Henry Paulson is proposing to reconstruct our financial regulatory institutions from scratch. According to the executive summary, this report has been in the works for a year: "Treasury began this current study of regulatory structure after convening a conference on capital markets competitiveness in March 2007." But the recent drama on Wall Street ensures an extra degree of salience:

Market conditions today provide a pertinent backdrop for this report's release, reinforcing the direct relationship between strong consumer protection and market stability on the one hand and capital markets competitiveness on the other and highlighting the need for examining the U.S. regulatory structure.

The proposal includes short-, intermediate- and long-term proposals, but the ultimate goal is regulatory efficiency, which will be achieved by consolidating federal power in the hands of three regulatory agencies. Each agency would be responsible for one of the following objectives:

• Market stability regulation to address overall conditions of financial market stability that could impact the real economy (the Federal Reserve);

• Prudential financial regulation to address issues of limited market discipline caused by government guarantees (the Prudential Financial Regulatory Agency); and

• Business conduct regulation (linked to consumer protection regulation) to address standards for business practices (the Conduct of Business Regulatory Agency).

Paulson refers to this structure as the "optimal" regulatory framework. The SEC's current responsibilities would be assumed by the CBRA.

The most interesting part of the executive summary is the paragraph in which Paulson explains other regulatory models:

Treasury considered four broad conceptual options in this review. First, the United States could maintain the current approach of the [Gramm-Leach-Bliley Act of 1999] that is broadly based on functional regulation divided by historical industry segments of banking, insurance, securities, and futures. Second, the United States could move to a more functional based system regulating the activities of financial services firms as opposed to industry segments. Third, the United States could move to a single regulator for all financial services as adopted in the United Kingdom. Finally, the United States could move to an objectives based regulatory approach focusing on the goals of regulation as adopted in Australia and the Netherlands.

The executive summary doesn't explain why the objectives-based approach would be optimal for the U.S. That is a conversation worth having. Elizabeth Brown started us down that road here at Conglomerate two years ago, and the British system has some fans in high places here in the U.S. Something tells me that this discussion is going to gain some increased attention in the next few years.

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