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My Two Cents

Waiting for Paulson

Chris Farrell Nov 21, 2007

Henry Paulson was a legendary dealmaker and chief executive of Goldman Sachs, Wall Street’s most profitable firm. But he’s been a bust as U.S. Treasury Secretary. For instance, he tried to revive talks on Social Security reform, and the conversations went nowhere.

Now, his big initiative is the superfund to prevent a market meltdown of Strucrured Investment Vehicles (SIVs) that are stuffed with mortgage- backed loans. Citigroup, JPMorgan Chase, and Bank of America have agreed to participate in the multibillion dollar fund that will support the market by providing back-up financing to the SIVs. But the superfund is largely an accounting gimmick that will benefit the banks, but not beleaguered homeowners.

Today’s Wall Street Journal has an interview with Paulson on the subprime mess. This paragraph caught my attention:

While he stopped short of endorsing a proposal by Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., to have mortgage companies freeze the interest rate on the two million mortgages due to reset to higher rates between now and the end of 2008, he said that’s “one idea.” Mr. Paulson said he supports finding some way to develop “standard criteria that’s going to allow for modification and workouts.”

Paulson is fiddling while Rome burns. Look, the proposal by the FDIC is sound and it has the virtue of simplicity. In essence, it says that homeowners that can make their adjustable rate payments at 8% can’t when the ARMs interest rate adjusts at 11% or 13%. So, let’s forget all this talk of voluntary standards–especially considering how banks continue to abuse their troubled customers–and make it mandatory. Homeowners will continue to make their 8% payments, and the upward adjustment is written off by the banks. After all, bank balance sheets can absorb the write-down easier than household balance sheets. And, with the 10-year Treasury note below 4%, an 8% loan is nothing to sneeze at.

Homeowners on the brink of an upward, unaffordable adjustment in their ARMs need bold action from Washington. Question is, when will Paulson finally take the initiative. So far, he seems far more concerned about his old pals on Wall Street than with homeowners.

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