Market 'reforms' a gift to Wall St.

It would be an overstatement to say Wall Street wrote the Paulson plan, but it sure had a lot of input. For example, the President's Working Group on Financial Markets, which is the ultimate source of the Treasury proposal, set up two advisory committees in September to give advice about industry best practices.

One committee was supposed to represent investors. It's the other, designed to represent the asset side, that gives the best example of who got a chair at the table while these proposals were being drafted. The committee was headed by Eric Mindich, a former Goldman Sachs partner who started Eton Park Capital in 2004. Others on this committee include D.E. Shaw, an international investment company with $35 billion in capital under management as of January, and Aetos Capital, founded in 1999 by James Allwin, the former head of Morgan Stanley's (MS, news, msgs) investment-management business.

What's missing here?

You can undoubtedly think of a few things that are conspicuous in their absence from the Paulson plan.

For example, I haven't been able to find any program for fixing the conflict-of-interest problems inherent in the current debt-rating system. Analysts at Standard & Poor's or Moody's (MCO, news, msgs) sit down across a table to work out a rating with the Wall Street folks who are both issuing the debt and paying the bill for the rating. That certainly has contributed to the debacle of AAA-rated mortgage-backed securities going into default at junk-bond rates.

And I don't see even the glimmer of a discussion about the advisability of giving the Federal Reserve more regulatory power when the U.S. central bank has proved so reluctant to use its existing powers in either the 2000 stock-market bubble or the 2006 real-estate bubble. The Fed was asleep at the switch during two different crises under two different Fed chairmen, so you'd think it would occur to someone that there's a problem with the Fed's culture or structure or something that makes the central bank a really bad choice for regulator.

Losing to London

But these aren't the issues on Wall Street's mind. They know this crisis will pass -- aided by a lot of taxpayer money, in all likelihood -- and that the real threat to Wall Street is the rising competition with overseas financial markets. Especially London.

This is the stuff of Wall Street's nightmares: Just a day after Paulson unveiled his plan, Japan's largest brokerage, Nomura Holdings (NMR, news, msgs), announced it was picking London over New York as the headquarters for its international operations. Nomura CEO Kenichi Watanabe rubbed salt in the wound by saying that London would be the financial factory for originating products that the investment bank would then export to the rest of the world. Nomura's London head count has climbed to 1,400 from 1,250 at the beginning of 2008. In New York, the numbers have declined to about 900 from 1,322 since the start of 2007.

Nomura's decision is just part of a pattern. London is now home to almost 50% of global trading in derivatives and 70% of the global trading market for already-issued bonds (called the secondary market). In 2007, 419 new companies listed on the London Stock Exchange versus 36 on the New York Stock Exchange and 138 on the Nasdaq.

Wall Street blames its losses on London's looser and more unified regulatory structure. (And on the Sarbanes-Oxley rules the U.S. put into place in the aftermath of Enron and other scandals from the 2000 market bust.) The team that produced the Paulson plan began as a working group looking at ways to increase the competitiveness of U.S. financial markets. The direction of the final product owes more to those roots than it does to the current crisis.

Wrong focus?

Wall Street might have a bigger problem than regulation, though. It's called the U.S. dollar. Nomura's CEO went out of his way to say New York was less friendly to international companies than London because of its cultural bias toward the dollar. In London, he said, Nomura would be able to comfortably work in 38 currencies. That's not a small point in a world where so many investors and countries are looking for ways to cut their exposure to a U.S. currency that seems to be in a long-term decline.

If the dollar is the real problem, then the Paulson plan won't do much to reverse the decline in Wall Street's market share.

Makes you wish they'd just concentrate on fixing some of the problems that led us to the current crisis in our financial markets.

Continued: Jubak's Picks' first-quarter performance

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