Treasury regulatory overhaul plan sparks debate

By David Lawder and Mark Felsenthal

WASHINGTON (Reuters) - 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."