The Paulson Plan: Doing What He Wanted To Do Anyway

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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.

Further Reading:
Scholars and Rogues
Paul Krugman

Comments

[TRYKER]

We need no "help" from anyone in this administration of fools to set things up for their next dirty trick. Leave it to the next administration and hope the American people have some input into new desirable legal regulations.
Interesting that 70% of the victims of the sub-prime scam were black and Hispanic. Even though many were fully qualified for low-interest fixed rate mortgages, they were steered to these corrupt financial instruments designed for failure.
Interesting too is the resultant loss of taxes to cities and counties that will make them vulnerable to the takeover of their utilities....power and water...by private corporations, just waiting in the wings. "Here, let us buy your water systems, power stations, bridges, hi-ways, tunnels...and let us charge you tolls to use them forevermore."
Privatization...its the ELITE WAY.

[Henry]

I think that the investment banks and their secs of treasury (Don Regan, Rubin, and now Paulson) have dictated the regulatory evolution of finance and banking in this country. The extinguishing of Glass Steagal to permit cross boarder banking has served to "consolidate" banking ownership (computer technology also helps). This permits financing of mega conglomerations all of which are to big to even understand their own balance sheets.
Paulson works for the mob (investment bankers) and his rules are well calibrated to permit the mob to rule. The only way this will change is to "trust-bust" the investment bankers. The reach is now world wide and their "patriotism" (or lack thereof) is ledgendary. Their patriotism is to greed wrentched profit for themselves. It is a glaring irony: The republicans are states righters, yet they will have nothing to do with establishing state borders as limits to state banking. Investment Banks are frankensteins (it's not their faults they are what they are) and the government by for and of the people needs to curb their malfeasance.

[Rule Of Law]

Paulson is a Goldman-Sachs alum, and knows where his bread is buttered. Goldman-Sachs--the guys who gave us the first Great Depression and one of the original funders of the so-called Federal Reserve. Works for the Mob? More like he's in league with the Devil.

[NicoleAnonymous]

There was an interview with Rubin recently and he was very critical towards Bush and his administration. He lost his job because Bush was angry that he didn't support his tax cuts for rich people.

[NicoleAnonymous]

I was wrong - it was an interview with Paul O'Neil in the NYT Magazine. This was my favorite response.

"What do you think of James Cayne, the former Bear Stearns C.E.O., who was off playing bridge as the company was collapsing?"

" I don"t want to make a judgment. Do you like to play bridge? I like to play bridge. "

[rcampbell]

Mike

Your comments are salient, but inappropriate for this thread. That you're so impressed with yourself for having started a business has nothing to do with this adminstration's complete failure regarding the economy. For you to suggest that simply owning a business and working hard will exempt you or others from the fallout of the lack of regulation and proper oversight of the financial industry shows a naivete' that I'm sure you'll grow out of.

The author's correct point is that, just as this administration pulled a fast one on the American public by siezing upon the event and subsequent nationalistic fervor of the attacks of 911 as a pretext to implement their already existing plan to invade Iraq, the Paulsen plan is an opportunity to offer the financial markets what THEY want under the guise of regulation and in the wake of a disaster of this administration's own doing.

BTW, I started a business on a shoestring 25 years ago this month. After working my ass of for 13 years I sold it and retired at 47 years old. That doesn't change the fact that the Paulsen plan is not unlike the administration's attempt to ease pollution regulation under the guise of something falsely called the Clean Air Act.

[texanna]

While I had not yet applied "The Shock Doctrine" to the Paulson plan, there was immediately a hearty level of skepticism on my part when I heard he had introduced his proposal for reorganization of the country's financial regulation. I mean, why on earth would any of us allow this regime to change anything at this time. But where are the voices of the Congressional leaders regarding this scheme? As usual, totally silent on these important matters while talking everywhere about how super delegates should execute their responsibilities and endorsing candidates so as to further muddy the waters of this swirl of a primary campaign.

[Purple Girl]

Don't Judge AmericaNs on the Inc's nor the Meida they employ. We saw the Writing on th eWall in the '70's regarding Oil and the Regions Unrest and their tactics - Remember, every other day fuel UPs, Hostage Crisis????
The Big 3 only went 'fuel Effecient' because the japanese were Kicking theri asses in sales (not for US), Once things 'settled Down' (our Inc's were greeeted as Liberators for the Elite of the Region- they rolled out th ered carpet, they sold theri people on th eAuction Block to the Predator Corps) Waht do they start PUSHING escalades and Hummers (the Autos & the Act). And Voila we are back in the '70s but with More 'Bam" to it. Please We've seen this happening. But Many were laughed at and lableed 'Conspiracy theorists' The 'New World Order ' Village Criers were Right! Many who have been warning US for decades- nearly a Century have had the Position to see very clearly ( Trumans BEST call). WE are not as Blind or ignorant or arrogant as the Corp Controlled Media has depicted US

[ConnieInCleveland]

We have seen this administrations response to concerns of citizens about Iraq, (SO), What are they going to say after they destroy our economy? (SO) -- and laugh all the way to the bank. Their leadership has gotten us into this mess. We are months away from new leadership, why let this administration change things now? We need to face our financial problems, not find new ways to cover them up.

Trust is earned! Blind faith is a mistake!

[Lilybart]

Einstein, or someone like him, once said that the person who made the problem is not the person who can fix the problem.

I agree. No reason to do anything until there is a new President and a new Congress.

[scott59]

It was something along the lines of "the thinking that got us into these problems will not be the thinking that gets us out of them". How true. More liberalizing the markets as the solution to all our ills when we need some appropriate regulation. How many days until a new administration?

[GrainOSand]

The moral of your story is --more of the same. If all that you have written is an accurate representation of the Paulson plan --and I believe it is, then what are we to do? As I read the article I could almost see the invisible hand of behind the scenes capitalists in the national till --skimming off the top, and sucking from a vacuum hose in the bottom. What can one do in the face of such arrogance to steal, to maintain and widen the gap between have"s-and-have-nots?

The sub-prime scheme was a pyramid scheme where the people who created those false securities and got out before the whole thing went south made a lot of money. The poor suckers who were just trying to taste the American dream got steamrolled through not reading and understanding the terms, or through unrealistic expectations of the sustainability of a complex con game. Too bad, a lot of people got hurt in this market downturn and more pain may be just over the horizon. May sanity come in the form of anew leader with a will and a way to do better.

[Mike O.]

"...got steamrolled through not reading and understanding the terms, or through unrealistic expectations of the sustainability of a complex con game."

If you didn't pay attention, then you didn't get "steamrolled". How about the many, many more millions who were repsonsible, took advantage of opportunity and succeeded?

Are you liberals so daft that you need someone to check and double check for you to ensure that you don't get "steamrolled" due to your on stupidity or lack of understanding?

The govenment is NOT your nanny.

[NicoleAnonymous]

So does that go for bankers also or only "liberals" who you think aren't smart enough to know better?

Didn't the bankers at BS read and understand the terms of the trades they were making? Didn't they understand what they were doing? They're being paid much more than most "liberals" yet their company was destroyed by their own incompetance.

The government is NOT their nanny.

[WIpatriot]

No the government is not, and should not be the Republicans' nanny either.

[Rule Of Law]

Patriot, this guy and about a half dozen like him on these boards, is a counter-puncher. He comes in after the fact and tries to hit folks when they aren't looking, never adding anything new or of value to the discussion--just the same tired old crap about those greedy lazy poor folks.

Why such a hater, Mike! And if you're gonna be a hater, why not try to be an equal opportunity hater and go for the gold ring?; The big guys at the top who steal from ALL of us, including you my friend, and just keep coming back for more. Or does that go against some principles you hold that we haven't seen yet, because all your posts seem to be hurray for me, and to hell with everybody else.

[research]

You got it! This is just more corrupt deregulation!

The same kind of deregulation that got us into this mess!

The Permanent republican fascist majority is still moving forward toward a Hoover depression, so they can further dominate the peasants and avoid prosecution.

Shock Doctrine,

Robber Barons,

Borrow and steal for your cronies republicans:

Conservative=corporatist=fascist=GOP=BushCo=McCain=Bankruptcy.

Bankrupt morally, intellectually, politically.

Bankrupt financially unless you are one of the few chosen cronies.

[Mike O.]

Stop being a "victim" and educate yourself, then you won't have to worry.

Why is it that millions are succeeding in this environment? I started a small business 13 years ago with $100.00. I was working two jobs at the time. I succeeded through hard work and sheer force of will. If I can do it, so can everyone else. I have no synpathy for those who refuse to take responsibility for themselves and expect others like me to pay for their willful ignorance and laziness.

[Rule Of Law]

Mike,

"I have no synpathy for those who refuse to take responsibility for themselves and expect others like me to pay for their willful ignorance and laziness."

You've just described every financial firm on Wall Street. What are you gonna do about it?

[WIpatriot]

The "victim" of this whole mess is responsible people who will be paying for it.

I'm presuming that's you, since you are such a success.
Since you presume that it's all lazy people who are the cause of this financial crisis, Ican assume your business is not one that requires clear thinking or financial acumen.

[Rule Of Law]

Hey, still no response from Mike or his clones. Are we winning yet?