Minimum down
Monday, March 17, 2008 11:16 AM PDT
It must pain Treasury Secretary Henry M. Paulson Jr. to call for more government regulation of lenders and their facilitators. On Thursday, an interagency group Paulson leads, the President’s Working Group on Financial Markets, recommended new or tougher rules for the entities that promote, originate, repackage, evaluate and invest in mortgages. The goal is to restore confidence in the credit markets and protect the public against a repeat of the current crisis.
If only Paulson and the other regulators in the group had more enthusiasm for the task at hand.
The root cause, they said, was that lenders and investors stopped caring enough about risk. But those players were merely responding to the incentives provided by cheap money (courtesy of the Federal Reserve) and rapidly increasing property values. The problem was that regulators didn’t seem to be paying attention as brokers peddled risky and sophisticated loans to novice borrowers, lenders doled out mortgages without checking the borrowers’ ability to repay them, ratings agencies slapped AAA grades on securities backed by questionable mortgages, and investors snapped up the securities with no real idea of what they were buying.
Paulson has called the situation a “market failure,” but it wasn’t the market that failed. Willing buyers and sellers all along the chain struck the deals that are now undermining the economy. It was the government watchdogs that failed to see the disaster coming. The group’s report reflects Paulson’s aversion to prescriptive rules that would sacrifice market flexibility in the name of consumer or investor safety. Still, the added oversight it seeks would make it easier for borrowers and investors to judge the risks they were taking and would push lenders to guard themselves more carefully against downturns.
The steps are more of an inoculation against future excesses than a cure for the current credit market tailspin. And they’d be more effective if the regulatory duties were consolidated under one agency. But they’re the least the government should do before lawmakers consider the bailout that Wall Street is clamoring for.
— The Los Angeles Times
