U.S. Treasury Secretary Henry Paulson made history this week with his blueprint for a comprehensive financial overhaul, a plan so detailed that it even covers regulations that date all the way back to the Civil War.

There’s no doubt that Paulson went in-depth with his report, but the real question is, "Will his plan be good for investors?"

Well, it depends… not only on your perspective, but also on what actually gets changed at the end of the day.

Let’s talk perspective first.

If you’re a regulator working for any of the half a dozen agencies Paulson’s plan effects, chances are what’s being proposed won’t feel great. As a matter of fact, some will probably view the plan with great animosity because the proposed reforms are so extensive. If the changes are implemented, they will break through staunchly defended turf lines that have survived previous regulatory remodeling attempts.

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At the same time, as a regulator with a ringside seat to the credit crisis, you might welcome the changes. Because the proposed changes could conceivably shield those involved from the wave of lawsuits that are undoubtedly already in the works.

If you’re a politician, Paulson’s proposal will probably be viewed as a great opportunity for grandstanding in the months ahead. We’ve already seen some of that in recent days. Depending on which party you’re from, the new and improved U.S. Federal Reserve will either "not be doing enough" or Paulson’s reforms will be viewed as a wild card play by a lame-duck President’s administration at the last minute in an election year.

At Money Morning, our view is pretty neutral.

We believe that the credit crisis is symptomatic of special interest groups, greed and successive administrations that have failed to effectively utilize the regulatory structure already in place.

But as much as the system hasn’t been allowed to work properly, we also feel it’s badly flawed. The current hodgepodge of regulations is designed for depression-era financial instruments, making the regulations almost totally unsuited for modern global finance and financial instruments.

Which brings us to what really matters – how sweeping reforms may affect investors.

Haunted by Past Failures

Given what we know about past attempts to re-regulate entire industries, we’re leery. And we’re uncomfortable for three reasons:

• First, if we look to Sarbanes-Oxley, which was passed in the darkest days following the dot.bomb blowout, we find a huge body of regulation that costs companies an extra $4.6 million to $5.1 million each in compliance fees, depending on which studies you choose to believe. In aggregate, we’ve seen figures suggesting that the overall cost of compliance has diverted as much as $35 billion from the bottom line of America’s top publicly traded companies.

While we’re all for ensuring fairness and transparency, that’s a remarkable sum to have forgone when it comes to potential investment profits stripped away in the name of compliance.

Some will argue that this is a moot point because more accurate disclosure can be construed as adding value, and we agree up to a point. But the trick here is whether the Paulson overhaul will rob shareholders of additional value in the name of still more "protection."

• Second, we’re also concerned that re-regulation could create a "disincentive" for companies to remain public. We’ve seen this before, too, when the number of companies delisting themselves tripled during the year after Sarbanes-Oxley became law.

Arguably, delisting has settled down somewhat in recent years, but many of the executives we’ve privately spoken with long to go private or remain private in an increasingly litigious environment dominated by draconian regulation. Which highlights a risk associated with such comprehensive reforms.

If the regulation proves to be onerous, it could prompt a whole new wave of companies to delist and go private again. The net effect would be a reduction in the number of qualified investment opportunities available to individual investors. In other words, there’d be "fewer fish to fry" as the old saying goes.

• And third, even if Paulson’s proposal (or some combination of other proposals) is enacted cleanly and clearly with a minimum of fuss, we wonder about the new regulations’ ability to "stay ahead of the curve."

Since the dawn of time, governments have demonstrated a remarkable propensity to prepare for the last great crisis while inadvertently creating a whole hospitable landscape for all new crises, yet to be contemplated, to arise.

Which is why we don’t see Paulson’s proposal any differently than past legislative actions.

News and Related Story Links:

• Money Morning:
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