In Financial Reform, It's Paulson vs. Cox

Last Updated Jun 24, 2008 6:04 PM EDT

ustreasury.jpgYou couldn't have two more different regulators and policy-makers.

In one corner, you have Henry "Hank" Paulson, Secretary of the Treasury. The former head of Wall Street titan, Goldman Sachs, he is known as a tough, bald-headed earth-shaker. In others words, he's a shark.

In the other corner is Christopher Cox, chairman of the U.S. Securities & Exchange Commission. This former altar boy from Minnesota and devotee of free market maven, Ayn Rand, spent years as a Congressman from Orange County, Calif. He grew a reputation on Capitol Hill as a thoughtful compromiser and a peace maker.

The issue is Paulson's master plan for greatly expanding the power of the Federal Reserve and to redraw Wall Street regulation amidst the aftershocks of the Bear Stearns collapse. Cox is drawing heat for taking a more stand-off approach in this reform attempt. He was trashed in a front page article in the Wall Street Journal this week for not being in the loop when Paulson orchestrated the bailout of Bear Stearns in March.

What to make of this? Paulson is re-energizing his reform effort in the run up to next month's Congressional hearings regarding regulating the financial industry. The banking system has been taking huge hits over the past year stemming from mega-hassles at Citigroup, Merrill Lynch, Bank of America, Wachovia and Bear Stearns, not to mention Goldman Sachs itself.

Paulson's plan would grant to the Fed new powers, allow greater access to financial institutions so regulators can move faster in the event of the next Bear Stearns, and fundamentally change the Fed's role from that of central bank to be uber-hall monitor for all of the financial industry.

Cox has backed some aspects of reform but has been somewhat taciturn. While his passivity on the matter has stood out, Cox seems to be taking a longer view. He wants Congress to do such things as expand oversight of risk assessment models. But as his actions in the Bear Stearns case show, Cox has a different assessment of what regulatory obligations should be. He is found of noting that the SEC was created in the Great Depression to protect investors. As he told the Journal, Cox does not believe that regulators should race in and save banks that make bad business decisions.

Sounds sensible to me. But there is one area where the SEC's role is murky. There is a strong argument that the SEC has not kept pace with regulating newly evolving structured financial deals dreamed up by investment banks such as foreign-based brokerage arms or hedge funds to certain insurance products.

Interestingly, Paulson's reforms were widely deemed dead-on-arrival when he proposed them in March. Some say he made them to calm markets in the short term. Another thing to be considered -- a premier Wall Street insider is proposing rules that should be to Wall Street's liking. Anyway, there's no way that Congress will pass anything with presidential elections so close. There's a good bet that neither Paulson nor Cox will be in power after January, anyway.

But the issues are hugely important and something needs to be done. But what? One factor will be whose vision prevails â€" that of the Wall Street shark or the altar boy from Minneapolis.