A plan to completely overhaul the financial system would make the U.S. Treasury the main watchdog and "cop" for a wide range of financial agencies and institutions. But the controversial plan has strong opposition.

A proposed radical financial overhaul-ostensibly meant to avoid corruption, crisis, and instability within U.S. financial markets-would extend the authority of the Department of the Treasury in unprecedented ways. Under the new system, the Treasury Secretary's office would assume a gigantic role with huge responsibility for overseeing almost all of our financial markets and institutions, including the mortgage industry.

Role of the Treasury

Today, the Office of the Treasury is primarily in charge of banks but, under the new plan, that role would grow to include non-banking organizations and Wall Street companies now governed by the Securities and Exchange Commission. Treasury Secretary Henry M. Paulson Jr.'s plan calls for the SEC to be merged with the Commodity Futures Trading Commission, for a consolidation of bank regulation, and for widespread oversight of the mortgage industry. As the Wall Street Journal reported, the new changes would allow the Federal Reserve "to peek into more corners of finance."

State regulators would, in many instances, be replaced by a single federal regulator, which is making many states upset about the proposal. Many state Attorneys General argue that the Paulson proposal will wrest enforcement authority away from them and give it to the federal government.

Paulson on the defense

Paulson, whose plan is touted and supported by the Bush Administration as a solution to many of our current mortgage market problems, counters that claim by saying that state oversight is sorely lacking. He wants to create a federal commission that would evaluate and grade the performance of state mortgage lending policies, for example, and toughen them if they're found to be too weak.

He contends that weak state regulation of the mortgage industry contributed to the subprime debacle. Opponents of his ideas regarding centralized policing of the mortgage industry compare it to the "No Child Left Behind" program of the Bush Administration, which many see as a failed policy that emphasizes arbitrary one-size-fits-all solutions over tangible, realistic and practical improvements.

Bring on the options

Already a group of leading financial and lending industry professionals-including the CEO of Bank of America, which recently bought out the nation's largest mortgage service company, Countrywide-is working on an alternative plan. But they admit that it will take some time to digest the new program and come up with a different proposal, because Paulson's plan is 218 pages long.

Whether the proposal will benefit the average consumer or homeowner, it's too soon to tell. Sometimes, centralized oversight results in weakness, not strength, as when the Department of Homeland Security took over FEMA, an agency whose weakness was tragically obvious during the Hurricane Katrina response. Paulson's proposal may actually turn out to be a path toward weaker oversight, if it means that too many responsibilities land on the shoulders of a single unprepared agency.