Treasury may delay sector overhaul

[Ron Burgundy]

Politico - Wall Street's continuing volatility is likely to delay a long-awaited administration proposal to overhaul regulation of the nation's financial services sector.

Plans for the overhaul were expected before the end of the first quarter March 31. But officials say Treasury Secretary Henry Paulson will likely delay the announcement, in part because of concern the news could spook a stock market already jittery in the wake of federal intervention into the collapse and sale of investment bank Bear Stearns.

“The department is preparing a blueprint for an improvement of the financial regulatory structure to strengthen consumer protection and our capital markets,” said Jennifer Zuccarelli, a Treasury spokeswoman. “We expect to release the blueprint within the next couple of weeks.”

The proposals have been in the works for months. In June, Paulson launched a task force to come up with ways to reform the creaking regulatory infrastructure that guides the financial markets.*

Paulson is expected to speak about the struggling housing and financial markets on Wednesday at the U.S. Chamber of Commerce, but the details of his regulatory reform proposal will not come during those remarks, say sources familiar with planning for the speech.

Meanwhile, House Financial Services Committee Chairman Barney Frank (D-Mass.) is calling for significant changes, including a new office to monitor marketwide systemic risk.

Whatever changes Congress and the administration come up with will have far-reaching implications: The financial services sector generated 7.8 percent of the nation's gross domestic product in 2006.

Some Republicans worry that the recent enthusiasm for new regulatory proposals could damage the economy in the long run.

Rep. Tom Price, a conservative Republican from Georgia on the House Financial Services panel, said the events of the last week prove that “the mechanisms are in place to be able to address the challenges that we have right now without Congress instituting all sorts of other rules and regulations that likely, in the end, would be too late and would also increase the bureaucracy and decrease the ability of the market to function.”

Financial markets were stunned by the sudden failure of Bear Stearns and the swift intervention by Treasury and the Federal Reserve to force Bear's sale to JP Morgan Chase & Co. for just $2 per share. But on Monday, JP Morgan upped its proposed purchase price to $10 per share, in response to angry Bear shareholders who threatened to withhold approval of the deal. That sent shares of Bear Stearns soaring, contributing to a marketwide rally Monday.

Specific details of new federal plans to overhaul the nation's regulatory infrastructure could roil an already churning market, which is one reason for the delay of the Treasury recommendations.

In the months it has been considering the plan, Treasury officials have kept mum about what they're considering. But in remarks before the City of London Corp. in December, Assistant Treasury Secretary for Financial Institutions David G. Nason said the ever-increasing interconnectivity of the global capital market is driving much of Treasury's thinking about how to best position the United States.

“Companies now can raise capital across the world, seeking environments that provide adequate capital and liquidity at the best cost,” he said. Treasury paints the move as an effort to boost U.S. financial competitiveness with nations across the globe.

One move to look for in the new proposal will be a consolidation of the alphabet soup of agencies that has evolved to oversee the disparate pieces of the nation's fiscal infrastructure.

Nason pointed out that the United States has five federal depository institution regulators, a federal securities regulator, a federal futures regulator and a state-based insurance regulatory system, as well as self-regulated financial institutions. It's a safe bet that proposals for major bureaucratic consolidation are on the way.

Separately, the scrutiny on federal regulators is sure to shine some light on a once obscure corner of the Securities and Exchange Commission: the Consolidated Supervised Entity, or CSE, program, whose staffers monitor risk management of Wall Street's broker-dealers. The staffers, known as “prudential supervisors,” monitor five holding companies of the key broker-dealers: Bear Stearns, Merrill Lynch, Lehman Brothers, Morgan Stanley and Goldman Sachs.

Though those investment banks collectively have nearly 200,000 employees and annual revenues north of $100 billion, there are only 25 staffers at the SEC dedicated to monitoring the risk posture of the firms. And some think that's not enough.

Jonathan Graffeo, a spokesman for Alabama Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, says, “Sen. Shelby has long raised questions about the adequacy of the CSE regime — both in terms of authority and resources.”

A spokesman for the SEC declined to comment for the record.

Still, it will be some time before Congress can turn to such regulatory inside baseball. Frank, for example, doesn't plan to hold hearings on his regulatory plan until the summer. For both him and Senate Democratic leaders, housing is the first order of business. There's also likely to be a strong push for a second economic stimulus package this year that could include items such as an extension of unemployment insurance that Democrats were forced to abandon during negotiations on this year's first stimulus bill.

House Republicans, too, are working on an alternative stimulus-type response to the nation's economic woes to unveil when they return from the congressional spring break.

“People are really upset and concerned about the housing crisis; there will be pressure on Congress to take some action,” said Brian Darling, director of Senate relations at The Heritage Foundation.

Frank and Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, will push a proposal for the Federal Housing Administration to offer up to $400 billion in new mortgages for lenders who agree to refinance struggling homeowners into more affordable loans.

But even as members of Congress from both parties talk up the possibility of a second stimulus, the White House is moving to quash the idea.

“The first checks haven't even gone out the door yet,” said White House spokesman Tony Fratto. “We were very clear on what we thought would be quickly effective, and that's what we got done.”

Fratto said the administration remains committed to making Bush's earlier tax cuts permanent as a means to stimulate the economy long term. The administration has also reacted coolly to calls for additional housing measures.

All of this, of course, comes in the context of a presidential election year. Sen. Hillary Rodham Clinton (D-N.Y.) sounded a populist note as she offered up a new mortgage proposal on Monday, urging Congress to give $30 billion to states, cities and towns to deal with the foreclosure crisis — the same amount of loan guarantees the Fed extended to Wall Street.

“Over the past week, we've seen unprecedented action to maintain confidence in our credit markets and head off a crisis for Wall Street banks,” she said. “It's now time for equally aggressive action to help families avoid foreclosure and keep communities across this country from spiraling into recession.”

source: http://news.yahoo.com/s/politico/20080325/pl_politico/9195 [link]