Treasury Secretary Hank Paulson’s “blueprint” for revamping the financial regulatory system is already coming under fire from powerful agency heads. As early as Friday, even before the details of the plan were widely-known, the plan was lambasted by John Reich, the director of the Office of Thrift Supervision, which oversees the savings and loan industry. Immediately after Paulson’s speech this morning, Commodity Futures Trading Commission big shot Bart Chilton released a colorful and blisteringly critical statement describing the plan as “moving boxes around in Washington DC.”

Paulson’s plan would combine the Securities and Exchange Commission, which regulates equities and debt markets, with the Commodity Futures Trading Commission, which that regulates the exchanges trading commodities and financial futures. The two commissions have very different regulatory approaches, with the SEC favoring direct regulation and a rules-based approach and the CFTC favoring a principles based approach that relies heavily on self-regulation by commodities and futures exchanges. SEC head Chris Cox has been described as being disposed to supporting the plan.

After the jump, we delve into the dirty, metaphor-strewn past of the CFTC commissioner.

It's often been said that we're in the worst financial crisis since the 1930s. So perhaps its no surprise that we seem on the verge of the biggest financial regulatory overhaul since the Great Depression. But we certainly didn't expect anything this sweeping to come out of the Bush administration. We clearly underestimated these guys. Talk about shock and awe.

But we're getting ahead of ourselves. Over the weekend Treasury Secretary Hank Paulson released the outline of his controversial and sweeping a plan to overhaul financial regulation. He would eliminate thed SEC, FDIC, CFTC, OTS and OCC. And after dumping out this bowl of alphabet soup, he would fill it right back up again with the Prudential Financial Regulatory Agency , the Conduct of Business Regulatory Agency, the Federal Insurance Guarantee Corporation and the Corporate Finance Regulator. It's going to take some time to digest these changes.

Later this morning, Paulson will give a speech about this plan. In the meantime, the plan is already coming under criticism. Barney Frank worries that the plan may take too much power away from states, particularly (from what we've been lead to understand) in the area of regulating insurance. Larry Ribstein worries that the new, more concentrated structure of regulation could result in losing significant flexibility in financial innovation.

"On this latter point, consider that the CFTC's replacement, CBRA is likely to be less accommodating," Ribstein writes. He adds that "with one regulatory agency we’re likely to get fewer new financial products."

We're going to hold back for now, as we attempt to work through what's known about the plan. Let's see what Paulson has to say. More later today.

Paulson Plan Begins Battle Over How To Police Market
Paulson's big bang [Ideoblog]

The Treasury's Entity is seen as a Citigroup bailout by lot of people for the very simple reason that it is a Citigroup bailout. That might not be the only thing it is, but stupid is as stupid does, and one thing this stupid thing does (or will do, if it ever gets off the ground) is bailout Citigroup, which is reportedly on the hook for as much as $80 billion from it’s four mammoth SIVs. Since the fund could buy Citigroup's SIVs, it would reduce the amount that Citigroup would need to write off. And reducing write-offs is something Citi desperately wants to do right now.

There’s at least a fair amount of quiet clapping about the Treasury Department’s role in creating the Entity. Citigroup, some say, is too big to fail, and the Treasury Department should step in to prevent the kind of financial market disorder that would come from the toppling of the towering financial giant.

But this kind of logic has some rethinking the wisdom of the financial regulatory reforms that allowed banks such as Citi to grow so large in the first place. When lawmakers reformed depression era laws that stood in the way of these financial super-markets, they tended to sound libertarian notes about allowing financial innovation and the operation of the free market to control the size and scope of Wall Street firms. The era of government planning was over. So the Glass-Steagall Act of 1933, which had separated investment houses from commercial banks—most famously requiring JP Morgan to part from Morgan Stanley—was changed to permit the growth of the universal banks.

Many now think that the universal bank is a failed strategy. From Citi to Merrill to Bear Stearns, there are calls for Wall Street firms to slim down, break-up and concentrate on the core businesses that made them wealthy and famous to begin with. But was it a failure? If growing into financial giants allowed them to unilaterally acquire a secret—and nearly costless—government insurance policy, it seems like a great gamble. The executives and shareholders get the upside, while the broader public insures against failure.

“What a scam that is,” writes William Greider in The Nation.

And it’s a scam the Greider thinks is over. Banking regulation will inevitably make a big comeback, he predicts.

“At least the unambiguous truth about ‘financial modernization’ is now on the table for all to see,” he writes. “That should keep the Wall Street guys from whining for a while about the oppressive nature of bank regulation. The next reform era, when it does finally arrive, will head in the opposite direction--restoring public protections for the little guys against the greedy excesses of big hogs.”

What Greider doesn’t mention is that this era of new regulations might be coming too late. Or, rather, right on time, depending on your point of view. Resistance to a new wave of banking regulation requiring bank breakups and dividing Wall Street according to regulatory fiats rather than market demand is likely to be weak in an era when many think the financial supermarket model has failed and should be abandoned. No-one expends much time, money or energy defending a right to do something they don’t want to do anyway. What’s more, there will be plenty of money made by investment bankers spinning-off, selling and acquiring the fragments they are shoring up against the ruins of the toppled giants. Some of these people may actually be the same ones who made fortunes building the giants.

And we’ll all raise a glass to the only saloon in town where it’s never last call: the Wall Street punch bowl.

Citibank: Too Big to Fail? [The Nation]

The government cannot effectively regulate the hedge fund industry and it’s a good thing too, Robert Steel said yesterday. The setting was a Manhattan Institute conference. Steel, a former Goldman Sachs executive who is now the Treasury Department’s top domestic finance official, raised two original arguments against hedge fund registration and regulation. Since this is something we talk about a lot around here we found ourselves a bit surprised that we hadn’t heard these ideas before.

Steel, the Treasury undersecretary for domestic finance, also said it would be costly and impossible to train enough people to keep tabs on some 8,000 hedge funds.

“I don't like the moral hazard of communicating a government all-clear,” Steel said at a conference hosted by the Manhattan Institute in New York today. The risk is that regulation “communicates confidence in a product that is riskier than normal investors should get involved in,” he said.

Both points are the sort of thing that are so obvious—once they’re raised. You instantly feel like you’ve known them all along.

Steel Says Hedge-Fund Regulation Risks 'Moral Hazard' [Bloomberg]

Duncan,

I’m starting to get what you’re saying about these damn jabronis. Viva la hybrids!

Best,
H

We were getting a bit worried that the apparent silence coming from US officials in the face of calls by various Europeans for international hedge fund regulation was a sign of acquiescence to the terrible idea. Fortunately, Henry Paulson swatted down the talk of hedge funds and private equity as "locusts" in need of international regulations and policing.

U.S. Treasury Secretary Henry Paulson made clear on Saturday that he thinks any risks posed by lightly regulated hedge funds can be handled through market discipline without adding heavy government regulators.

"Market discipline, focusing on the risk management of regulated counterparties, is the most effective way to address potential systemic risk concerns," Paulson told a news conference at the close of a two-day Group of Seven finance minister's meeting in the German industrial city of Essen.

He said a thriving global hedge fund industry "is in the U.S. interest" and adds liquidity to financial markets.

Paulson makes case for tougher enforcement of securities laws

Paulson says need to apply business rules lightly

Just as long as those guys in Washington are giving the market clear signals.

Speaking of Hank Paulson, has anybody seen the new Paulson twenties yet? Last month we noted that the first bills bearing the new Treasury Secretary's signatures were rolling off the presses and into circulation. And we announced a contest: the first person sending in a photo of themselves holding up a Paulson twenty wins a drink with DealBreaker's Bess Levin. (Sadly, it will not be unsupervised. John Carney will tag along as a chaperone.) So get those pictures in asap. Email to tips(at)dealbreaker(dot)com (subject line "Paulson Twenties.")

Our heads are still aching from drinking one (okay, three or four) too many margaritas in honor of Jeff Skilling, the guy at the helm when Enron hit the iceberg of its financial gambles who yesterday got hit with a sentence of 24-years or life (whichever comes first). So it is comforting this morning to know that it’s not just us tequila-quaffing kids who are skeptical about increasing the risk of criminal liability for American corporate executives.

U.S. Treasury Secretary Henry Paulson said he is considering recommending changes to the 2002 Sarbanes-Oxley corporate governance law because its restrictions have overwhelmed some American companies. While the "net result'' of stricter reporting standards for executives has been positive, Sarbanes-Oxley has also contributed to "an atmosphere that has made it more burdensome for companies to operate,'' Paulson said in an interview today from Washington.

"We're going to need to look at how we can address some of these issues,'' Paulson said. "This is something we're giving a lot of thought to.''

Paulson's comments come as business groups press the Bush administration to loosen the Sarbanes-Oxley restrictions. The U.S. Chamber of Commerce and other groups say the law stifles innovation and puts corporate officials, who must certify the accuracy of their financial results, at risk of prison terms.

"We as a country do as good a job as any nation of shining a light on a problem when a problem occurs,'' Paulson said in the interview. "Oftentimes the pendulum will swing too far.''

If he keeps this up, we're going to start feeling bad about the whole "tree-hugger" thing.


Paulson Says Sarbanes-Oxley Adds to Companies' Burden [Bloomberg]

Hank Paulson got a pretty sweet leaving package when he stepped down from running Goldman Sachs to take the job as George Bush's Treasury Secretary. And now his move down to Washington, DC is looking even sweeter. Eight million dollars sweeter.

U.S. Treasury Secretary Henry Paulson, the former chief executive officer of Goldman Sachs Group Inc., sold his 50th floor condominium near Manhattan's Lincoln Center for almost $8 million, according to public records.

Paulson paid a total of $2.88 million for two apartments he bought and combined on West 67th Street, one in 1996 and the other in 1998. Tax on the re-sale was about $112,000, according to the New York City Register.

U.S. Treasury's Paulson Sells New York Condo for $8 Million [Bloomberg]

It’s all Goldman Sachs all the time at the Treasury Department these days. Former Goldman CEO Hank Paulson is bringing Goldman senior director Robert Steel on board the good ship Treasury as undersecretary for domestic finance.

Steel started in the equities division at Goldman, and eventually rose to run the group. He was served on the management committee for years with Paulson. He rose close to the pinnacle of power at the firm as vice chairman. We’ve heard that he was one of those who pushed for changes at the NYSE to permit buy and sell orders for the most heavily traded stocks to pair up electronically, eliminating the middlemen of specialists and floor brokers. At the time, he was said to have urged Paulson to combat then NYSE chief Dick Grasso’s resistance to these changes.

Bush to nominate Goldman's Steel to Treasury post [Reuters]

A transcript of Hank Paulson’s talk with Maria Bartiromo was published in The Wall Street Journal. Looking back on our morning of bourbon bets and liveblogging, we think we did a damn good job of conveying the spirit of Paulson’s words.

But if you absolutely have to know exactly what our Treasury Secretary said, feel free to click the link below.

Transcript of Treasury Secretary Henry Paulson on CNBC [Wall Street Journal]

Senators Charles Schumer and Lindsey Graham are long-time China hawks, and most recently have been threatening China with tariff sanctions if it won’t adopt a flexible exhange rate for its currency. Today they are meeting with Treasury Secretary Hank Paulson, who is viewed as friendly toward China. Or, to revert to more typical DealBreaker parlance, Hank’s a China-Hugger.

Presumably, Paulson will ask the Senators to give him more time to negotiate with his Chinese counter-parts.

US senators to meet Paulson on China yuan concern [Reuters]

Yesterday we learned that a federal grand jury in the Eastern District of Missouri had returned indicted 11 individuals and four corporations connected with the online gambling business on various charges of racketeering, conspiracy and fraud. The founder of BetonSports.com, Gary Stephen Kaplan, was dramatically arrested while changing flights on a trip from the UK to Costa Rica.

Today some in the online gambling industry are wondering whether they might have a friend or ally in the Bush Administration, namely Treasury Secretary Hank Paulson. During his time at the top of Goldman Sachs the investment bank reportedly made investments in online gambling, including Betonsports. So will Paulson back his boys now that he is in the second highest ranking cabinet level post?

Uhm, don’t bet on it.

U.S. Treasury secretary Henry Paulson a friend to online gambling? [Gambling911.Com]

Hank Paulson is getting sworn in as Treasury Secretary today. We'll be liveblogging the event.

11:10. Late already. Hank is already operating on Washington, DC time.

11:15. President takes the podium. He’s looking a bit shaggy. Solid red-tie. What does that symbolize?

[Continued after the jump]

Hank Paulson's nomination as Treasury Secretary was confirmed by the Senate yesterday. Bloomberg fills us in on why his confirmation hearings were so 'effin boring.

The cautious approach in testimony to the Senate Finance Committee June 27 and in responses to written questions likely was planned to avoid disrupting markets before Paulson, 60, digests all his briefing material, said Sophia Drossos, a currency strategist at Morgan Stanley.

"He was probably bland by design,'' she said from New York. "Paulson was aiming to make it low key. At least we know we don't have a loose cannon.''

Snore.

Paulson Plays Safe on China, Taxes, Deficit on Road to Treasury [Bloomberg]

Hank Paulson gets the nod from the Senate Finance Committee.

The Senate Finance Committee on Wednesday approved Henry Paulson's nomination to become treasury secretary and sent it to the full Senate for a vote that is likely to come fairly quickly.

The committee approval came after a nomination hearing on Tuesday where Paulson faced scant opposition as he voiced support for Bush administration tax cuts and promised to keep pushing China toward increased currency flexibility.

The full Senate can give its approval by a voice vote, and on Wednesday morning Senate Majority Leader Bill Frist said Paulson's nomination will be considered this week.

So it may be only a matter of days before Hank officially moves from being the number one guy at Goldman Sachs to being the guy who takes orders from George W. Bush.

Outgoing Goldman Sachs CEO, Hank Paulson, plans to sell his shares in Goldman Sachs, according to published reports. A March regulatory filing valued Paulson's shares at $485 million.

The oddest thing about the report is that Paulson's filings with the government ethics office disclose his total worth at $164 million because the magical accounting of our nation's capital caps the disclosed value of any single asset at $50 million. A number of assets hit the cap, including his shares and options in Goldman and US Treasury bonds, according to published reports.

Paulson to Sell Goldman Stake, White House Aide Says [Bloomberg]

Just when he thought he was getting out, they pull him back in.

In this case, it's Hank Paulson who thought he was getting out--the outgoing head of Goldman Sachs is preparing to leave Wall Street for his new role as the next Treasury Secretary--and Richard Grasso, the former boss of the NYSE, who may pull him back in.

CNBC's Charles Gasparino is reporting that Grasso served Paulson with a subpoena. Or, more likely, lawyers who work for the one served a subpoena to lawyers who worked for the other.

New York Attorney General has launched a lawsuit against Grasso, claiming his pay package at the NYSE violated New York laws requiring that compensation at non-profits be reasonable. Spitzer wants Grasso to return $100 million of the $140 million he got in compensation while running the NYSE. At the time the NYSE was a non-profit organization.

Paulson sat on the board of the NYSE and is said to have led the push to force Grasso to resign amidst public scandal over the size of the pay package in 2003. Despite this, Paulson's testimony may help Grasso since Paulson has praised Grasso's work as an executive. (Alternatively, and we're just speculating here, Grasso may just want a chance to embarrass one of the people who forced him out of the NYSE.) Gasparino reports that Grasso's lawyers fear that once Paulson assumes his job at the Treasury he may attempt to claim an executive branch immunity and avoid being forced to testify.

Spitzer. Grasso. Paulson. It's 2003 all over again. But this time its personal.

Paulson Subpoena [SquawkBlog]

A DealBreaker source connected to the White House reports that some high-level members of the administration are annoyed by reports that Hank Paulson continues to play a role in talks to split the presidency of Goldman Sachs. Paulson, the CEO and chairman of Goldman, was recently nominated by George Bush to succeed John Snow as Treasury Secretary.

“Folks think he should be concentrating on his new job, not trying to secure the value of his Goldman stock by meddling with its succession issues,” the source said.

The source asked to remain confidential. Specifically, the source said, “You guys kill blogs everytime you mention them. Imagine what will happen to me.”

A note of caution after the jump.