Business

NEED LEVERAGE

Treasury Secretary Henry Paulson’s sweeping plan to overhaul the US financial system may further whack already-battered Wall Street investment banks if it’s put into effect, market players fear.

While the upcoming presidential election means it isn’t likely that Paulson’s proposals – the most extensive the financial community has seen in nearly 80 years – will take effect any time soon, there is concern that the plan could eat into the already thinning businesses of some of Wall Street’s biggest names.

Among those that could be hit, said Punk Ziegel analyst Richard Bove: Morgan Stanley, Merrill Lynch, Goldman Sachs and Lehman Brothers.

Bove told The Post that the plan might eat up to a 33 percent hole in broker revenues because parts of the plan may look to impose stricter rules on brokerage firms, which have grown fat by racking up on leverage.

Many brokers have been using $32 of leverage for every dollar of capital on their books – a ratio that policy makers and regulators could aim to slash in half to around 15 to 1.

One of the harder-hit brokers may be small firms such as Lehman Brothers, which many have feared may go the way of Bear Stearns.

“Whatever the final form is, the goal is going to be less leverage, more due diligence and more responsibility,” said CreditSights analyst David Hendler.

“That’s going to make it that much harder for smaller-scale players,” he added.

Paulson’s 218-page plan proposes eliminating the Office of Thrift Supervision and merging the regulatory oversight of the Commodity Futures Trading Commission with the Securities and Exchange Commission. He also calls for establishing a federal Mortgage Origination Commission, among other measures.

The Treasury secretary’s scheme comes as the biggest investment shops undergo an unprecedented unraveling in confidence and credit and a dramatic withering of profits generated during the mortgage boom.

Investment banks already have had to write down hundreds of billions in soured debt as the US financial system has unraveled since last August.

The resulting deterioration has led to the ouster of topflight bank executives and more recently a Fed-inspired bailout of 85-year-old Bear Stearns by JPMorgan Chase, which is offering to buy out the troubled investment firm for $10 a share.

Paulson’s plan attempts to address some of the banking excesses of the past five or six years and retool a regulatory system that has largely been viewed as severely outdated.

Still, many viewed the moves as an initiative that did not go far enough in dealing with mortgage abuses and the current credit crisis gripping homeowners and Wall Street firms alike.

“This is a regulatory proposal but it doesn’t mean it’s a solution to the problem of the mania of bubbles,” said Hendler. mark.decambre@nypost.com