Treasury Secretary Paulson has been making the rounds selling his plan to help with the mortgage crisis, a plan that has "government facilitating the [financial] industry coming together to prevent a market failure." The plan is too limited in scope to have much of an effect, so the plan and the current sales blitz is more of a political effort than a means of averting a crisis.
This is part of a much longer interview Secretary Paulson did with the LA Times as part of the attempt to sell the policy. In this part of the interview, Paulson attempts to identify the market failure that justifies government intervention, but it's hard to call the attempt successful. He does talk about coordination failure among lenders that prevents private sector solutions from emerging, and he references resource constraints that prevent lenders from underwriting new loans on a case by case basis on better terms to prevent foreclosure, but he doesn't explicitly explain the market failure and he does not project the sense that he has a firm grasp of the nature of the market failure he is asserting:
These are Not Normal Times, Commentary, LA Times: ...Market failure defined
Peter Hong: Could you be a little clearer on what you mean by "market failure"?
Henry Paulson: As I've said, chaos. If ever there is a role for government to bring the private sector together to deal with a situation that — when I say market failure I say that we have an unprecedented situation, and the private sector has to find a way to deal with that. Otherwise you're going to see them drowning in people who can't make resets, whom they would ordinarily want to keep in a home.
And again, I think if you take the time, call in servicers, talk to people at Wells Fargo and others, take the time to really understand it, they'll see that once you get into the process of underwriting a new loan — refinancing or modification — and you go through all the paperwork they have to go through and collect the data, that takes a long time. And they don't have the resources to do that and handle the volume at the same time.
Tim Cavanaugh: Well, wait a second, they had the resources to do it and handle the volume when they wrote the loans in the first place.
Henry Paulson: Well, it's different than — these were securitized. I'm not going to defend what went on, but I haven't talked to anyone out there, who is knowledgeable about the industry and is in the industry, who says they have the resources to handle all the underwritings to handle the modifications.
Tom Petruno: Some would argue that it was lax underwriting that got us into trouble in the first place: no assets, no income, no problem. So we're asking the underwriters to go to fast-track — not ask too many questions and give these people a break. It's...
Henry Paulson: Well again, the lenders are giving themselves a break also. They're acting in a way that's in their interest. This is not — I think you all — I see I've got a skeptical group here. It's amazing: I've spent my life in the private sector, and it's amazing how many people I've met who've never spent a day in the private sector who think any kind of government involvement is somehow hurting market.
Tim Cavanaugh: This ain't Stockton!
Tom Petruno: We're all in the private sector here!
Henry Paulson: No, I mean various idealogues I've discussed this with, because the fact is, if you understood my point, lenders like to keep people in a home, keep payments coming. Who are they helping if they keep getting bogged down?
Jim Newton: Well given that it's in their interests, why is the government needed to bring this along?
Henry Paulson: Because it's a diffuse industry, and I think some of the bigger, more sophisticated people understood this earlier. There's a whole host of issues, including accounting issues and others that slow this down.
Tim Cavanaugh: But you're not going to do their accounting for them. What's the service that you're providing?
Henry Paulson: It just took a while for people — and it wasn't like there was resistance; this group kept growing and learning and working and being added to. It's amazing to me, the skepticism out there when you have the servicers covering the industry, they've got their investors coming together, they had all the regulators there.
I thought the skepticism would be of another source. We've got a housing downturn created by a whole series of lax lending processes, easy credit, runups in markets that were unsustainable. This effort doesn't solve that problem. This is one piece of the issue. And this will not in and of itself solve what's happening in the housing market. What this will do is make a difference in that we won't have housing prices driven down in ways that distort the market because the industry can't get organized to solve the problem.
Tim Cavanaugh: Is it distortion in the market when the market was already distorted up to a degree that maybe wasn't unprecedented, but was certainly unusual in American history?
Henry Paulson: So you'd like to see it distorted down too. Well, that's — reasonable people can disagree. I think that would be a market failure and I think that's why the market players came together ... There's a theory here that the process that led to this problem was so flawed, that let's hope that the unwind can be so messy that people will get what they deserve.
Jon Healey: No no no, it's more about learning. The risk to investors in securitization were masked somehow, because they found themselves surprised.
Tom Petruno: They claim they were surprised ...
Jon Healey: Yeah, they claim they were surprised, but if you look at some of these writedowns...
Henry Paulson: Right. Again, I don't think this is doing anything to mask the risk. I think this is an innovative way and a practical way [...read entire interview...]