Hammering Hank Paulson

Hank Paulson, secretary of the Treasury, a former chairman of Goldman who spent three decades on Wall Street wants to create 3 new financial regulators and combine the hodgepodge of financial regulatory agencies we currently have.

Treasury recommends a "Prudential Financial Regulator" to oversee financial institutions that have an explicit government guarantee such as deposit insurance, a "Business Conduct Regulator" to monitor disclosures, business practices, chartering and licensing, and a "Corporate Finance Regulator'' with responsibilities for general issues related to corporate oversight in public securities markets."

Under his plan the Office of Comptroller of the Currency (which dates to the Civil War) would combine with the Office of Thrift Supervision. He would also combine the Securities and Exchange Commission with the Commodity Futures Trading Commission. Mr. Paulson does not expect his proposal to become law this year, but hopes for more debates that would extend into 2009.

The administration proposed a Mortgage Origination Commission to evaluate the effectiveness of state governments in regulating mortgage brokers and protecting consumers.

The combinations of the three banking regulators would make a smoother set of financial laws, rather than the patchwork of state regulations in place today. I believe the creation of a Mortgage Origination Commission should be on the back burner until the whole mortgage mess is over and the dust has settled. If it is rushed I foresee a mountain of regulation and fees that will drive up the costs of obtaining a mortgage for average consumers. I’ve written about my suggest wait and see policy previously. Investors do not want to create another situation where they loose billions of dollars again. Revising the mortgage regulations would be nice, but let’s wait for the smoke to settle first.

The Federal Reserve is planning to purchase up to $200 Billion worth of underperforming loans. This is great idea if properly implemented. The Fed can create wealth, just for this situation.

I hope they buy these mortgages at a discount to somewhat punish these investors. Purchased price of 85% of the existing value? The Fed could then freeze adjustments, or lower rates to slow foreclosures. The creation of an agency similar to what the Resolution Trust Corporation did for failing S&Ls, to run a fire sale on all of the empty properties. It would push home values down even further (to where they belong), but taking our medicine now will make the cold go away sooner.