Paulson calls for broad rule changes

By John Brinsley  |   2008-7-3  |     NEWSPAPER EDITION

UNITED States Treasury Secretary Henry Paulson called for regulatory changes that would allow financial firms to fail without threatening broader market stability.

The Treasury chief also proposed steps providing for the president to approve any use of taxpayer funds to help a financial company. In excerpts of a speech for delivery in London yesterday, Paulson identified a legal gap that has left unspecified how to deal with the failure of a financier that doesn't take deposits, such as investment banks.

Paulson's proposals aim to tighten supervisors' oversight of lenders and dealers while at the same time discourage companies from depending on a government rescue if their bets go wrong.

His speech comes a week before a congressional hearing to debate a regulatory overhaul in the wake of the credit crisis that caused the near-bankruptcy of Bear Stearns Cos, Bloomberg News said.

"We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm," Paulson said in the speech excerpts distributed by the Treasury to reporters traveling with him in London.

The Treasury chief noted while there is a resolution mechanism for commercial banks, there is no such process for securities firms. Federal Deposit Insurance Corp Chairman Sheila Bair has also urged that an agency be given power to take over and liquidate investment banks in an orderly manner. The FDIC has that power over lenders whose deposits it insures.

"We will need to give our regulators additional emergency authority to limit temporary disruptions," Paulson said in the remarks planned for delivery at Chatham House, an international affairs research organization.

"Any commitment of government support should be an extraordinary event that requires the engagement of the Executive Branch."

The Fed invoked emergency powers as lender of last resort to give Bear Stearns a temporary loan in March and then to agree to take on US$30 billion of the company's assets to secure its takeover by JPMorgan Chase & Co.

Some central bankers and former officials have said those actions, and the Fed's opening of direct loans to primary US government bond dealers, created the danger of spurring more reckless lending by providing a backstop.

"Two concerns underpin expectations of regulatory intervention to prevent a failure," Paulson said.

"They are that an institution may be too interconnected to fail or too big to fail. We must take steps to reduce the perception that this is so - and that requires that we reduce the likelihood that it is so."