Paulson reveals plans for biggest financial reform since Depression

Hank Paulson, the US Treasury Secretary, issued a plea for serious consideration of his ground-breaking plans for a simplification of financial regulation, as critics lined up to warn they would not be enough to protect consumers and prevent financial crises.

The proposals, trailed as the most far-reaching overhaul of the regulatory system since the Great Depression, will hand new powers to maintain financial stability to the Federal Reserve, and fold the Securities and Exchange Commission into a giant new regulator overseeing all financial market trading.

But while the plan received praise for being bold, banking groups, consumer advocates and politicians added a litany of caveats that could bog down any attempt to push through serious reform.

"This is a complex subject deserving serious attention," Mr Paulson said as he unveiled the plan yesterday. "Those who want to quickly label the blueprint as advocating 'more' or 'less' regulation are over-simplifying this critical and inevitable debate. Government has a responsibility to make sure our financial system is regulated effectively, and in this area we can do a better job ... Few, if any, will defend our current balkanised system as optimal."

The plan would consolidate a number of smaller regulators and give new powers to the Federal Reserve to examine the books at hedge funds, insurance firms and brokers, and to look for instability in the financial system. The near-collapse of Bear Stearns last month illustrated how inter-connected securities firms, hedge funds and banks have become now that they trade a raft of complex derivative products. The Fed stepped in to broker a rescue deal precisely because the failure of Bear Stearns would have precipitated a system-wide crisis.

However, the Paulson plan has its roots long before the credit crisis emerged last summer. Indeed, it was conceived as a means of keeping Wall Street competitive in the face of a reinvigorated London market and emerging centres of financial power in Asia. Then, Wall Street leaders claimed that too-harsh regulation was leaving them hamstrung against countries with lighter-touch regulatory regimes.

In March last year, the Treasury Secretary convened a conference of powerful figures to debate potential change, where attendees included the former Federal Reserve chairmen Paul Volcker and Alan Greenspan, the billionaire investor Warren Buffett, and chief executives of some of America's biggest corporations. "When we announced that we would work on such a blueprint, other than some enthusiastic academics, few noticed," Mr Paulson said.

"Today, of course, capital markets and financial regulation are on everyone's mind. As recent events have demonstrated, investor protection and market stability are critical elements of competitiveness. Far from being at odds with one another, they are mutually reinforcing."

The immediate prospects for progress of the reform plan hinge on the reaction of the Democrat leaders of the powerful congressional finance committees, Senator Christopher Dodd and Barney Frank of the House of Representatives. Both men have floated reform proposals of their own aimed at tightening regulation to prevent a repeat of the mortgage mis-selling and credit rating agency mis-steps that led to the current credit crisis.

Mr Dodd said yesterday that the plans "would do little if anything to alleviate the current crisis" and Mr Frank warned that the proposal did not give the Federal Reserve the teeth needed to pursue its wider role.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Please enter a valid email
Please enter a valid email
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Please enter your first name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
Please enter your last name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
You must be over 18 years old to register
You must be over 18 years old to register
Opt-out-policy
You can opt-out at any time by signing in to your account to manage your preferences. Each email has a link to unsubscribe.

By clicking ‘Create my account’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in