The backlash continues

Commenting on the Paulson proposals for overhaul of the US system of financial regulation, I said:

I still think the political battles will be prolonged, that they are likely to result in watering down of even these fairly modest proposals, and that this is not nearly enough.

The next round of those battles has started. Bloomberg reports:

Three former leaders of the U.S. Securities and Exchange Commission say the Bush administration's proposed overhaul of financial regulation threatens to weaken the agency, a process that may already be under way with help from the SEC itself.

David Ruder, Arthur Levitt and William Donaldson, all former SEC chairmen, said a Treasury Department push for the agency to adopt the regulatory approach of the much smaller Commodity Futures Trading Commission would be a mistake.

It's ``not useful'' for the SEC to have ``a prudential-based attitude in which regulators solve problems by discussing them informally with market participants and ask them to change,'' Ruder, a Republican SEC chairman under President Ronald Reagan, said in an interview. ``We have to have an enforcement approach.''

Levitt, who led the SEC from 1993 to 2001 under President Bill Clinton and who supports an SEC and CFTC merger, says the terms proposed by Treasury are ``wrongheaded'' because they would give the trading commission ``primacy.''

SEC Chairman Christopher Cox, 55, hasn't endorsed a merger between the two agencies, said SEC spokesman John Nester. ``He would insist on a system of oversight that best protects investors, promotes fair markets and facilitates capital formation.''

Culture wars are inevitable in any merger. Personally I think an old style SEC (rather than the watered down current version) made for an effective conduct of business regulator. Its regulatory capital regime is, however, badly flawed and potentially imprudent, and taking that aspect away from the SEC would make a lot of sense. Presumably none of this is going to happen before Bush departs so the wars will last a while. So talking of old conflicts, here is the church which currently occupies the site where Joan of Arc died.