The Paulson Plan: Doing What He Wanted To Do Anyway

Ultimately, Paulson's plan remains "shock therapy" -- wait for a shock, in this case the market collapse, then do what you wanted to do anyway, but couldn't get through in normal times.
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So Paulson has come out with a plan. It's primarily a reorganization plan, pushing the Thrift regulator into the SEC, creating a federal mortgage regulator, giving the Fed the right to inspect the new firms that now have access to its liquidity. There's some talk about objectives based It's almost always a bad sign when the primary "reform" is to create new agencies or merge old ones and Krugman is right to ridicule it as The Dilbert Strategy. What don't I see here?

1) I see no hard and fast statements about leverage in the plan. 30/1 leverage is what made many of these companies so vulnerable. Any plan that does not put hard caps on leverage, get rid of "default insurance" and so on, will change nothing.

2) I see talk of a federal agency for regulating mortgages, but I see no talk about securitization of mortgages. A federal agency pre-empting state ones could actually reduce standards, not increase them.

3) I see no specific talk about forbidding certain types of mortgages such as balloon mortgages and liars mortgages.

4) I see no requirement for banks to keep mortgages on their own books rather than securitizing them.

5) I see no discussion of the ratings agencies, who rated a ton of absolute crap as the highest investment grade and were behind the curve in recognizing when both mortgages and companies were at risk. The current crisis, as a ton of folks have pointed out, is not a liquidity crisis. It is a confidence crisis. How are we going to become confident in the quality of mortgages and various other securities again if no one is checking them to make sure they're worth what issuers say they are?

6) Worse than all this, I see that the plan actually suggests effectively reducing oversight of the creation of new security products, which given that exotic instruments are what got us into this problem in the first place, is insane:(pdf)

The SEC should consider streamlining and expediting the SROrule approval process, including a firm time limit for the SEC to publish SRO rule filings and more clearly defining and expanding the type of rules deemed effective upon filing, including trading rules and administrative rules. The SEC should also consider streamlining the approval for any securities products common to themarketplace as the agency did in a 1998 rulemaking vis-à-vis certain derivativessecurities products. An updated, streamlined, and expedited approval process will allow U.S. securities firms to remain competitive with the over-the-counter markets and international institutions and increase product innovation and investor choice.

• The SEC should undertake a general exemptive rulemaking under the InvestmentCompany Act of 1940 ("Investment Company Act"), consistent with investor protection, to permit the trading of those products already actively trading in the U.S. or foreign jurisdictions. Treasury also recommends that the SEC propose to Congress legislation that would expand the Investment Company Act by permitting registration of a new "global" investment company.

The creation of the Department of Homeland Security did nothing to improve security in the US. Nada. Zip. What it did was allow billions of dollars to go to rural red states which are unlikely to be attacked by terrorists, while ignoring real security needs. Organizational reform does not, by itself, do a damn thing -- they are almost always power grabs.

Now power grabs aren't always bad. It depends what you're going to do with the power you grab. Paulson's plan either doesn't tell me what specifically will be done with the increased power, or when it does (as with the SEC or the mortgage regulatory body) it tells me the plan is decrease regulation (the SEC) or to preempt state regulation (mortgages). In no place do I see stern words about leverage, about default insurance, about exotic securities. Instead I read about streamlining and about making business "easier" to do.

The commission that came up with this plan was seated a year ago. What they have proposed is nothing more than what they wanted anyway, such as a federal charter for insurance companies, which as Marcy Wheeler points out, seems to have nothing to do with the current crisis. But there's been talk of a federal charter for insurance for a long time. I used to work in insurance compliance and it's a mess of 50 state laws. Some of them are a joke, but the toughest (currently New York) are far tougher than anything I can see a federal charter creating. But a federal charter would save insurance companies a lot of money to have only one regulator and many of the larger companies have been pushing it hard for years. So yes, this is just something they wanted to do anyway.

Paulson's plan is meaningless and will do nothing to slow this meltdown. More importantly, I doubt it will do much if anything to slow the next meltdown. Fundamental changes are needed, and reorganizations absent a hard mandate, mean nothing. Ultimately, this remains "shock therapy" -- wait for a shock, in this case the market collapse, then do what you wanted to do anyway, but couldn't get through in normal times.

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