Hank Paulson’s APRIL FOOL’S JOKE.
That’s how US Treasury Secretary Paulson’s latest plan, unveiled yesterday is being described by at least two columnists this morning. I have to chuckle as well. When I first heard about it yesterday I assumed it was another step in the government and Fed’s attempts to unlock the seized up financial markets. Or some new regulations to keep the same type of debacle from happening in the future. But no, it’s just the opposite! Instead of more regulation, its less regulation. Seems that BEFORE everything hit the fan last August, the subprime mess, the CDO expose, the huge bank write-offs, investment banks stopping supporting the auction-rate market, etc., Secretary Paulson had commissioned a study of how to modernize regulation of the financial services industries. Well, the results out yesterday propose that the Securities and Exchange Commission - set up AFTER the 1929 Great Crash and put in place to prevent future financial breakdowns - be sort of eliminated, merged with the Commodity Futures Trading Commission. And that the Federal Reserve Bank take over that regulatory role. The same Federal Reserve Bank, ex its regulation-anathematized chairman Alan Greenspan, which decided to NOT look into subprime a few years back even after one of their governors suggested such. And this new plan would be modeled after the Financial Services Authority over in England, the authority which sat on the sidelines until the first run on a English bank in 100 years happened. Net, net, and to put it nicely, Secretary Paulson, ex of Goldman Sachs, is recommending a “lighter touch” as its being delicately put toward financial services regulation. More bluntly it means less financial services regulation, not more as most are now calling for to prevent this same sort of out of control, “Greed Gone Wild” situation we’re now suffering thru happening again. Others are calling the plan Wall Street’s “dream come true.” Schwartz View: I have to agree with the University of Maryland School of Law Professor Michael Greenberger on Bloomberg yesterday. Professor Greenberger says regulatory reform is “desperately needed” while this plan is “reform in name only.” This plan takes power away from the SEC and state regulators and is a move toward more deregulation, continuing down the road which got us in trouble in the first place. Seems like that’s where the root problem lies. In today’s new, complex, opaque and almost totally unregulated investment instruments. Ironically, these same derivatives which caused this problem would not be regulated under Paulson’s plan. My big worry is these asset-backed/collaterized debt obligations (CDO’s) or defacto credit default swaps as Mr. Greenberger describes them are now being used by the Federal Reserve to loan money. The US taxpayer is now banking on them! Pretty wild! And yet, Secretary Paulson says we need more of the same. Thankfully, most observers feel this proposal has no chance of going anyway. Guess the US Treasury Department had to propose something after spending so much time and effort on the study which began when everything was hunky-dory and the juicy fees were floating all boats, the money center banks, investment banks, private equity, etc.. Still it shows the mindset of the powers that be before the realization hit that risk was being ignored in the name of profit.
04-03-2008 8:49 AM