Convictions: Slate's blog on legal issues

Wall Street, meet the unitary executive

On Monday, Treasury Secretary Hank Paulson unveiled the Bush administration's "Blueprint for Stronger Regulatory Structure," its latest response to the sub-prime mortgage crisis and severe case of influenza affecting America's financial markets.  No surprise, the plan calls for some fairly sweeping changes in the way the SEC, Federal Reserve, and other agencies regulate America's financial markets.  According to the Post:

. . . Treasury Secretary Henry M. Paulson Jr. said he also plans to ask Congress this year to set up a new agency to oversee mortgage lending and take action to enhance his department's role as the chief regulator of financial markets.

The Treasury's initiatives seek to sweep away the current patchwork of regulation over the coming decade in favor of three more powerful agencies to oversee banking, market stability, and consumer and investor protection. The plan's authors have argued that such changes are needed because government oversight has not kept up with the pace of financial innovation.

Paulson acknowledged that the recommendations would not prevent future crises but said that they would make government more nimble in addressing them. "We should and can have a structure that is designed for the world we live in," he said in a speech at the Treasury.

Uh huh.  So, let me make sure I have this right.  The administration embraced deregulation and free market theory as if it were handed down from Mt. Sinai.  It then sat idly by while the sub-prime mortgage market imploded, and watched as that market's failure trickled up into other sectors of the economy.  All the while, this admistration spent taxpayer money like a drunken sailor (to use Sen. John McCain's memorable phrase), running up the federal debt and mortgaging our grandchildren's future.  And the administration pursued wars in Iraq and Afghanistan likely to cost the country $3 trillion.  And now, they want the people trust the Bush administraiton by giving it more power over the American economy?

Wall Street, meet the unitary executive.  Another day, another crisis, another power grab.

Remember SOX!

According to the New York Times, the Treasury Department is pushing a plan which broaden and deepen the reach of the federal government into America's financial markets:

According to a summary provided by the administration, the plan would consolidate an alphabet soup of banking and securities regulators into a powerful trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.

While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it carefully avoids a call for tighter regulation.

The plan would not rein in practices that have been linked to the housing and mortgage crisis, like packaging risky subprime mortgages into securities carrying the highest ratings.

The plan would give the Fed some authority over Wall Street firms, but only when an investment bank’s practices threatened the entire financial system.

And the plan does not recommend tighter rules over the vast and largely unregulated markets for risk sharing and hedging, like credit default swaps, which are supposed to insure lenders against loss but became a speculative instrument themselves and gave many institutions a false sense of security.

Parts of the plan could reduce the power of the Securities and Exchange Commission, which is charged with maintaining orderly stock and bond markets and protecting investors. The plan would merge the S.E.C. with the Commodity Futures Trading Commission, which regulates exchange-traded futures for oil, grains, currencies and the like.

All of which may sound good now, in the heat of the moment.  But so did Sarbanes-Oxley ("SOX") when it was first proposed -- and according to UCLA law professor Stephen Bainbridge, the results haven't been great: "The lesson is that when something MUST be done, the best thing to do may be nothing. Not, to be sure, the politically wise thing, but the right thing. Unfortunately, we’re in the same sort of environment that led to SOX."