SmallCap Sentinel Analyst

There’s a new sheriff in town and his name is Bernanke.

In a new plan proposed by the Bush administration (which will be outlined by Treasury Secretary Henry Paulson in a conference tomorrow), the Federal Reserve will play a key role in determining how the government regulates the nation's financial services industry from banks and securities firms to mortgage brokers and insurance companies.

This plan would give the Fed new powers and responsibilities including the authority to oversee financial market stability. This will allow Mr. Bernanke and his posse to examine the books of any institution it deems to represent a “threat” to the proper functioning of the overall system.

The plan also includes a measure that would create a national regulator for the insurance industry, which is now largely governed by the states, and would create a Mortgage Origination Commission to try to address the abuses exposed in the current tidal wave of mortgage defaults.

This proposal is certain to set off heated debates within different sectors of the financial services industry and in Congress. We here at the Clark Report have already formulated our opinion and it isn’t favorable.

As a believer in free market capitalism, continued government intervention and regulation doesn’t sit well with me. Granted, there are many problems that have been brought to light in recent months since a severe credit crisis began hammering financial markets last August. But is the government really the best entity to be telling us how to run our financial system? Last time I checked, the United States Treasury was in a nine trillion dollar deficit.

If I need to see a heart specialist, he had better not be overweight and reek of smoke. If I need a personal trainer, there can’t be a spare tire around the waist and flab under the chin. My dentist needs to have straight shiny white teeth. Anyone I look to for advice and guidance needs to live up to my expectations, and I’m sorry but the government doesn’t in this situation.

Providing advice and guidance is one thing, regulation is an entirely different beast.

The proposal would allow the Fed, in its new role as "market stability regulator," to dispatch examiners to check the books not just of commercial banks but of all segments of the financial services industry.

Can you imagine the negative reaction of a company’s stock price when they are visited by this band of regulators? Whether or not they have done anything wrong at all, the perception of error and malfeasance will be enough to tarnish the company short term reputation.

This knee jerk overreaction could cause unintended future consequences not just for the companies affected but for the overall functionality of the system. Remember the Sarbanes-Oxley law, passed in 2002 in response to the accounting scandals at Enron and other large companies? Although it was proposed with good intention, it brought with it inadvertent consequences that have hurt the global competitiveness of American companies. I personally can attest to the increased time, efforts, funds and manpower that have been redirected away from running a business in order to complying with Sarbanes-Oxley. Everyone was punished for the wrongdoings of a few.

This proposal, widely touted as the broadest overhaul of financial oversight since the Great Depression, will have to run the gauntlet of Congress first. Republican support might be weak if the new plan is perceived by the industry as creating a tougher regulatory environment for banks and insurance companies. On the other hand, Democrats are likely to say the plan still falls short of providing the regulatory strength needed to prevent another breakdown in the financial industry.

It could be months before we have a final draft that meets with enough approval to pass into law. In the meantime, expect that companies will tighten their belts and clean up their financial houses. With Sheriff Bernanke new-fangled clout and power, no company is safe.

In my opinion, this new regulation that is intended to ultimately help individuals get a fair deal will cause financial institutions to be so stringent and assiduous that the “little man” will suffer most.

Ironic, isn’t it?

Disclaimer: This report is for entertainment purposes only and is not intended as and should not be used to provide investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on specific financial needs and objectives, goals, time horizon, and risk tolerance. Asset classes and/or investments described in this report may not be suitable for all investors. Past performance is no guarantee of future results. No forecast should be considered a guarantee either. The information, opinions and analysis contained herein are based on sources believed to be reliable but no representation, expressed or implied, is made as to its accuracy, completeness or correctness. Write or call MP for detailed disclosure as required by Rule 17b of the Securities Act of 1933/1934 - Market Pathways 17595 Harvard Ave., Suite C519 Irvine, CA 92614. MP is not an investment advisor and this report is not investment advice. This information is neither a solicitation to buy nor an offer to sell securities. Information contained herein contains forward-looking statements and is subject to significant risks and uncertainties, which will affect the results. The opinions contained herein reflect our current judgment and are subject to change without notice. Information contained herein may not be reproduced in whole or in part without the express written consent of Market Pathways Financial Relations Incorporated.