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It's a scam, a fraud, a charade, a lie.
But what else did you expect from a package of "reforms" fronted by a Treasury secretary who was formerly the CEO of investment bank Goldman Sachs (GS, news, msgs), a package written by Treasury Department officials with input from Wall Street's biggest players? It's no coincidence that many of the plan's ideas echo those peddled by Wall Street lobbyists for years in the halls of Congress.
The plan throws the public and the politicians a few bones, but in reality the reforms have almost nothing to do with fixing the problems in the financial markets that have produced the current crisis. Instead, they're an astutely timed effort to use the current crisis to give Wall Street what it has wanted for years: less regulation.
Oh, to be sure, Wall Street and Treasury Secretary Henry Paulson are pretty adept at putting lipstick on a pig. The Federal Reserve would get broad new powers, we're told. The plan would combine regulatory agencies, ending overlap that, the plan's authors claim, contributed to the current crisis. Hedge funds and the other new kinds of investment vehicles that are at the heart of the current mess would have to supply the Fed with more information about their activities.
The real plan
But that's all just window dressing. Let's look at what the Paulson plan would actually do:Merge the Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission. That's not a bad idea. It doesn't really make sense to have one agency regulate the securities markets and another regulate the market in financial futures.
But the merger also would shift some of the SEC's key regulatory powers to industry groups -- so-called self-regulatory organizations. For example, investment advisers no longer would be directly regulated by the SEC but by a yet-to-be-established trade group responsible for enforcing standards of conduct and behavior.
In general, the merger would replace the prescriptive rules of the SEC with the futures commission's "principle-based" method of regulation. The former tells Wall Street what to do and precisely how to do it, while the latter sets general goals but not how to achieve them. London's financial markets have been gaining market share at New York's expense, and Wall Street has come to see London's regulatory system as a key competitive advantage.
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Set up a federal insurance charter. This would allow the nation's biggest insurance companies to be regulated by one federal agency rather than by myriad state agencies. Not all state insurance regulators are equal; some are extremely lax while others are aggressive advocates for consumers in their states. In effect, because the federal charter would pre-empt state regulation, this "reform" would let big insurance companies get out from under the glare of the most active state commissioners.
A good analogy is the way that relatively lax federal environmental standards restrain the ability of more aggressive states, such as California, to adopt stricter rules. Of course, this "reform" has no connection to the current crisis, but it is a long-term goal of the biggest players in the insurance industry.
Set up new federal standards for mortgages but leave the authority over the subprime-mortgage market where it is now -- with the Federal Reserve. One reason to leave these powers with the Fed, the Paulson plan says, is that the Fed has in place a comprehensive process to balance the costs and benefits of new regulations. Oh, really? That's worked out great so far, hasn't it?
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Give "nonbank" banks access to the Federal Reserve's discount window to head off any future liquidity crisis and, in exchange, require more information from these investment banks, hedge funds and other specialized investment vehicles. The nation's commercial banks long have been able to borrow short-term funds from the Fed in a pinch. In exchange, though, these institutions face strict regulations on how much capital they need to have to back their lending. The Paulson plan would leave Lehman Bros. (LEH, news, msgs), Goldman Sachs, Bear Stearns (BSC, news, msgs) and others of the nonbank financial world unregulated but give them the same right to tap the Fed for cash.
Ignore the crying need for better regulation of derivatives. The call for nonbank-bank transparency is a bad joke in the context of a world where nobody can tell who owes whom how much in trillions of dollars of derivative contracts. The Paulson plan would leave unregulated the markets such as those for credit default swaps, the "private" contracts that "insure" against a borrower going under.
Seems like a risk, no? Didn't the Federal Reserve just organize a takeover of Bear Stearns because that company was party to so many of these private contracts that the Fed was afraid to let Bear Stearns and its creditors quickly liquidate its portfolio?
Continued: Wall Street has its hands in the cookie jar
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