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FOCUS: Paulson financial regulation reform plan already faces discounting -
Like the mortgage-backed securities behind the current market turmoil, the financial regulation reform plan Treasury Secretary Henry Paulson is scheduled to officially present Monday morning has already been given a 'haircut' -- in this case in the form of substantive criticism and political discounting.

The plan has been given tepid praise as a first step, while much of the criticism focuses on the unlikelihood of any major changes happening during the seven months before the nation knows who will next occupy the Oval Office.

Paulson may be getting off to a fast start in the post-credit-crunch regulatory debate, said Lou Crandall at Wrightson ICAP, but 'a fast start doesn't mean there will be an early finish to the regulatory reform process.

'It usually takes years for new collective wisdom to emerge in Washington policy circles on almost any subject and the free-market consensus that has dominated the financial regulation debate for so long has only been shredded over the past few months.'

Business groups, however, have tended to support the plan.

'We look forward to reviewing Secretary Paulson's proposal and working with the Treasury, members of Congress, and regulators on reforms that will enhance the competitiveness of the US economy and maintain the delicate balance between appropriate regulation and the need for a more flexible and efficient system of financial supervision,' said Rob Nichols of the Financial Services Forum, an industry group.

Words and phrases such as 'reviewing,' 'working with,' and 'delicate balance' are polite signals the industry would resist stronger regulation.

The Fed has welcomed the move as an important first step. The Fed's thoughts will be fleshed on Wednesday and Thursday when Chairman Ben Bernanke makes a pair of appearances on Capitol Hill.

Democratic presidential candidate and Illinois Senator Barack Obama has already called the plan inadequate.

And, unsurprisingly, he heads of some current regulatory agencies have already gone public with their objections.

There are, in fact, only three designated 'short-term' recommendations in the Paulson plan which the executive branch could put in place this year.

First, it recommends expanding the President's Working Group on financial markets to cover the whole financial industry and formalizing its role as an inter-agency coordinator.

Second, it recommends establishing a federal Mortgage Oversight Commission to monitor and upgrade state regulation of mortgage brokers.

Third, it would formalize process of information gathering from investment banks which the Federal Reserve has begun since it opened discount window lending to them.

The highly publicized rearranging of the current alphabet of federal regulators into three major new acronymic agencies--the Market Stability regulator otherwise known as the Fed, the Prudential Financial (nyse: PRU - news - people ) Regulatory Agency and the Business Conduct Regulatory Agency -- is specifically deferred.

'There is less here than meets the eye and what is here is guaranteed not to be implemented during the remaining months of the Bush presidency. And that of course is precisely the point of this exercise. Appear to be doing something and dump the mess in the lap of your successor,' said investment banker and consultant Yves Smith of the Naked Capitalism economics blog.

Democrats in Congress have been calling for tougher regulation of investment banks by the Federal Reserve as the price to be paid for new access to its loans.

But much of the Paulson plan has been in the works for more than a year--since before the credit crisis -- when he was focused instead on reforming regulation to avoid losing financial market business to more flexible regulatory regimes overseas.

Management consultant Peter Cohan says that motivation shows through in the details of the Paulson plan.

'I think it's a clever way to use the current credit crisis to loosen regulation on the financial industry,' he said.

Cohan's analysis of the plan's motivation may be controversial but his analysis of its political prospects in Congress is close to mainstream. Before re-regulation in the minds of most members comes mitigation--how stop the housing meltdown and protect their constituents from foreclosure.

'Many members will need to weigh the concerns of their constituents who have suffered from the credit crunch against pressure from the industry -- with its campaign contributions -- which may favor the looser regulation that Paulson proposes.

'Furthermore, it is unlikely that much will get done in Congress that does not benefit those running for president. Unless some proposals are seen benefiting the 2008 combatants, regulatory changes in this area are likely to get deferred until 2009.

ID: 41802
Author(s): Moore, Dennis
Publication date: 30/03/08

Created: 07/09/08. Last changed: 07/09/08.
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