Henry Paulson has suggested that part of the genius of his plan to save the US financial system by purchasing toxic mortgage paper from banks and brokerages is that it is simple and free of bias. He argued that adding provisions that are designed to limit management compensation at firms which are bailed out or riders to aid individual homeowners would create too may layers of complexity and dilute the core benefits of the program.
Paulson poisoned this well by belatedly adding a new proposal to his own plan. According to The New York Times, "Foreign banks, which were initially excluded from the plan, lobbied successfully over the weekend to be able to sell the toxic American mortgage debt owned by their American units to the Treasury, getting the same treatment as United States banks."
While foreign financial companies with subsidiaries in the US may employ Americans and may have troubled mortgage paper, Paulson’s inclusion of firms headquartered overseas is certain to make his legislation almost impossible to pass.
Many members of Congress will respond to the inclusion of foreign banks in the bailout with a visceral reaction based on their belief that homeowners’ interests should be put before those of overseas lobbyists. This position is nothing more than a trap for the feeble-minded. The buying up of toxic assets has very little to do with saving people with troubled mortgages.
However, mortgage-backed securities pose trouble to the US credit system no matter what the provenance of their holders may be. A systematic sweeping up of the garbage will have to be blind to whom the owners are, as long as the asset sits in America’s capital markets.
It must have dawned on Paulson late that he had left something behind when he went up to Capitol Hill to make his sale. When he tried to correct this mistake, he undermined the power of his original argument which was to save the US credit markets . His revision may be correct but it is fatally ill-timed.
Douglas A. McIntyre
Top Gaining Stocks
Top Losing Stocks