The Treasury Department has released its "Summary of Regulatory Proposal," which is far-reaching in its scope and implications. While it has been released in the shadow of recent adverse developments in the financial industry, it is incorrect to consider the entire Summary as a reaction to those events, because it actually has been under consideration and development for a long time. Even so, current events have been so dramatic that the Treasury no doubt felt that to issue the Summary without dealing with them would have left too many urgent matters hanging in the air, and the work product would have been incomplete and negatively received.
Historically in the United States, regulation of the insurance industry has been left to the individual States rather than being made subject to federal oversight. The result has been a hodgepodge of insurance regulation, requiring an insurance company to comply with the individual requirements of each State in which it wishes to do business. For the first time, a system of national registration is proposed, whereby insurance companies would have the option of joining a uniform federal regulatory system which would pre-empt State regulation. By itself, this proposal holds the promise of increased efficiency and cost savings.
Another element in the proposal is that the Commodity Futures Trading Commission be absorbed into the Securities Exchange Commission. It has been felt for a long time that expansion of the number of commodities which are subject to the CFTC has tended toward duplication of regulation, and that in the light of changing times and practices certain efficiencies can be realized if the two regulatory bodies were to be consolidated.
Many of the Treasury's longer-term recommendations involve the creation of new regulatory offices, thereby adding to the "alphabet soup" of agencies and offices which are the staff of life in governmental Washington. Undoubtedly, they will be considered and reviewed by Congress, which will likely be bombarded with special pleading by particular interests, each with its own ax to grind. The approval process may take years, and the outcome may be quite different from the Treasury's proposals, which admittedly are just starting points for discussion.
Congress and the general public will be most interested in those parts of the proposals which obviously were added in response to recent developments (such as the collapse of Bear Stearns). In its "Short-Term Recommendations," Treasury makes reference to an existing Executive Order which created the "President's Working Group on Financial Markets" (the "PWG"). The Treasury's Summary proposes that the PWG "should continue to serve as an ongoing inter-agency body to promote coordination and communication for financial policy," but that its functions should be broadened to include the entire financial sector rather than the financial markets alone.
Whereas the PWG now consists of the heads of the Treasury Department, the Federal Reserve, the SEC, and the CFTC, it would now be expanded to include the heads of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision. The PWG would continue as the coordinator for financial regulatory policy.
The Federal Deposit Insurance Corporation and the Office of Thrift Supervision would be combined into a single new agency.
By way of paying due attention to the present mortgage crisis, Treasury proposes the immediate creation of a new federal commission, the Mortgage Origination Commission, which will be charged with producing uniform minimum licensing qualification standards for state mortgage market participants. Quite obviously, Treasury wants fly-by-night mortgage originators to be brought under control by way of qualification, testing, and licensure, in an effort to prevent some of the abuses which led to the present crisis.
Heretofore, and presently, the Federal Reserve's "discount window" has been available only to depository institutions (i.e., banks) for short-term emergency loans. This effectively precluded Bear Stearns, which is not a bank, from seeking help directly from that source when, in effect, it faced a "run on the bank." Treasury proposes that the discount window be available to non-depository institutions as well as to banks. Had that been the case recently, the Fed would not have needed to resort to a device such as bringing in JPMorgan Chase as an intermediary. Fiction would be replaced by reality.
These two proposed short-term changes - licensing of mortgage originators and opening the discount window to non-banks - will receive great attention by Congress right away. Both would seem to be badly-needed improvements, the first of which might have substantially prevented the formation of the mortgage crisis in the first place, and the second of which could have helped to smooth it out after it came to light.
The author publishes an investment newsletter focusing on Japanese Candlesticks at http://candlewave.com/
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