White House plan offers little foreclosure relief

The proposals unveiled Monday will likely re-open a debate over whether the Federal Reserve was too slow to use its existing powers to cut interest rates and too lax at regulating the business practices that contributed to the problem in the first place.

“They missed the subprime crisis in August,” said Greg Valliere, chief political strategist at Stanford Financial Group in Washington. "They were the regulators who were supposed to stop all of this predatory lending. This is like putting Eliot Spitzer in charge of the Morals Division."

The plan would also consolidate dozens of state and federal regulators that currently oversee pieces of the banking and investment industries. With so many powerful constituents behind those agencies, the odds are long that Congress will enact a comprehensive reform package this year. Just few months before summer adjournment, a third of the members of the Senate and all of those in the House have already begun to focus on getting re-elected in November.

“There's a need for comprehensive legislation to change the regulatory system in my view, and Congress will have to get down to it," said former SEC Chairman Harvey Pitt. "But that probably won't come until after the election.”

Progress on various legislative solutions has also been slowed by a broad philosophical divide over how to respond to the surge in foreclosures and the resulting market turmoil. Democrats have generally favored government intervention to rework mortgages that are set to jump to unsustainable levels — either as a buyer or insurer of new loans to help homeowners avoid foreclosures. Republicans have generally favored a “hands off” approach and support the idea that, no matter how painful the consequences, people who took on more risk than they could handle — whether home buyers or investors — should have to accept the resulting losses.

Philosophical differences aside, the reforms outline by Paulson Monday would be a daunting task; each of the agencies involved has its own powerful constituency in business and on Capitol Hill.

Paulson's plan is not the first, for example, to propose merging the regulatory role of the Securities and Exchange Commission and the Commodities Futures Trading Commission. As derivatives, like options, have morphed into ever-more complex securities, the regulation of these risky bets has not kept up with expansion of trading volume. But past efforts to combine the two key agencies — each of which regulates different pieces of the market — has been stymied by turf wars. Oversight of the CFTC is the domain of the House and Senate agriculture committees, while the SEC falls under the finance committees of those houses.

"That comes up constantly," said Kenneth Scott, professor of law and business at Stanford University, referring to a SEC/CFTC merger. "I don't see any likelihood of that."

Bank regulation is similarly split among agencies that were created decades ago, and in some cases haven’t evolved as quickly as the industries they’re supposed to regulate.  Long after the collapse of the savings and loan industry in the early 1990s and the removal of Depression-era restrictions on interstate banking, regulation is scattered among a patchwork of state and federal agencies. Past efforts to streamline that structure have come up short; it remains to be seen whether the White House will be able to overcome opposition to consolidate or abolish these agencies.

Office of Thrift Supervision Director John Reich has already vowed to oppose Paulson’s proposed changes, calling is just the latest in a series of failed efforts at restructuring over the last 60 years, and one that would meet the same fate. The American Bankers Association has also come out against some Paulson’s proposed changes.

"Dismantling the thrift charter and crippling state banking charters will weaken banking in America," said ABA president and chief executive officer Edward Yingling.

Regardless of the philosophical divide, a further deterioration of the economy will likely put continued pressure on members of Congress on both sides of the aisle. But Monday’s White House proposal may help defect criticism that the government failed to act to contain the financial crisis.

“It gives them some cover politically and globally and shows that, ‘We realize there's a problem. There is a plan out there,’” said Valliere. “We all know Barney Frank and others will change it. But at least Paulson is giving the impression that he's on top of things.”

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