New Regulation to Clean up Financial Industry Mess

Legislators and economists are still trying to get their arms around how the subprime mortgage crisis blossomed into a full-blown financial industry meltdown. Fingers are being pointed at the fractured regulatory system that failed to provide much-needed oversight.

There's no custodian on the government payroll who can handle the job of cleaning up the mortgage industry mess. Legislators will have to take action the only way they know how-by making laws.

Blueprint for change

Last March, the Department of the Treasury published a weighty document entitled Blueprint for a Modernized Financial Regulatory Structure. The report called for a massive overhaul and consolidation of the multiple government agencies currently tasked with regulating different segments of the financial industry.

Few would disagree with the contention that the existing regulatory system has its inefficiencies. But even so, Blueprint was not widely supported. Proponents had a variety of complaints: the proposal lacked any power to alleviate the current crisis, the regulatory system wasn't broken and didn't need to be fixed, the production of the document was politically motivated, and so on.

That was eight months ago. Since then, an already weak financial industry has faced several significant events. Lehman Brothers went bankrupt, AIG was bailed out by the feds, Washington Mutual became the largest bank failure in U.S. history, and the Treasury Department was authorized to purchase worthless mortgage-related securities en masse.

A starting point

As the mortgage meltdown drags on, the voices calling for regulatory reform are getting louder and greater in number. At some point, legislators will have to tackle the issue head on. When they finally sit down to hammer out the options, Blueprint will probably get a second look-if only to serve as a starting point for the discussion.

One of Blueprint's primary arguments is that the current regulatory system is too fragmented to provide a consistent level of oversight. The document recommends consolidation, replacing highly focused agencies with streamlined, multifunctional units that have broader scopes of authority. Some key parts of the strategy include:

• Establishment of a federal Mortgage Origination Commission (MOC) that would support state licensing and regulation of mortgage originations

• Enactment of federal legislation that specifies licensing qualifications for the mortgage industry

• Consolidation of federal banking regulation into one agency that would be supervised by the Federal Reserve or FDIC

• Creation of a federal charter system and regulatory agency for insurance companies

• Consolidation of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC)

• Organization of financial industry regulation under three agencies (market stability regulator, prudential financial regulator, and business conduct regulator), which would be supported by the FDIC and a corporate finance regulator

In short, Blueprint argues for a sweeping overhaul of the regulatory framework. It's up to lawmakers to decide if the concept is workable, or if some other solution might be more appropriate. In any case, they'll have to do something-because at this point, the mess is too big to ignore.