A sweeping overhaul of financial regulation that Treasury Secretary Henry M. Paulson Jr. will propose today started out last year as an effort to streamline and deregulate oversight of global markets, but the administration was forced to add elements addressing the mortgage crisis as it escalated this year.
The timing of the massive proposal suggests that it represents the administration's response to the credit crisis that broke out in August, which is endangering the economy and led to the collapse of Bear, Stearns & Co. However, experts say the reform could take five to 10 years to get through Congress, making it mostly a matter for the next president.
Mr. Paulson conceded in an interview with the Wall Street Journal this weekend that the plan actually represents the administration's wish list for easing financial regulation in the wake of the heavy-handed regulatory response to financial abuses uncovered in the Enron and other accounting scandals in 2002.
"With very few exceptions, most of this blueprint should not and will not be implemented until after the present market difficulties are past," he said, adding that the plan continues to rely on "market discipline" to prevent major financial mistakes in the future and that it might not even prevent future financial crises.
"I don't mean to imply that we aren't going to keep having these periods every five to ten years. I don't think any regulatory system is going to change that," he said. "I think we rely very, very heavily on market discipline. Mistakes are made. Having said that, I still think we need a system that is more efficient and gives us a better chance, gives us more tools to try to solve problems."
Critics of the plan say it fails to address significant problems that emerged in the mortgage crisis, most notably the unregulated universe of an estimated $50 trillion of mortgage and credit derivative securities that are the heart of the current paralysis in credit markets. The Paulson plan would only collect additional information on these risky instruments, which are blamed in part for the demise of Bear Stearns.
The chairman of the Senate Banking, Housing and Urban Affairs Committee, Sen. Christopher J. Dodd, Connecticut Democrat, said the recommendations deserved careful consideration, but said he thinks they "would do little if anything to alleviate the current crisis."
One element of the plan would establish a federal Mortgage Origination Commission to establish national standards for mortgages, but it would leave enforcement of those regulations largely to the states, which failed to prevent the current crisis. Treasury sponsors say the commission is the one element of the plan that should be passed this year.
House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, said Mr. Paulson's plan is a "very constructive step forward," particularly in "rejecting the argument for the status quo." But he said significant differences remain between the administration and Democrats on how to alter regulation in the wake of the mortgage crisis.
In a speech prepared for the plan's unveiling today, Mr. Paulson reveals he did not intend to make major changes in the way mortgages and mortgage securities are regulated, and does not think holes in the regulatory system are to blame for the crisis. On that point, he differs from many other banking experts, who say state and federal regulators were asleep at the switch in the run-up to the housing crisis.
"I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil," Mr. Paulson said in the draft speech.
"Despite the fact that there will be a temptation to view this through a lens of what is happening now in credit markets, this has been a process that has been going on for a year," said David G. Nason, the Treasury's assistant secretary for financial institutions. "These are very complex issues that require a serious amount of debate."
The blueprint got near universal praise from industry groups, which pushed for a streamlining of regulation after objecting that the crackdown on accounting abuses in the 2002 Sarbanes-Oxley law was hampering U.S. financial competitiveness.
The Federal Reserve would be a big winner, gaining new powers to serve as the protector of stability for the entire financial system. The plan would abolish some institutions such as the Office of Thrift Supervision and the Commodity Futures Trading Commission; their responsibilities would shift to other agencies.
According to a 22-page executive summary, the Paulson plan envisions a three-stage process that would precipitate the establishment of three main regulatory agencies. The Fed would sit at the top with expanded responsibilities as the "market stability regulator." But the Fed would lose its current powers over bank holding companies.
The proposal would combine the five agencies now responsible for regulating banks, thrifts and credit unions into a single regulatory agency. The powers of the Securities and Exchange Commission would go into a super agency responsible for business conduct and consumer protection.
• This story is based in part on wire service reports.