Plan to Overhaul Financial Industry Outlined

Treasury Department Undersecretary Robert Steel outlines how the Bush administration's proposal to overhaul government oversight of the financial industry would broaden the Federal Reserve's risk assessment role and define consumer protection goals.

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ROBERT SIEGEL, host:

Well, now more on the financial blueprint that was released today. Joining us in the studio is Undersecretary of the Treasury Robert Steel. Welcome. Good day.

Undersecretary Robert Steel (U.S. Department of Treasury): Good afternoon. Thank you.

SIEGEL: As we've heard, this is a long-term project that was begun a while ago and will take some time to approve. But, is there anything in the treasury a blueprint that you think had it been part of existing law and regulation might have averted any of the problem as the mortgages, mortgages back security that we're now focus on so much.

Undersec. STEEL: Well, let me step back, Robert, and first of all, thank you for inviting me. And to the question, I think the primary focus at Treasury has been working through the challenges that are representing themselves. We began to discuss these issues last August with the president and his specifically tasked Secretary Paulson to basically focus on these issues, which were related to homeowners and keeping homeowners in their home. And they were also related to making recommendations about what we've learned specifically from the situation.

About two weeks ago, we issued a present working group report that focus on the shorter-term issues of lesson to learn. The blueprint today is really have a longer-term nature that I think is less for a specificity about the issues of the day, but more the long-term construct for I had think about things.

SIEGEL: But, I did read in part of the blueprint offers en example of exempting the Federal Reserve might be able to do with some new market stabilization function would be given; that it could evaluate risk management; that it could inform people of the risks of certain kinds of securities. Is that realistic? I mean everyone on Wall Street could have looked at securities that are being issued and evaluated the risk could another few dozen people the Federal Reserve have done that much better that anyone else did.

Undersec. STEEL: Well, I think the key issue maybe is of a broader nature with this description of someone who has responsibility for overall risk in the system or systemic risk, and that responsibility is awarded to the Federal Reserve on the longer-term model that we outlined.

Any idea is that someone should be looking at things overall, not to provide the specific regulation about its certain type of institution of the safety and sound […] institution, but taking a broader look over everything.

And those institutions that might not have a prudential regulator such as hedge funds private equity that the Federal Reserve in this role as the overall's reviewer of systemic risk, would have line of sight and be a responsible for looking at those institutions in addition to the others.

SIEGEL: But you, like Secretary Paulson, you're a Goldman Sachs (unintelligible). I while ago, I understand but do you think that on Wall Street you would have welcome to the fed as the arbiter of risk, and that's appropriate risk in such noble as securities?

Undersec. STEEL: Well, I think its - hopefully we're moving past our roles that we might have in the past and we're now thinking from a policy perspective. And I think the idea - we really try to outlined three specific blanks(ph) for the longer-term perspective here.

One is the overall idea of someone who's responsible for looking out for the overall risk of the system. Two, a second layer of regulator who's responsible for how individual organizations that have a federal guarantee operate. And the third is the new idea, which is someone who's specifically responsible and their dedicated goal is consumer protection. And so, this third peeler is really a new focused area, whereas those responsibilities today are in several different institutions. This is bringing you together which we think, actually brings more focus to that issue.

SIEGEL: In the couple of areas, insurance and mortgage brokers, the Treasury's outline seems to offer new federal roles, that at least compete with a bit of subsume state authority. Is federalism one of the inefficiencies that holds back the American financial services factor? And it would be easier to simply have one set of regulations?

Undersec. STEEL: Well, I think that you're poking in a very important issue, when I think the right issue here is balance. For example, in insurance, we proposed an optional federal charger, where people can choose between the two. And with regards to mortgage origination, we talked about a new idea - a mortgage origination commission. And one of the seated members of that commission is specifically described as someone from the states. And the goal is the key

SIEGEL: But we have federal commission, though?

Undersec. STEEL: Yes, sir. But the states would still have the same responsibilities, and hopefully, the federal commission would set a guideline as to what is the proper process and the process procedures and the proper regulation, registration, etc, which is we view as good but, there's also be -the commission would provide a perspective on each state, so that if you wanted to invest in mortgage securities, you could see of this package of securities, how many come from what state and things like that?

SIEGEL: Well, Undersecretary of the Treasury Robert Steel. Thank you very much for talking with us.

Undersec. STEEL: Thank you.

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White House Proposes Financial-System Overhaul

Treasury Secretary Henry Paulson is proposing the most sweeping overhaul of regulations for the financial industry since the Great Depression, saying Monday that the measures are not meant to remedy immediate economic concerns.

Paulson said the proposal is an "aspirational model" for regulation, designed to be flexible, but that it should not be implemented until the difficulties are resolved.

"This blueprint addresses complex, long-term issues that should not be decided in the midst of stressful situations and should not be implemented to add greater burden to a market already under strain," Paulson said.

"These long-term ideas require thoughtful discussion and will not be resolved this month, or even this year."

The proposal gives the Federal Reserve new powers to act as a "market stability regulator," including authority to examine the books of any financial institution — not just banks — that might pose a threat to the stability of the financial system.

The rising tide of bad debt has made it harder for consumers and businesses to get credit and sparked fears of a recession, which many economists believe is already here.

Business groups are split on Paulson's newly recommended approach, and banking lobbyists are critical of some of the details affecting their industry.

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