Former U.S. Treasury Secretary Henry Paulson called for an overhaul of financial regulation in an article in the Financial Times on Tuesday, largely reiterating a plan he proposed in March 2008.
No single agency now has this role. Many lawmakers expect that the Federal Reserve will be designated to assume it, although some wonder if the Fed is up to the job.
Today's financial crisis has made abundantly clear that our financial system would benefit from a regulator whose focus is on risks across the financial system, Paulson said.
There is support for giving the Fed this duty, he added. It would require the Fed to have access to information from a broader set of financial organizations, including hedge funds and systemically important payment systems.
He said such a regulator would need the power to intervene if it concluded that the financial system was at risk.
He called on Congress to find ways to unwind failing non-bank institutions to avoid a repeat of the 2008 collapses of investment banks Bear Stearns and Lehman Brothers.
Any rewrite of financial regulatory authorities must include the explicit federal authority to intervene and wind down a failing non-bank in an orderly manner, he said.
Paulson, a former boss of Goldman Sachs Group Inc
During that time, the financial system careened into crisis when a real estate bubble burst, undermining mortgage-backed securities and other exotic financial instruments that hammered major banks with huge losses and paralyzed credit markets.
In a tumultuous period during late 2008 when he seemed to be running Washington and Bush receded from the scene, Paulson tried to rescue the situation with a $700-billion bailout plan. But its implementation was erratic and markets kept falling.
Paulson was replaced by Geithner shortly after President Barack Obama took office.
In his article, Paulson called for combining two federal bank regulatory agencies: the Office of Thrift Supervision and the Office of the Comptroller of the Currency.
He suggested centralizing scrutiny of mortgage origination; creating an optional federal insurance charter; integrating the Securities and Exchange Commission and Commodity Futures Trading Commission; and continued improvement of clearing and settling processes in over-the-counter derivatives markets.
Financial institutions should be regulated based on what they do and sell, not how they are organized, which is the prevailing premise for U.S. oversight now, he said.
No one would ever design a system like this. It has evolved in an accretive way ... It allows and promotes regulatory arbitrage in which companies shop around for the least intrusive regulator, he said.
For instance, he said, the existing system allowed bailed-out insurer American International Group Inc
(Reporting by Kevin Drawbaugh; Editing by Phil Berlowitz)