Overhaul may be overdue
NEW YORK -- The Bush administration's plan to overhaul the financial regulatory system was described by Wall Street players Monday as an important first step but by no means a solution to the bigger problems facing the industry.
Treasury Secretary Henry Paulson released the 218-page plan that will consolidate more regulatory power in the Federal Reserve. The plan will give the central bank more power to protect the stability of the entire financial system, merging day-to-day bank supervision into one agency.
Wall Street trade groups praised the proposal, which gives the Fed the ability to look at investment banks' books -- and only act if a problem threatens the market. However, some analysts feel it does not go far enough toward preventing the kind of over exposure to risky investments that crippled Bear Stearns Cos.
"I don't think that the proposed changes will have a significant effect … I do think it's a step in the right direction," said Michael James, managing director of equity trading at Wedbush Morgan. "There's always going to be people opposing changes on Wall Street. I personally don't feel that these changes would be a bad thing."
Indeed, the government's plan -- which needs congressional approval -- takes a soft approach to monitoring investment banks. Already Democrats like House Financial Services Committee Chairman Barney Frank, who is working on his own regulatory revamp, said the proposal won't give the Fed enough authority.
Those critical of the plan say more effort should be put into limiting some of the risk investment banks take on complex investments, such as asset-backed securities. Global banks have lost almost $200 billion since last year's credit crisis began and are expected to hemorrhage more this year.
What will change for investment banks is they will need to become more transparent and allow the government to have more access to their books. That is already for the most part being done by the Securities and Exchange Commission.
The proposal would allow the Fed to intervene if investment banks become overexposed or perhaps are too leveraged. But, for the most part, the Fed would only intervene in cases where problems could put the entire market at risk -- such as with Bear Stearns.
"This isn't going to create a new role for the Fed as some sort of panacea to eliminate what is characterized as systemic risk," said Michael Zuppone, chair of the securities and capital markets practice at international law firm Paul Hastings.
He said the current proposal is almost like "creating a homeland security department for the financial services sector." President Bush created the agency after the terrorist attacks of 2001 by consolidating a number separate security agencies.
The government's proposal for bank oversight will also string together different agencies. For instance, the plan proposes the merger of the Commodity Futures Trading Commission and the Securities and Exchange Commission -- blending them to monitor U.S. futures, commodities and equities markets.
CFTC acting Chairman Walt Lukken said in a statement the differences between the two agencies are not accidental and that trying to "homogenize the two regulatory regimes is certain to cause more harm than good."
"Although the creation of a new unified regulator for securities and futures could bring efficiencies, the trade-offs of such a significant undertaking should be weighed carefully given these turbulent economic times and the competitive global advantage currently enjoyed by the U.S. futures industry," he said.
There is also some concern the Fed simply isn't big enough to keep the financial system going. The nation's three biggest banks and four biggest investment banks have about $10 trillion in assets.
"The risk is it may be too much for any one agency to handle," said Michael Panzner, a strategist and financial author. "It's not going to stop house prices from falling and it's not going to stop the credit bubble from continuing to unravel."