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For lawyers with expertise in finance and securities, the ambitious financial regulatory reforms by Treasury Secretary Henry Paulson seem less like a blueprint for overhaul than a blue plate special � served with all the fixings on the cheap. The proposal would, among other things, greatly expand the authority of the Federal Reserve Board to oversee financial markets. It would nationalize insurance industry regulation, taking it out of the hands of the 50 states and creating an Office of Insurance Oversight. “This is not going to be well received,” said Joseph Gatti, with Dechert’s finance and mortgage-backed securities specialists in Washington. “I am surprised Paulson let this come out at this time. It arrives right in the midst of crisis management, on the same day the [Housing and Urban Development] secretary resigns, the key person on housing,” he said. “This seems very, very strange timing.” Housing Secretary Alphonso R. Jackson resigned last week as federal authorities investigated whether he awarded lucrative housing contracts to friends. “The electoral appeal of ‘It’s the economy, stupid’ is well understood,” said James R. Tanenbaum, chairman of the global capital markets group for Morrison & Foerster from its New York office. “After the election, and after the recovery is under way, several elements of the Paulson report are likely to lose their luster,” he said. “At the very least, the Republicans can point to this report as ‘taking action.’ “ Few elements in the array of proposals can be achieved without new legislation. “Once you open that box, it seldom goes the way you planned in the quiet of your office,” said Daniel Tyukody, head of Orrick, Herrington & Sutcliffe’s Los Angeles securities litigation and financial regulation group. Paulson’s proposals would also eliminate the Office of Thrift Supervision, which regulates the savings and loan industry, itself the center of a crisis in the late 1980s and early 1990s. The Office of the Comptroller of the Currency, which oversees national banks, would assume the responsibilities. The proposals also call for merging the Securities and Exchange Commission (SEC) with the Commodities Futures Trading Commission (CFTC), established in 1974 to oversee open operations of futures markets. Tyukody described the SEC merger with the CFTC as blending very different regulatory styles. The SEC is rules-based, while the CFTC has a lighter, principles-based regulatory style. “Merging the SEC and CFTC, if they actually did that, something would have to give,” he said. “The SEC is heavy on dotting i’s and crossing t’s, while the CFTC has a lighter touch. They can’t just be put together,” he said. “One constant about the financial markets is that loopholes are always exploited by unscrupulous, greedy people. There needs to be a remedy for that behavior,” said Leslie Caldwell, co-chairwoman of white-collar defense at Morgan, Lewis & Bockius from its New York office, and a former federal prosecutor who led the Enron prosecution task force. She thinks there is little realistic chance of the Paulson plan passing, saying the creation of a new structure “reminds me of the Homeland Security Department. A lot of things were thrown in, but it hasn’t really worked,” she said. Another less ambitious provision in the plan would establish a Mortgage Origination Commission to set minimum licensing standards and grade each state’s licensing practices for mortgage brokers. Dechert’s Gatti called that proposal a positive. “That is something that has been missing and should be dealt with appropriately. It could be carved out as a stand-alone change,” he said. “If anything had a shot, that might.” But the proposed restructuring raises concerns about American competitiveness in financial markets. “Aspects of the recommended restructuring raise serious concerns about the continuing global competitiveness of our capital markets and the ability of our financial intermediaries to remain world leaders in capital markets innovation,” said Morrison & Foerster’s Tanenbaum. “The fact that our present system of banking, securities and commodities regulation evolved over a long period of time and may have been the result of a series of historical anomalies, does not mean that it is fundamentally unsound or lacking in efficacy,” he said.

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