CBS News

Sweeping Overhaul Of Fed Proposed

Bush Administration Would Strengthen Reserve's Oversight Of
Financial Institutions

WASHINGTON, March 29, 2008

(CBS/AP) The Treasury Department wants to empower
the Federal Reserve to force American businesses to clean up their acts: no more
bad loans, no more over-extended investments.

The Bush administration is
proposing a sweeping overhaul of the way the government regulates the nation's
financial services industry from banks and securities firms to mortgage brokers
and insurance companies.

CBS News correspondent Kimberly Dozier reports that the plan to be announced Monday, a blueprint of which has been in
development for months, would give the Federal Reserve stronger powers of
oversight, deputizing teams of Fed "hit men" to hone in on any financial firm
they suspect of engaging in risky business - the kind that turns Wall Street
bearish and makes it hard to fill the shopping basket or keep a roof over your
head.

"Our focus, the focus of policymakers, is on reducing the
spillover into the real economy from turbulence and disruptions in our financial
markets," Treasury Secretary Henry Paulson said on The Early Show earlier this month.

The plan would also streamline some of the other
government agencies regulating finance, merging securities and commodities
oversight, for instance.

But Treasury officials won't be calling for any
new rules or regulations. Their proposal would simply give them greater powers
to examine a company's books, essentially the equivalent of a Big Brother "I'm
watching you."

Critics are already saying that none of this would have
stopped the sub-prime mortgage crisis, that has led to record house foreclosures
across the country.

Dozier reports this plan may not be enough to
satisfy lawmakers on Capitol Hill who have to sign off on it - and many of them
are already hard at work on their own proposals, which would impose a lot more
new regulation.

The administration divided its recommendations into
short-term goals that could be adopted quickly, intermediate recommendations and
an "optimal" regulatory framework, which contains a radical restructuring of how
the government supervises banks and other financial institutions.

The
recommendations are the product of a yearlong review that was begun in an effort
to modernize the government's regulatory structure so that the country's
financial services industries could better compete in a fast-changing global
economy.

The plan also seeks to address problems that have been brought
to light in recent months since a severe credit crisis began roiling financial
markets last August.

That crisis has already claimed as its biggest
victim Bear Stearns, the nation's fifth-largest investment bank, which came to
the brink of collapse before a government-arranged purchase by JP Morgan Chase
& Co.

"I am not suggesting that more regulation is the answer, or
even that more effective regulation can prevent the periods of financial market
stress that seem to occur every five to 10 years," Paulson will say in the
remarks he will deliver on Monday.

But the plan does seek to
address problems highlighted by the current crisis in which the Fed in an
unprecedented move has begun making direct loans to securities firms in an
effort to shore up a system badly shaken by billions of dollars of losses
stemming from sour mortgage loans.

The proposal would allow the Fed, in
its new role as "market stability regulator," to dispatch examiners to check the
books not just of commercial banks but of all segments of the financial services
industry.

The administration proposal would also consolidate the current
scheme of bank regulation by shutting down the Office of Thrift Supervision and
transferring its functions to the Office of the Comptroller of the Currency,
which regulates nationally chartered banks.

The plan recommends that the
Securities and Exchange Commission, which regulates stock trading, be merged
with the Commodity Futures Trading Commission, which regulates futures trades
for oil, grains and various other commodities.

The plan would create a
national regulator for the insurance industry, which is now largely governed by
the states, and would create a Mortgage Origination Commission to try to address
the abuses exposed in the current tidal wave of mortgage defaults.

The
role Federal Reserve Chairman Ben Bernanke and his colleagues have been playing
to shore up the financial system would be formalized in the administration plan
by giving Fed officials greater power to detect where threats might be lurking
in the system.

The proposal is certain to generate intense scrutiny in
Congress and within the financial services industry, where past efforts to
change how regulation is handled have met with fierce resistance.

Many
Democrats in Congress are already pushing tougher proposals that would impose
much stricter regulation in an effort to crack down on abuses exposed by the
current credit crisis.

Senator Charles Schumer, a New York Democrat,
said he believed Paulson's plan offered some valid suggestions.

"In
broad outlines, we agree with large parts of Secretary Paulson's plan," Schumer,
chairman of the Joint Economic Committee, said in a statement. "He is on the
money when he calls for a more unified regulatory structure, although we would
prefer a single regulator to the three he proposes."

Under Paulson's
approach, the long-term goal would be to designate the Fed as market stability
regulator and to have a financial regulator who would focus on financial
institutions that operate with government guarantees such as providing deposit
insurance.

The administration plan, which was first reported by The New
York Times on its Web site Friday night, also proposes a business conduct
regulator who would be in charge of overseeing consumer protection issues.


The initial reaction from the securities industry was also positive.


"Treasury has delivered a thoughtful and sweeping plan which should
provoke intense discussion, debate and potential legislative changes," said Tim
Ryan, president of the Securities Industry and Financial Markets Association.


"Our present regulatory framework was born of Depression-era events and
is not well suited for today's environment where billions of dollars race across
the globe with the click of a mouse," Ryan said in a statement.

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Reserved. The Associated Press contributed to this report.