Treasury Proposes Financial Regulatory Overhaul

Treasury Secretary Henry M. Paulson, Jr. has proposed a sweeping overhaul of the U.S. financial regulatory system that, for the first time, would bring insurance companies, hedge funds, private equity funds, venture capital funds and mortgage originators under direct federal supervision. The proposals, contained in a Blueprint for Financial Regulatory Reform officially released on March 31, would also reorganize the existing financial regulatory infrastructure in ways more fundamental than the United States has seen since the enactment of the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934.

Although some commentators are suggesting that the details of the Blueprint reflect an effort to limit the federal government’s role in the financial markets, the fact that these proposals have been put forward by a Republican administration in the middle of a financial crisis in the last months of its tenure may indicate that a shift of thought has occurred among federal policymakers. In addition, the Administration can expect both the Federal Reserve and Democratic members of Congress to insist that the Federal Reserve have a broader and more permanent regulatory role with respect to the activities and capital requirements of any groups that have access to the discount window.

The Blueprint acknowledges the practical hurdles to achieving its objectives. Factors such as traditional notions of federalism, the existing Congressional committee structure, the agencies’ powerful instincts for self-preservation and organized pressure from industry lobbyists, are likely to substantially delay or paralyze any attempt at a fundamental overhaul of the U.S. financial regulatory system.

A Davis Polk memorandum describing the highlights of the recommendations in the Blueprint is available here.