The Bush administration is proposing the broadest overhaul of Wall Street regulation since the Great Depression. But the plan, to be unveiled tomorrow, has its genesis in a yearlong effort to limit Washington's role in the market.
And that DNA is evident in the fine print.
Although the proposal would impose the first regulation of hedge funds and private equity funds, that oversight would have a light touch, enabling the government to do little beyond collecting information - except in times of crisis.
The regulatory umbrella created in the 1930s would grow wider, with power concentrated in fewer agencies. But that authority would be limited, doing virtually nothing to regulate the new financial products whose unwise use has been a culprit in the crisis.
The plan hands vast new authority to the Federal Reserve, essentially formalizing what has been an improvised process over the past three weeks, but some fear that the central bank's role in creating the current mess will undercut its ability to clean it up.
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. He has worried that efforts to substantially tighten regulation could hamper the ability of American markets to compete with foreign rivals.
Some industry representatives embraced the plan. "The Treasury's report is an important step in reconciling America's confusing and often overlapping regulatory regimes," Robert G. Pickel, chief executive of the International Swaps and Derivatives Association, said yesterday. "Hopefully, this report can help streamline and improve the competitiveness of America's financial services sector."
As the full effect of the credit crisis becomes clearer, the political stakes are growing.
Paulson is taking a stand against critics who support even stricter regulations, while rejecting any notion that the crisis in the financial markets or the collapse of Bear Stearns can be laid at the administration's doorstep. In a draft of a speech to be delivered tomorrow, Paulson declares: "I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil."
And while he does acknowledge that the current regulatory structure might be outdated, Paulson's vision for the future echoes the traditional Republican view that new rules and agencies are no substitute for market discipline.
