Financial overhaul

The Baltimore Sun

WASHINGTON -- Treasury Secretary Henry M. Paulson Jr. unveiled yesterday the most sweeping proposal to revamp the nation's financial regulatory system since the Great Depression. How much of it is enacted, however, will depend greatly on the political will of the next administration and the next Congress.

"These long-term ideas require thoughtful discussion and will not be resolved this month or even this year," Paulson acknowledged in a speech detailing his Blueprint for Regulatory Reform.

The proposals would broadly expand the powers of the Federal Reserve, merge the regulation of stock and commodities markets, fold savings and loan institutions under the umbrella of bank regulation and allow insurance companies to opt out of state regulation in favor of a newly created federal insurance regulator.

For consumers, Paulson's plan would create a new super-regulator whose powers would cut across financial services with overarching responsibility for protecting investors and consumers.

The plan also would create a new federal entity to oversee the mortgage origination process so that lending standards never again would erode to the point where they sink the national housing market.

Very little of the plan can be set in motion by executive order or under existing regulatory authority, so it will be up to the next president and Congress to determine how to proceed.

Leading Democrats who now control Congress didn't rush to embrace the Paulson plan.

"I would call this the wild pitch. It's not even close to the strike zone," said Sen. Christopher J. Dodd of Connecticut, the Democratic chairman of the Senate banking committee, which would oversee many of the proposals.

Senate Majority Leader Harry Reid of Nevada said he was surprised by the new report, even though it's been known in financial circles for some time that the Bush administration was preparing a blueprint for modernizing the regulation of financial markets.

"They've been working on this a year? Why haven't they told us?" asked Reid, who with Dodd fielded questions on a conference call.

Dodd and Reid questioned the timing of the proposed overhaul, coming out the day that Congress returns from Easter recess to tackle plans to provide loan guarantees for distressed mortgages once they're modified by lenders.

Paulson has favored a voluntary approach by lenders to rework troubled home loans, but Dodd and other Democrats think that lenders aren't moving fast enough. Some plans under consideration in Congress call for the government to purchase distressed home loans at a discount, modify them and then try to auction them off to investors as mortgage bonds.

On the campaign trail yesterday, the two Democratic presidential candidates said Paulson's effort failed to address current problems, while presumptive Republican nominee Sen. John McCain welcomed it as a starting point for a national discussion, particularly on the need for better regulation of mortgage brokers.

The Paulson plan offers three time frames for regulatory changes: short-term proposals that could be enacted before the next president takes office in January, intermediate-term plans that could take two to eight years for congressional approval, and long-range goals that serve mainly as discussion points.

The most immediate thing that Paulson thinks can and should be done this year is creating a Mortgage Origination Commission to provide much-needed federal oversight for the home loan origination process.

"Simply put, that process is broken," Paulson said.

This new commission, which appears to have support from top Democrats, would be composed of a representative from each federal agency with some jurisdiction over banking and a representative from the association of state banking supervisors.

Together these regulators would design professional standards for licensing mortgage brokers and others who originate home loans. The group would establish educational requirements and provide for a track record of complaints and/or disciplinary action.

This idea gets to the heart of today's housing meltdown. Mortgage brokers originated about two-thirds of adjustable-rate sub-prime mortgages, those issued to borrowers with weak credit. They were spottily regulated on the state level and not at all on the federal; most toxic loans that brokers originated were issued by nonbank lenders who also were regulated only on the state level.

The Paulson plan wouldn't place nonbank lenders under federal regulation but its tougher rules hypothetically would rein in bad behavior by state-regulated lenders.

Another area of interest to consumers in the plan is its call to allow national insurance companies to opt out of state regulation if they're willing to be regulated by a federal insurance regulator, which doesn't now exist. The Treasury argues that 50 separate state regulatory schemes put insurers at a disadvantage when they compete in a global economy.

However, Dodd of Connecticut, where many top insurance companies are based, suggested that there may be a more middle-ground approach. He thought that federal regulation of the life insurance industry could be a good idea.

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