Washington Split Over Regulating Wall Street

But Mr. Schumer cautioned that the Bush administration’s deregulatory mind-set could make it difficult to do anything this year.

The Treasury Department is hoping to unveil its own blueprint for regulatory overhaul in the next few weeks. Last week, Mr. Paulson acknowledged that the problems exposed by the housing crisis were diffuse and complex and could not be solved with a single action. But he suggested that he did not want to take any drastic regulatory steps while the financial markets remained in turmoil.

“The objective here is to get the balance right,” Mr. Paulson said last week. “Regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it.”

Given the philosophical differences about the value of government regulations, some experts were skeptical that Congress and the Bush administration would agree on more than cosmetic changes.

“There is a political will, but I’m not certain that it can overcome longstanding philosophic objections to dealing with free markets in a crisis environment,” said Arthur Levitt Jr., the chairman of the Securities and Exchange Commission under President Bill Clinton.

The Federal Reserve’s recent decisions to lend hundreds of billions of dollars to the nation’s biggest investment banks, and to underwrite JPMorgan Chase’s takeover of Bear Stearns, may have changed the balance of power.

The Fed reported on Thursday that investment banks had quickly taken advantage of the lending program and had taken out $28.8 billion in new loans by Wednesday. That did not include any loans that JPMorgan Chase took on through the $30 billion credit line it received as part of its deal to acquire Bear Stearns.

Goldman Sachs, Lehman Brothers

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[LBC  Loading...      ()   ] and Morgan Stanley voluntarily disclosed that they had taken loans under the Fed’s new program, in part to reduce any stigma about it. But the volume of borrowing suggests that many other Wall Street firms took advantage as well.

The new borrowing could strengthen Mr. Frank’s hand in calling for tougher regulation, because it immediately raises the question of why investment banks should be allowed to borrow from the Fed without subjecting themselves to the same kind of oversight that commercial banks face.

But the broader issue for both Congress and the Bush administration is that even bank regulators did little to slow the explosive growth of high-risk subprime mortgages, many of which were “liar’s loans” that did not require borrowers to verify their incomes.

At least four federal agencies — the Federal Reserve, the F.D.I.C., the Office of the Comptroller of the Currency and the Office of Thrift Supervision — have some jurisdiction over mortgage lending. Making matters more difficult, state banking regulators had jurisdiction over the fast-growing array of nonbank mortgage lenders, which accounted for about 40 percent of new subprime loans before that market collapsed last August.

Except for the Federal Reserve, all of the federal bank agencies receive funding from fees paid by member institutions, and some specialists have long argued that the agencies competed with each other to woo institutions with lighter regulation.

“There was no federal coordinated oversight, and as a result there was a competition to reach the bottom, both in federal and state organizations,” said Brian C. McCormally, a former enforcement chief at the Office of the Comptroller of the Currency.

Ms. Bair of the F.D.I.C. cautioned that industry and government turf battles would make it difficult to agree on a single regulator, especially a strong one. But she said the need for one was clear.

“We need to go in the direction of more regulatory consolidation,” Ms. Bair said. “It would make more sense to have some type of umbrella agency, if for no other reason than facilitating information.”