WASHINGTON Treasury Secretary Henry Paulson revealed sweeping plans on Monday for streamlining a hodgepodge of financial regulations that are blamed for allowing the U.S. mortgage crisis to balloon into a full-blown economic threat.
The proposals, in the form of a 218-page "blueprint" that was started before markets unraveled in August, offer no quick fix for the credit contraction that threatens to tip the U.S. economy into recession. The plan was already meeting some resistance from Capitol Hill and competing corners of the government bureaucracy as a potentially protracted debate took shape.
Under the proposals, the current patchwork of as many as seven federal regulators would be consolidated under three agencies: the U.S. Federal Reserve, a newly created financial regulator, and a third agency for consumer protection and business practices.
Stocks ended the day up modestly as investors expressed cautious optimism that the government stood ready to help stabilize volatile financial markets. Treasury debt prices also rose. The dollar ticked higher against a basket of currencies.
Paulson acknowledged that most of the proposals would not be enacted until after the current troubles have passed, perhaps long after President George W. Bush leaves office in January.
The regulatory blueprint proposes eventually vesting new powers in the Federal Reserve as a "market stability regulator" -- effectively formalizing a role the central bank adopted recently by expanding the list of financial firms that can borrow directly.
It would give the Fed authority to demand that all financial system participants supply it with full information on their activities and grant the Fed a right to collaborate with other regulators in setting rules for their behavior.
The Bush administration has faced political pressure from critics who blame lax regulatory oversight for the mortgage mess. Paulson, a 30-year Wall Street veteran, stressed that regulation must be light enough to keep markets innovative, and said those who tried to label the blueprint as advocating more or less regulation were "oversimplifying."
"I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years," he said.
"I am suggesting that we should and can have a structure that is ... more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions, one that will better protect investors and consumers, and one that will enable U.S. capital markets to remain the most competitive in the world," he said.
In a nod to the likely turf battles to come, a Treasury official said the department was "trying not to let the political challenges shape how we see things."
Walt Lukken, acting chairman of the Commodity Futures Trading Commission, which under Treasury's plan would be merged with the Securities and Exchange Commission, said the CFTC had specialized expertise that could be "jeopardized" in a larger regulatory agency.
Sen. Christopher Dodd, the Connecticut Democrat and chairman of the influential Senate Banking Committee, said the plan did not address the root problems of the financial turmoil -- namely souring subprime mortgages and rising foreclosures..
"To talk about overhauling the regulatory system is a wonderful idea. But frankly it doesn't relate to the issues we're grappling with," Dodd told reporters on a conference call. "It's not even close to the strike zone."
On Wall Street, investors concluded that it would be some time before any substantive changes were made.
"Since most of what's in the Treasury plan will take new law, its fate will be determined by another Congress with a new president in a different financial market two years from now," said Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington.
Since problems surfaced in August with rising failure rates on subprime mortgage loans to less credit-worthy borrowers, credit markets have come near seizure several times. Public anger has mounted at what was perceived as slack enforcement of existing rules.
Many mortgage loans were made without basic fact-checking. Some lenders did not verify whether borrowers actually earned the incomes they claimed or whether they were steered into inappropriate loans with low initial "teaser" rates that soon reset higher, requiring much larger monthly payments.
Treasury also recommends getting rid of a Depression-era charter for thrifts, which was intended to make it easier to obtain mortgage loans, saying it is no longer necessary. That would mean closing the Office of Thrift Supervision and transferring its duties to the Office of the Comptroller of the Currency, which oversees national banks.
In one important change to try to clamp down on mortgage brokers, the Treasury is urging the establishment of a "mortgage origination commission" made up of regulatory agency representatives that would be able to set licensing standards for mortgage brokers.
That would boost consumer protection by increasing scrutiny of the personal conduct, disciplinary history and educational qualifications of the brokers, who are frequently the first contact for borrowers.