The Bush administration on Monday rolled out the broadest overhaul of Wall Street regulation since the Great Depression, presenting a series of proposals that would, for the first time, create a set of federal regulators with authority over all players in the financial system. But the proposal will do almost nothing to regulate the alphabet soup of sophisticated financial products that have fueled the current financial crisis. And it will not rein in practices that have been linked to the mortgage crisis, like packaging risky loans into securities carrying the highest ratings. Hedge funds and private equity firms, which have enjoyed freedom for government oversight for years, would finally fall under federal watch. But that oversight would be minimal, enabling the government to do little beyond collecting information until a widescale financial crisis has already occurred. The checks and balances in the plan reflect the mindset of its architect, Treasury Secretary Henry M. Paulson Jr., who came to Washington after a long career on Wall Street, including a stint as chief executive of Goldman Sachs. Paulson has worried that any effort to substantially tighten regulation could hamper the ability of American markets to compete with foreign rivals - and, in fact, the proposal stemmed from a series of policy discussions that began well before the current tumult that has rocked the nation's economic underpinnings. The plan began last year as an effort by Mr. Paulson to streamline the different and sometimes clashing rules for commercial banks, savings and loans and nonbank mortgage lenders. “I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every 5 to 10 years,” Paulson said in his prepared remarks. “I am suggesting that we should and can have a structure that is designed for the world we live in, one that is more flexible.” Paulson also deflected blame for the current tumult away from his administration. “I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil,” he said. Under the plan, the Fed would receive some authority over Wall Street firms, but only when an investment bank's practices threatened the financial system as a whole. The Fed would be able to examine internal bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the overall financial system. The plan would also merge the Securities and Exchange Commission with the Commodity Futures Trading Commission, which regulates exchange-traded futures for oil, grains, currencies and the like. And the blueprint suggests several areas where the SEC should take a lighter approach to its oversight, including allowing stock exchanges greater leeway to regulate themselves. Some of the agencies within Washington's patchwork system of financial regulation would be consolidated. One new agency, which the Treasury calls a “prudential financial regulator,” would focus on the safety of financial institutions that have explicit government guarantees. The other watchdog would oversee business conduct to protect public investors and customers of financial firms. Congress would have to approve almost every element of the proposal, and Democratic leaders are already drafting their own bills to impose tougher supervision over Wall Street investment banks, hedge funds and the fast-growing market in derivatives like credit default swaps. Administration officials acknowledged last week that they did not expect the proposal to become law this year, but said they hoped it would help frame a policy debate that would extend well after the elections in November. __
