Hank Paulson's speech last Wednesday to the US Chamber of Commerce on financial markets regulatory redesign, about which I wrote here, was, in retrospect, a warning about today's release of the Secretary's 'blueprint' for a new scheme.
You can read all about it in today's Wall Street Journal. The details would be many, I am sure. The executive summary was reported to be some 22 pages, the full report running to something in excess of 200.
However, to me, three facets of the recommendations stand out.
The first is one on which I picked up during Paulson's speech on Wednesday- forming exchanges for current OTC instruments such as credit default swaps. When he referred to this on Wednesday, I found it telling.
When Paulson mentioned it twice today- once in his speech, and another in an interview on CNBC- it told me that Paulson correctly understands that these unregulated instruments, whose settlement and clearing has become problematic, are going to be reined in hard.
This is a good thing. Leaving them roaming in OTC land has become a dangerously destabilizing feature of today's financial markets. It may end up as one of Paulson's two best legacy achievements.
The other would be Federalizing the insurance markets. Paulson took the politically difficult, but economically- and regulatorialy-necessary step of calling for Federal supervision of insurance to supersede any existing state-level regulations. Citing national and international scale of providers and a need for competitive developments in the industry, Paulson's recommendation may finally force loose a major stumbling block which has helped delay meaningful progress on affordable healthcare insurance plans in this country. It would be his other monumental legacy to accomplish this particular Federalization.
The third noteworthy aspect of Paulson's recommendations is the near-term formation of a Federal mortgage certification board. The intended consequence of this board would ostensibly create a body of Federally licensed mortgage industry professionals.
Are there no bad practitioners of law or medicine? Plumbing, electrical work or carpentry?
Licensing alone will not prevent the shoddy lending practices or improper mortgage broker activity which played their parts in the home lending debacles now being sorted out.
A recent Wall Street Journal editorial noted that requiring licensing for a profession typically raises prices, but offers no guarantees of better products or services. This will, sadly, be true for the mortgage business, as well.
Rather, as my partner suggested over a month ago, the more obvious and simple solution is to require a 20% cash downpayment for any mortgage made in the US. Period.
No exceptions. A borrower's balance sheet must be frozen and clean, and on that balance sheet must he sufficient cash to constitute 20% of the purchase price of the home.
Most of the problems with subprime mortgages or shady brokers would have been mitigated simply by requiring the borrowers to qualify with 20% of the purchase price in cash.
It is very similar to the original installment credit regulations in place in the US in the 1950s, before the growth of installment lending via bank credit cards.
Other than overloading the Fed with excess supervision duties, as I noted in my earlier, linked post, and this bad idea for mortgage banking licensing, Paulson's recommended blueprint for newly-regulated US financial markets holds great promise, and is long overdue.
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