March 31, 2008
Turf, Policy, and The Treasury Department's Financial Regulation Overhaul
Posted by David Zaring

Following Gordon's post on the long term vision of the Paulson proposal, one of my rules of administrative law thumb is that new regulatory schemes tend to be born in crises and in a hurry.  But the corollary to that rule is that the much of a new scheme's content will have been around for a while.  The Treasury Department's new effort, to be announced later this morning, appears to follow both rules.  We've pointed you to the long term vision, the AP has seen an overview of the mechanics, Treasury wants to:

-Expand the role of the President's Working Group on Financial Markets to include the entire financial sector rather than just financial markets.

-Create a federal commission, the Mortgage Origination Commission, to develop uniform, minimum licensing standards for mortgage market participants.

-Close the Office of Thrift Supervision, which regulates thrift institutions, and move those functions to the Office of the Comptroller of the Currency, which regulates banks.

-Merge the functions of the Commodity Futures Trading Commission into the Securities and Exchange Commission to create one agency to provide unified oversight of the futures and securities industries.

-Establish an Office of National Insurance within the Treasury Department to regulate those in the insurance industry who want to operate under an optional federal charter.

-Work to establish as a long-term goal three major regulators: the Federal Reserve as a "market stability regulator"; a "prudential financial regulator" to take over the functions of five separate banking regulators; and a "business conduct regulator" to regulate business conduct and consumer protection.

Merging the CFTC and SEC certainly isn't new.  Nor, as the US has increasingly been called on to harmonize its practices of insurance supervision with foreign regulators, is the idea of moving that supervision from the states to the federal government altogether surprising (not, of course, that it has anything to do with the current crisis).  In addition to the AP summary, it appears that the SEC's ex post regulation of financial products would change, and the Fed and Treasury would get way more authority over non-commercial bank financial institutions.

If turf is your thing, then you should conclude that the Fed and the Treasury Department would, if these proposals were enacted, get massive new responsibilities, while the SEC, OTS, CFTC, and FDIC would lose authority.  My final rule of thumb is that when agencies are pitted against each other in a legislative fight, their constituencies tend not to be individual congressmen, though the chairs of committee charged with overseeing regulators may not want to see those regulators disappear.  Rather, the foot soldiers in these fights tend to be the lobbyists for regulated industries themselves.  So you have the policy arguments (shouldn't we, after all, merge the CFTC and SEC?) and the question about whether the Securities Industry Association will care about the reorg, or fear the power of the Fed.  I think we can assume that the hedge fund and derivatives industry lobbyists will oppose much more regulation, though they may welcome the idea that the putative regulator at least would not be the SEC.

The Washington Post is where you turn for legislative prospects Kremlinology; it puts the chances at passage, at least as things currently stand, as pretty low.  Check out the amusingly dismissive take by the head of the Office of Thrift Supervision, the S&L regulator which, somewhat mysteriously, has always been separate from the OCC, which regulates banks:

John M. Reich, director of the Office of Thrift Supervision, discounted the importance of the blueprint, which calls for his agency to be merged with the Office of the Comptroller of the Currency to streamline the regulation of similar types of financial firms. In an e-mail to his employees, which was obtained by The Washington Post, Reich wrote that "you might be wondering whether financial services restructuring is an idea whose time has finally come. I don't think so."

Reich suggested that the current arrangement, of multiple banking regulators, offers important checks and balances. "When the Treasury Department issues its recommendations, expect to see news stories and renewed questions about what the future will hold," Reich wrote. "Take note of the fanfare, then look back to [past failed efforts to restructure financial regulation] and resume the important work that you continue to do so well."

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