The Missing Link In Paulson’s Argument

“This is a private sector effort, involving no government money; so some may ask ‘Why are these government officials here today?’  We are here because we all know that it is in everyone’s interest – homeowner, servicer, investor – to develop a market based approach to avoid foreclosures that are preventable.”

– Henry Paulson, Secretary of the Treasury, Speech, Thursday, December 6

“There is no federal funding involved: the gains come from streamlining and systematizing a complex and cumbersome process.”

Henry Paulson, “Our Plan To Help Homeowners” (subscription required), The Wall Street Journal, Friday December 7

There’s one very obvious hole in Paulson’s explanation of why government got involved: If it’s in everybody’s self interest, why didn’t they do it on their own? 

Businesses and investors are the ones most concerned with how their businesses and investments do and the ones that know the most about what is going on and how to deal with it.  They have both the incentive and the knowledge to best do what is needed.  So why did Paulson and the Feds have to intervene to bring everybody together?  It just doesn’t add up.

On the surface, it makes sense to me that investors would like to see mortgages reworked so that even if they get paid less, they still get paid rather than having to deal with defaults.  So why didn’t the individual companies, acting alone or in consultation with each other, come up with some sort of plan for dealing with the coming resets and potential disaster?

It’s in their interest to keep these mortgages alive so that they can continue to earn money by servicing them and so their investors can continue to get paid in an orderly fashion.

Paulson says that the ordinary process of modifying a loan is complex and time consuming and needed to be streamlined to deal with the volume of problem mortgages that we are likely to see in the next couple of years.

Okay, fair enough.  It’s a bigger problem this time and it will pose a strain on the resources of servicing companies.  Why couldn’t they figure this out and streamline it themselves to make limited resources of time and energy address the scope of the problem?

Everything sounds good but I just don’t get why the government had to get involved and make such a big show of it.  I am suspicious that no pressure was applied to mortgage servicers and investors to give strugggling homeowners more concessions than they might otherwise have been inclined to give them and to get it done NOW.

It’s kind of like selling the mortgage backed securities on the books of the Structured Investment Vehicles (SIVs) to the Master Liquidity Enhancement Conduit at “market prices”.  Market prices are what would prevail in the absence of the MLEC!  The MLEC will buy at “fair prices” that the banks like to protect their books and make everything look okay.

So the plan sounds good on the surface.  But I smell a fish.