Wall Street's appraisal of Treasury Secretary Hank Paulson's much-ballyhooed plan for overhauling the United States financial regulatory structure? If we accept the movement of stock market indexes as evidence, the reaction was a mild shrug. The Dow Jones Industrial Average rose 46 points.
Given the huge play that the Wall Street Journal and the New York Times are lavishing on Paulson's plan, you'd think the mood would be a little more tense. After years of looking the other way, the sheriff is supposed back on the beat, promising to comprehensively change how the government oversees financial markets. Yay! No more distressing repeats of the embarrassing market turmoil that has plagued the global financial system since last August. The party's over, boys. We'll have no more of that get-rich-quick flimflam that you love so much.
Well, actually, no. My guess is that the main reason Wall Street isn't alarmed is that it knows quite well it has nothing to fear from Paulson's plan to, as Paul Krugman wrote in his column Monday, comprehensively rejigger the "org chart" for the federal government's regulatory apparatus. And as proof of that, you need look no further than the section of the executive summary of the 212-page "Blueprint for a Modernized Regulatory Structure" that is devoted to a consideration of "Futures and Securities."
As BusinessWeek's Michael Mandel pointed out in his blog Monday morning, one key paragraph of that section reads as follows:
The SEC should also consider streamlining the approval for any securities products common to the marketplace as the agency did in a 1998 rulemaking vis-a-vis certain derivatives securities products. An updated, streamlined, and expedited approval process will allow U.S. securities firms to remain competitive with the over-the-counter markets and international institutions and increase product innovation and investor choice.
Read that over again. Slowly. Does it sound like regulation? Not to Mandel, and not to me. It sounds like the plan is to actually make it easier for financial institutions to create the kinds of complex financial instruments that helped to create the mess that markets are in today. When you streamline the regulations so as to expedite the approval process what you are doing is enabling less oversight of an industry that has proven itself manifestly incapable of managing its own risk exposure.
But wait, it gets worse. One recommendation in the "Blueprint" is to merge the SEC and the Commodity Futures Trading Commission so that there will be one regulatory institution with responsibility for both the futures and securities markets. Fair enough, even the most stringent critics of Paulson's proposals agree that there are too many different government regulatory bodies with overlapping responsibilities. But the "core principles" of this new, super-powered SEC "should be modeled after the core principles adopted for futures exchanges and clearing organizations under the Commodity Futures Modernization Act ("CFMA"). By imbuing the SEC with a regulatory regime more conducive to the modern marketplace, a merger between the agencies will proceed more smoothly."
The problem? The CFMA, which Congress passed in 2000, was written at the behest of Wall Street, and designed under a less-regulation-is-better ethos that can be held largely responsible for the excessive "innovation" and utter irresponsibility that has characterized the last decade. The CFMA basically told derivatives traders to regulate themselves. Which they did.
And we've all seen the result.
If the CFMA is to be considered the model for future regulatory oversight of the financial industry then no wonder Wall Street shrugged. Paulson's message to his former colleagues: business as usual.