What's Missing in Paulson's Report: Regulatory Consolidation

Looking over the full report from the President's Working Group today, I'm struck by one thing above all: that it makes no mention of the alphabet soup in Washington which enabled regulatory arbitrage and a general lack of accountability or transparency. As no less than Tim Geithner said last week:

The regulations that affect incentives in the U.S. financial system have evolved into a very complex and uneven framework, with substantial opportunities for regulatory arbitrage, large gaps in coverage, significant inefficiencies, and large differences in the degree of oversight applied to institutions that engage in very similar economic activities...
We need to move to a simpler framework, with a more uniform set of rules applied evenly across entities involved in similar functions, and a more effective balance of regulation and market discipline. And institutions that are banks, or are built around banks, with special access to the safety net, need to be subject to a stronger form of consolidated supervision than our current framework provides.

The Working Group report, by contrast, repeatedly talks in a vague, hand-waving kind of manner about "regulators" as though there's no problem there at all. Here's a taster of the kind of language used:

Federal and state regulators should strengthen and make consistent government oversight of entities that originate and fund mortgages...
State and federal authorities should coordinate to enforce the rules evenly across all types of mortgage originators...
Overseers of institutional investors (for example, the Department of Labor for private pension funds; state treasurers for public pension funds; and the SEC for money market funds) should require investors (and their asset managers) to obtain from sponsors and underwriters of securitized credits access to better information about the risk characteristics of such credits...
Supervisors of global financial institutions should closely monitor the firms' efforts to address risk management weaknesses, taking action if necessary to ensure that weaknesses are addressed...
U.S. banking regulators and the SEC should promptly assess current guidance...
Regulators should adopt policies that provide incentives for financial institutions to hold capital and liquidity cushions commensurate with firm-wide exposure...

It goes on and on like that for 5 pages of recommendations. Regulators this, supervisors that, with no names named and no indication that these regulators and supervisors have clearly failed at all this and that there might be something broken which needs fixing on the regulatory side of things.

This was why it took an Eliot Spitzer to come along and bash some heads together: the existing regulators (OCC, OTS, SEC, FDIC, NY Fed, NCUA, CFTC, etc etc etc) were a mess. Some institutions had far too many regulators; others, essentially, had none. And no one had any desire to prosecute financial institutions which were misbehaving. If the current system remains in place, does anybody seriously believe that "supervisors of global financial institutions" will be any better at monitoring "risk management weaknesses" than they have been up until now?

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