending and securities trading that were exposed by the current credit crisis. Some state officials criticized what they saw as unwanted federal intrusion on their turf.
Massachusetts Secretary of the Commonwealth William F. Galvin blasted Paulson’s approach as “a disastrous backward step that would put the investor in jeopardy” because it would pre-empt state regulation of securities and insurance.
The administration said that it planned to work with Congress to have constructive conversations, but officials would not predict when any aspects of the proposal could be enacted into law.
Asked if Bush’s goal was to get the overhaul approved before he leaves office, presidential press secretary Dana Perino told reporters aboard Air Force One, “We’ll have to see. It is a big attempt.”
The plan, which would require congressional approval for its biggest changes, seeks to trim a hodge-podge collection of overlapping jurisdictions that date back to the Civil War.
It would give the Federal Reserve more power to protect the stability of the entire financial system while merging day-to-day bank supervision into one agency, down from five at present.
It also would create one super agency in charge of business conduct and consumer protection, performing many of the functions of the current Securities and Exchange Commission.
It would propose eliminating the Office of Thrift Supervision and the Commodity Futures Trading Commission, merging their functions into other agencies.
The head of the commodity trading commission raised concerns about the plan. CFTC Acting Chairman Walt Lukken said merging the Securities and Exchange Commission and his agency could end up making “the U.S. futures industry less competitive globally” unless differences in the laws governing the sales of securities and futures contracts were resolved.
The Paulson plan would ask Congress to establish a federal Mortgage Origination Commission to set recommended minimum licensing standards for mortgage brokers, many of whom now operate outside of federal regulation, and it would also take a first step toward federal regulation of the insurance industry by asking Congress to establish an Office of Insurance Oversight inside the Treasury Department.
Paulson acknowledged in his remarks that most of the changes will not occur until after a lengthy debate in Congress, leaving it to the next administration to deal with the biggest changes proposed by the report. He also said the Bush administration’s focus would remain on getting through the current severe credit crisis, which has roiled financial markets since last August.
Paulson rejected Democratic charges that it was lax regulation of mortgage brokers and the financial industry that had led to the current problems.
“I do not believe it is fair or accurate to blame our regulatory structure for the current market turmoil,” he said. “I am not suggesting that more regulation is the answer or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years.”
Sen. Charles Schumer, D-N.Y., said he strongly disagreed with Paulson. “The unregulated corners of our economy did much to contribute to the meltdown in our housing market and the accompanying spillover to our financial markets,” Schumer said in a statement. “The administration’s ’deregulation-above-all-else’ attitude helped cause the problems we now face.”
Banking groups raised strong objections to the plan while other groups expressed approval.
“Dismantling the thrift charter and crippling state banking charters will weaken banking in America,” said Edward Yingling, president of the American Bankers Association.
Tim Ryan, head of the Securities Industry and Financial Markets Association, which represents more than 650 securities firms, banks and asset managers, praised the overhaul proposal and said there was widespread agreement on the need for modernization in an era “where billions of dollars race across the globe with the click of a mouse.”
Frank Keating, president of the American Council of Life Insurers, praised the insurance proposals but Dan Mica, president of the Credit Union National Association, said his organization was “astonished and angered” by the plan to abolish a separate federal regulator for credit unions. He said this move would “essentially turn credit unions into banks.”
In Congress, House Financial Services Committee Chairman Barney Frank, who is working on his own regulatory revamp, called Paulson’s proposal a “constructive step forward” but said it wouldn’t give the Federal Reserve enough authority to carry out its expanded job to police the stability of the entire financial system.
Many Democrats said that Congress’ first priority should be to deal with the current mortgage crisis that is threatening millions of Americans with the loss of their homes and that an extensive debate on a regulatory overhaul should not occur until a new president is in office next year.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., told reporters that he viewed the administration’s plan as a “wild pitch — it’s not even close to the strike zone” of what is needed to help the country get through the current mortgage crisis. He said the real problem was not the need for new regulations but “the failure of this administration to utilize the tools they’ve been given over the years to deal with the very practices that caused this problem.”
The proposed overhaul would be the most extensive since the current regulatory system was created in response to the 1929 stock market crash and the Great Depression.
It comes at a time when the financial system faces its most severe credit crisis in two decades, one that has resulted in billions of dollars of losses for big banks and investment houses and the near-collapse of Bear Stearns, the country’s fifth-largest investment bank.
The rising tide of bad debt has made it harder for consumers and businesses to get credit, further weighing on an economy struggling with a prolonged housing slump and soaring energy prices. Many economists believe the country is already in a recession.