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How Washington Works

by Peter G. Miller
March 31st, 2008

For the past few days rumors of a new plan to regulate Wall Street have been referenced in Washington. The way this really works is that the 22-page document can discussed but not fully revealed or published. If the public reaction is good, then the Administration (all Administrations do this) makes a formal announcement and takes credit. If the public reaction is bad, then the plan can be magically changed or given over to a committee or group to “study” — a code word meaning buried in the deepest mine anyone can find.

We now have the Bush plan to reform Wall Street and thus a portion of the mortgage marketplace. Michael Mandel of Business Week says:

“In the middle of perhaps the greatest financial upheaval since the Great Depression, Treasury Secretary Hank Paulson is proposing a change in financial regulations which basically amounts to a big wink to Wall Street. His plan will go nowhere, both for political and practical reasons. In fact, it does not even meet the minimum standard of improving transparency, which would reduce the possibility of a similar crisis in the future.”

Mandel adds that “for political reasons, nothing is going to happen until after the presidential election. The Democrats in Congress have no reason to sign onto the Paulson plan. But the next president—whoever it may be—should put financial transparency at the top of the regulatory agenda.”

Over at the New York Times, Nelson D. Scwartz and Floyd Norris report that “Although the proposal would impose the first regulation of hedge funds and private equity funds, that oversight would have a light touch, enabling the government to do little beyond collecting information — except in times of crisis.

“The regulatory umbrella created in the 1930s would grow wider, with power concentrated in fewer agencies. But that authority would be limited, doing virtually nothing to regulate the many new financial products whose unwise use has been a culprit in the current financial crisis.”

For those who may not know, at least at the mortgage end such proposals are junk. The Federal Reserve ALREADY has the power to regulate national banks and their mortgage subsidiaries under the Home Owner and Equity Protection Act (HOEPA)

As we have previously noted, under HOEPA’s Section 129(I), the Federal Reserve has expansive powers to deal with unfair and deceptive acts or practices (UDAP) regarding ALL loans. As Michael Calhoun, President of the Center for Responsible Lending, says, “the Board has not used this authority.” If the government doesn’t define any lender actions as unfair and unconscionable then what claims can be made by borrowers?

A new system of capitalism has emerged in the past few weeks — we now have privatized profits and socialized losses. Real regulation would limit public risk and cost at the very time when the government has the leverage to make regulation a practical reality. Instead, it has simply become the place to dump mortgage-backed-securities that can’t be sold elsewhere for more money.

At Business Week, see Why the Paulson Plan is DOA

At the New York Times, see: In Treasury Plan, a Reluctant Eye Over Wall Street

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