Paulson reveals plans for biggest financial reform since Depression

By Stephen Foley
Sunday 23 October 2011 02:15

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.

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