MercoPress. South Atlantic News Agency

Paulson proposes biggest overhaul of US financial sector

Paulson wants the Fed. to play a stabilazing role in markets

The United States Treasury revealed on Monday its blueprint for the biggest overhaul of regulation of the financial sector since the stock market crash of 1929 and the ensuing Great Depression.

The plan would change how the US government regulates thousands of businesses from the biggest banks and investment houses down to the local insurance agent and mortgage broker. Treasury Secretary Henry Paulson unveiled the 218-page plan in a speech at the Treasury Department declaring "a strong financial system is vitally important, not for Wall Street, not for bankers, but for working Americans." However Paulson rejected claims that existing regulations have led to the turmoil and said the plan, which needs Congressional approval, should not be implemented until current difficulties roiling financial markets are resolved. The plan would beef up the powers of the Federal Reserve, which earlier this month engineered the purchase of troubled investment bank Bear Stearns by JP Morgan. It would give it greater oversight of all kinds of financial institutions from hedge funds to insurance companies. "Government has a responsibility to make sure our financial system is regulated effectively. And in this area, we can do a better job," Mr Paulson said. The government says the proposals are an effort to help US firms become more competitive in the global economy. The report was commissioned before credit markets began to seize up in August last year. Fears of exposure to high-risk assets have made banks and financial institutions increasingly reluctant to lend to each other. Bear Stearns got into trouble when other banks refused to lend it money over fears that it had too many bad debts due to the sub-prime mortgage crisis. The proposals give sweeping powers to the Federal Reserve - enabling it to tackle the kind of turmoil that is currently hitting financial markets. The Fed would become "market stability regulator" - allowing it to examine the books of any financial institution deemed to potentially threaten the stability of the financial system. The Fed has been forced to a series of dramatic steps in the past month to bail out financial firms that have reported more than 200 billion dollars in write-downs over mortgage-backed securities. The overhaul will see a new organization set up to take over the role of the five separate banking regulators. A body to regulate business conduct and consumer protection is also likely to be proposed. "Our current regulatory structure was not built to address the modern financial system" Mr Paulson said. "We should and can have a structure that is designed for the world we live in." "One that is more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions and one that will better protect investors and consumers." Among other measures proposed is the creation of a commission to establish stricter criteria for firms involved in the mortgage market. Mortgages for sub-prime borrowers, those with poor or patchy credit histories, have been at the heart of the recent market turmoil that has resulted in billions of losses for big banks. A merger of the Securities and Exchange Commission, which regulates companies with publicly traded shares, with the Commodities Futures Trading Commission, which oversees commodities trading, is also part of the proposals. The review into the sector began early in 2007 after the financial services industry complained that over-regulation from Washington meant US firms were not as globally competitive as they could be. In a related development, Britain and the United States plan a joint Anglo-US financial working group to improve monitoring of the international financial system, the London Financial Times reported Monday. According to the paper, British Chancellor of the Exchequer Alistair Darling and Paulson agreed last week to set up the group, which is to prepare proposals for better monitoring and regulation of the international financial markets.