Financial and corporate crises bring regulation; the bigger the crisis, the more the regulation.  A few years ago, major corporations, particularly Enron and WorldCom, were engulfed in scandals.  Coming hard upon the bursting of the dot.com bubble and revelations of improper sales practices of Wall Street banks, these scandals were the catalyst for the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), a far-reaching reform of public companies.  One forgets that, only about a year ago all the talk in financial and business circles focused on the need to roll back Sarbanes-Oxley, which was allegedly proving to be too burdensome for U.S. business.  Regulation, or at least constraining regulation, tends to disappear only in the good times.  As another example of this counter-revolutionary trend, in 1999 the Depression-era restriction on keeping separate commercial banks, investment banks, and insurance companies ended with the passage of the Gramm-Leach-Bliley Act.  By contrast, in these dire times the voices for regulatory rollback fall silent and those for regulatory expansion are heard.  In keeping with this pattern, the U.S. Treasury Department has just released a plan (the “Treasury Plan”) for sweeping reform of financial regulation that is in part necessitated by the financial crisis, which has exposed problems in the regulation.

In brief, the Treasury Plan calls for three levels of reforms:  short-term, medium-term, and long-term.  In the short term, the Plan addresses several immediate symptoms of the crisis.  It proposes to formalize the current system whereby, on an emergency basis, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) makes its loan facilities available to non-banks, in addition to banks and banking organizations.  It also proposes, in this short term, to implement a system of uniform qualifications for mortgage origination licensing; in other words, it would regulate the party that triggered the current financial crisis.  In the medium term, among other things, the Treasury Plan is more ambitious:  it proposes to abolish the distinction between a savings & loan and a commercial bank charter, to select one federal “back-up” regulator for state banks (now responsibilities are shared by the Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”), which administers the insurance program for bank deposits), to make the Federal Reserve in charge of all “systemically-important payment systems,” to provide for an alternative federal insurance charter (now all insurance companies are chartered by the individual States), and to combine the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”).  Finally, and most ambitiously, the Treasury Plan in the long term would revamp the entire financial regulatory system in the following way.  It would make the Federal Reserve the regulator of “market stability” (presumably doing what it has done recently to prevent a financial meltdown)  It would also create a new “prudential” financial regulator whose job it would be to focus upon the financial stability of individual financial firms, like banks, that receive federal financial guarantees and would deal with such matters as capital adequacy and risk management in them.  Finally, it would establish a “business conduct” regulator, which would be in charge of consumer protection, firm disclosure, business practices, and chartering and licensing of financial firms (the new combined SEC/CFTC would fit here).