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UPDATE: Treasury Secretary To Call For Sweeping Regulation Overhaul
Dow Jones

NEW YORK (Dow Jones) -- U.S. Treasury Secretary Henry Paulson is calling for extensive, wide-ranging reforms to the way the government regulates financial markets, including proposals to give the Federal Reserve more power and create new bodies to monitor mortgages and other transactions.

Paulson is slated to formally present the Treasury Department's new plan in a speech scheduled for Monday morning.

Among the many items in the plan is a proposal to make the Fed "responsible for overall issues of financial market stability," according to the executive summary.

Paulson's recommendations come on the heels of the Fed and Treasury's dramatic bailout of Bear Stearns Cos (BSC) and other emergency acts, including allowing investment banks to borrow directly from the Fed.

In addition to the Fed's current powers to provide liquidity through its monetary policy tools, the central bank "should be provided with a different, yet critically important regulatory role and broad powers focusing on the overall financial system," the executive summary said.

The new role for the central bank would include "the responsibility and authority to gather appropriate information, disclose information, collaborate with the other regulators on rule writing, and take corrective actions when necessary in the interest of overall financial market stability," it said, adding that this was a "long-term" component of the plan.

A Fed spokesman welcomed the blueprint.

"The Treasury's report presents a timely and thoughtful analysis and is an important first step in the complex task of modernizing our financial and regulatory architecture. We look forward to working with the Congress and others to help develop a policy framework that will enhance financial and economic stability," the spokesman said.

Some now, some later

The proposal is divided into "short-term" and longer term proposals.

Under proposals for quick action, the Treasury suggested that a new Mortgage Origination Commission be created to develop standards for state mortgage market participants. The body would be run by a presidential appointee and a board with representatives from the Fed, the Federal Deposit Insurance Corporation and other existing government bureaus.

In the longer term, the blueprint would merge some regulatory bodies.

Under the plan, the Securities and Exchange Commission and the Commodity Futures Trading Commission would be combined into a single market-watching body.

Similarly, the Office of Thrift Supervision -- which currently oversees federal thrift banks and credit unions -- would be folded into the Office of Comptroller of the Currency to create a unified banking regulator.

Ultimately, this would leave the U.S. with three agencies instead of the fragmentary system.

One agency, the Fed, would oversee market stability. The second would be a prudential regulator of banks, and the third would oversee business conducted by financial firms.

The plan also calls for beefing up the President's Working Group on Financial Markets, an interagency body founded in the aftermath of the 1987 stock market crash. The plan's summary said the group's "focus should be broadened to include the entire financial sector, rather than solely financial markets."

Not everyone pleased

Although the plan was advertised as a way to bring stability to financial markets, experts said the proposal doesn't get at the roots of the current crisis.

Democrats in Congress said the blueprint was not as far-reaching as it could have been.

"Very complex financial instruments have evolved in recent years, like CDOs [ collateralized debt obligations] and credit default swaps, which pose potential problems in terms of systemic risk. The Treasury Department should address these issues as well," said Sen. Charles Schumer, D-N.Y.

Treasury seemed resigned to conflict with Congress and interest groups, saying that its blueprint "was a first step on a long path."

How far the proposals go this year depend on the reaction of Rep. Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, and Sen. Chris Dodd, the Connecticut Democrat who chairs the Senate Banking panel.

Frank has already championed the idea of a stronger Fed role over investment banks.


  (END) Dow Jones Newswires
  03-31-08 0048ET
  Copyright (c) 2008 Dow Jones & Company, Inc.
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