In financial crisis, U.S. Treasury chief turns to the Fed

In financial crisis, U.S. Treasury chief turns to the Fed
Bush administration plan would shuffle U.S. regulatory responsibilities
Last Updated: Monday, March 31, 2008 | 1:27 PM ET CBC News

With parts of the financial system crumbling around him, U.S. Treasury Secretary Henry Paulson announced a plan Monday to shuffle regulatory agencies and give the Federal Reserve responsibility for ensuring market stability.

Paulson, a former Wall Street investment banker, unveiled a 218-page "Blueprint for a Modernized Financial Regulatory Structure" aimed partly at dealing with problems caused by mutant investments developed on Wall Street.

The plan, in the works since last June, seeks to close the barn door after one of the worst financial crises since the Depression. A disaster that began with high-risk "sub-prime" mortgages has left millions of families at risk of losing their homes, littered the landscape with bad debts and led to a Federal Reserve-backed bailout of a major Wall Street firm, Bear Stearns.

Paulson said he does not "blame our regulatory structure for the current market turmoil," although the existing system "can allow important regulatory matters to fall through the cracks."

His plan, much of which would require new legislation, would combine five federal agencies that regulate deposit-taking institutions.

It would merge the Commodity Futures Trading Commission with the Securities and Exchange Commission and create a new "conduct of business regulator" to assume many of the roles of the CFTC, the SEC and insurance and banking regulators.

The Federal Reserve, the U.S. central bank, would take on a "different yet critically important regulatory role with broad powers focusing on the overall financial system," Paulson said.

"To do its job as the market stability regulator, the Fed would have to be able to evaluate the capital, liquidity, and margin practices across the financial system and their potential impact on overall financial stability," he said. "The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability."

Speaking to reporters, Paulson said the Fed would try to head off new disasters caused by complicated and poorly understood investments.

He said he was "not looking to outlaw innovation" in securities markets, but he worries about "excess complexity."