Federal banking proposal gets mixed reviews locally

Proposed sweeping regulatory changes for the banking, mortgage and insurance industries got mixed reviews locally Monday.

"I say no to about 80 percent of the proposals I've read," said Mark Kollar, founder of Rosemont-based Kollar Financial Strategies. "How will it affect my clients? I don't think it will."

Treasury Secretary Henry Paulson on Monday proposed the broadest overhaul of U.S. financial regulation since the Great Depression, saying American capitalism needs to be better prepared for "inevitable market disruptions."

"Our current regulatory regime is almost solely focused above ground at the tree level," Paulson said in remarks at the Treasury in Washington. "The real threat to market stability is below ground, at the root level where the health of financial firms is intertwined."

Northbrook-based Allstate Corp. said it endorses one element of the proposals: An optional for insurers to get a federal charter. Currently, insurers like Allstate are required to get insurance charters at the state level.

"As it is now, there are a lot of inefficiencies, like playing with 50 individual rule books," said Rick Halberg, spokesman for Allstate. "We also think it will result in more consistency in the level of federal protections."

But the Des Plaines-based Property Casualty Insurers Association of America issued a statement saying state-regulatory enforcement is preferable to federal oversight of the insurance industry.

"We also believe that we must take care to preserve and respect the prerogatives of the states, which by law and longstanding practice are the acknowledged regulators of the insurance industry," wrote David Sampson, president of the insurance industry association.

Paulson's 218-page "Blueprint for Regulatory Reform," commissioned two months before credit markets seized up in August, said more rules aren't the answer to the current period of turmoil.

The former chairman of Goldman Sachs Group Inc. said the system of regulating banks, securities firms and insurance companies is outmoded and the Federal Reserve should expand its oversight of financial services beyond banks.

One of the proposals calls for the creation of a federal Mortgage Origination Commission. But Marve Stockert, executive director of the Lombard-based Illinois Association of Mortgage Professionals, said he doubts such a commission would be able to oversee the 15,000 loan officers in Illinois alone.

"We endorse the idea, but I'm skeptical they can implement it," Stockert said.

Paulson acknowledged the proposed changes would take "many years to complete" and most will require legislative approval.

The U.S. presidential election makes it hard for the Bush administration to push through changes in its final year, said Arthur Levitt, who was chairman of the SEC from 1993 to 2001.

The Fed, which earlier this month engineered JPMorgan Chase & Co.'s purchase of Bear Stearns Cos. and became lender of last resort to the biggest bond dealers, would oversee "market stability,'' under the proposals Paulson unveiled.

The Securities and Exchange Commission, traditionally the main regulator of Wall Street firms, would be merged with the Commodity Futures Trading Commission. Paulson said the goal of that proposal is to combine "the best parts of both."

The Treasury recommended the Fed share authority over banks, securities firms and insurers in monitoring corporate disclosures, writing rules and stepping in to prevent economic crisis.

The plan makes a distinction between the Fed's "normal" lender-of-last-resort discount window to help banks meet short-term funding needs and "market stability" lending to help stave off funding shortages and panics. In that function, loans could be extended to federally chartered insurers and financial institutions.

Under the Treasury's proposal, the Fed would collect information from commercial banks, investment banks, insurance companies, hedge funds, private-equity firms and commodity-pool operators. Such a role would empower the central bank to go "any place" it needs to preserve financial stability, said Robert Steel, the Treasury's undersecretary for domestic finance.

Paulson said "with few exceptions, the recommendations in this blueprint should not and will not be implemented until after the present market difficulties are past."

Local community banks expressed opposition to the proposed banking reforms.

Independent Community Bankers of Illinois President Bob Wingert said the banking oversight reforms proposed by Paulson could significantly damage the community banking industry by federalizing banking enforcement instead of relying on individual states.

"We think it is seriously flawed," Wingert said.

Regulating banks and mortgages

Under the Bush administration's plan:

The Federal Reserve would be the sort of uber cop of financial market stability.

Day-to-day banking supervision would be consolidated into one agency, not five.

One super agency would be in charge of business conduct and consumer protection.

Mortgage Origination Commission would recommend minimum licensing standards for mortgage brokers.

Office of National Insurance would oversee those in the insurance industry under an optional federal charter.