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Treasury Blueprint for Regulatory Reform Likely to Get Longer Look

This March, the Treasury Department released its Blueprint for a Modernized Financial Regulatory Structure.  The Blueprint called for a thorough restructuring – and even deeper federalization – of the financial services regulatory system.  The Blueprint called for, among other things: a new federal agency to oversee mortgage origination; optional federal chartering for insurance companies; consolidating federal banking oversight with one agency, regardless of whether a bank is federally or state chartered; merging the SEC and the CFTC; and creating a triple-headed scheme of federal regulation, with single agencies having oversight for market stability, “prudential” oversight of government-backed institutions, and business conduct.

 

At the time the Blueprint was released, the financial services and securities industry was headed for rough water:  the auction-rate securities market had cratered; subprime mortgage portfolios and mortgage backed securities were clearly in trouble; concerns were bubbling about naked short selling; Bear Stearns collapsed, and was sold.

 

Those were the days.  Since then, Lehman Brothers imploded.  Merrill Lynch was sold at a firesale.  AIG required emergency resuscitation to survive. Subprime lending and overinvestment (and misvaluation) of subprime-backed securities has proven to be the biggest disaster, and even more damaging, since the junk bond/leveraged buyout mania that fueled and then destroyed Drexel Burnham Lambert in the 1980s.  And Congress is on the verge of passing a staggering bailout package to try to bring some sort of order to the market. 

 

In this environment, the push for a regulatory overhaul will only be more intense.  With a new administration on the horizon, the demand for substantial increases in the scope of federal regulation will make change inevitable, regardless of whether it is an Obama or McCain administration.  The Treasury Blueprint  will, undoubtedly, not be the exact model for a new regulatory scheme. However, we can be sure that federal oversight will become both broader and deeper.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on September 25, 2008 (boomark / email).