More than a year ago, when the markets were flying high, a chorus of alarm went up on Wall Street. Talk spread that the United States risked losing its edge in the financial world.
But the threat that many executives saw was not the credit crisis then looming — it was the threat of excessive litigation and over-regulation. Wall Street urged Washington to lighten up.
The financial industry could not get what it wanted then, but it may get what it wants now.
If adopted, the sweeping overhaul of the system overseeing the American financial system proposed by Treasury Secretary Henry M. Paulson Jr. on Monday could hand Wall Street investment banks a major victory in their years of effort to streamline regulation.
While the plan is unlikely to gain congressional approval soon, and may go nowhere in a partisan election year, it echoes many of the seemingly subtle and yet profound changes that Wall Street has been lobbying for all along.
One change Wall Street wants is for regulators to shift from policing the industry with hard and fast rules — do this, don’t do that — to using looser “principles” that might be open to interpretation. Another is to modernize the hodgepodge of state and federal regulators that sometimes overlap and compete with one another.
Paulson’s plan would take a step toward both of these changes by consolidating banking and insurance regulators and potentially merging the Securities and Exchange Commission with the Commodity Futures Trading Commission, then stripping the combined entity of much of its regulatory authority. Many on Wall Street applaud those proposals.
“I thought it was a major step forward,” Thomas A. Russo, chief legal officer of Lehman Bros., said of the proposal. “The world became homogenized, but the regulatory structure stayed within the same straitjacket.”
Proponents of the principles approach say it is more efficient. They point to the meteoric rise of London as a global financial center, which has fueled worries that New York might one day lose its title as the world capital of capital. The Financial Services Authority, Britain’s main financial regulator, relies on principles rather than rules.