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New treasury secretary revs up Working Group on Financial Markets ...

Section: Daily Dispatches

... and wants even less regulation.

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Paulson Pulls for U.S. Markets

Treasury Chief Aims to Tweak
Rules Some Say Are Crippling
The Nation's Competitiveness

By Deborah Solomon
The Wall Street Journal
Monday, October 23, 2006

WASHINGTON -- With just two years to make his mark, new Treasury Secretary Henry Paulson is focusing much of his attention on making American financial markets more competitive.

So far, his efforts have mainly involved meeting and jawboning. He is well-positioned to help tweak some rules, but his power could wane next year if Democrats make significant gains in the November elections.

Since taking the reins in July, the Wall Street veteran has reinvigorated the President's Working Group on Financial Markets, which had languished. He also has backed a private-sector effort to recommend changes to laws and rules that critics say handicap U.S. financial markets. And he raised business hopes that the government will ease a controversial rule created by the Sarbanes-Oxley law in response to corporate scandals.

Mr. Paulson is chairman of the Working Group, which coordinates government policy on financial markets and includes the heads of the Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission. Mr. Paulson has insisted that they meet about every six weeks. Before his arrival, the group met every few months and sometimes as infrequently as once a quarter.

"The issues that are natural for the President's Working Group to deal with are issues that he has thought a lot about while he was on Wall Street and to which he clearly has wanted to devote a lot of attention while he's here in Washington," said Randal Quarles, who recently stepped down as Treasury undersecretary for domestic finance.

The Working Group is a significant lever to influence policies outside the Treasury's bailiwick. The committee is "where he can have influence over the process and can shape the debate," said Rob Nichols, president of the Financial Services Forum, a group of chief executives from that industry that met with Mr. Paulson and President Bush last week. Mr. Nichols, a former Treasury spokesman, said Mr. Paulson talked about "what we can do to keep the U.S. economy competitive and keep the capital markets competitive."

Mr. Paulson's efforts are a response to a growing business concern that the regulatory and legal environment puts U.S. capital markets at a global disadvantage. Mr. Paulson often points out that more initial public offerings of stock are being issued on exchanges outside the U.S. Business leaders complain that the costs of doing business in the U.S. are increased by provisions of Sarbanes-Oxley, class-action lawsuits and a state and federal law-enforcement crackdown on corporate misbehavior.

The U.S. Chamber of Commerce on Friday held a public forum in Washington to publicize such issues. "If our capital markets become less competitive, the cost of capital rises, [stock] listings, and investment opportunities go overseas," said David Chavern, the chamber's chief of staff.

Mr. Paulson is having the Working Group look at the systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis, officials said.

He has ordered his chief of staff, Jim Wilkinson, to oversee the creation of a Treasury command center to track markets world-wide and serve as an operations base in a crisis. The center would revive a market-monitoring room closed in a 2003 budget cut. Mr. Wilkinson has relevant experience: A former spokesman for the U.S. in Iraq, he was a White House aide during the Sept. 11, 2001, terrorist attacks.

Mr. Paulson, a former chief executive of Goldman Sachs who declined to comment for this article, has said the regulatory pendulum "may have swung too far" in response to corporate scandals. He is expected to sound the capital-markets-competitiveness theme in future speeches. He also has emphasized restraining the growth of federal spending, but that will require congressional cooperation, a particular challenge if Democrats take control of one or both houses of Congress.

The secretary doesn't need much congressional cooperation on other priorities, including persuading China to keep moving toward market capitalism and shoring up the competitiveness of U.S. capital markets through rule changes.

Much depends on his persuasiveness. The Treasury's jurisdiction is limited. The controversial Sarbanes-Oxley rule -- which requires that companies assess their internal controls to ensure their financial reporting is accurate and reliable -- was crafted by the SEC and the Public Company Accounting Oversight Board. Both plan revisions before the end of the year.

Mr. Paulson, aware of the ticking clock on the Bush presidency, wants to move quickly. He told the organizers of the private Committee on Capital Markets that he wanted recommendations by next month.

"He explained what the political cycle was and that Treasury would be thinking about this issue come the new Congress in January, and if we were going to have an impact on that process, we would want to get this out by end of November," said Hal Scott, a Harvard Law School professor who heads up the panel.

The committee includes business leaders and academics but not consumer or shareholder-rights activists. It will draft a report looking at legal-liability issues, the Sarbanes-Oxley rule, shareholding rights and the regulatory process, including whether the SEC should weigh costs and benefits more explicitly before adopting rules. Mr. Paulson didn't help create the group, but he called it "important to the future of the American economy and a priority for me."

Gary Gensler, an assistant secretary for financial markets in the Clinton Treasury, said Mr. Paulson should be careful how he wields his power.

"I think that we have very competitive markets and have had for a very long time," Mr. Gensler said. "That's not to say it's not worth looking, but I think the hallmark of the U.S. markets is efficiency tied with a set of clear rules. ... There's always pressure that comes from groups to roll something back. What would be a mistake, though, is to think we need some wholesale changes."

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