Henry Paulson

[TJ_98370]

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Make financial services firms liable for creating toxic mortgages - what a crazy idea!



Treasury Secretary Henry Paulson says the U.S. is examining the subprime mortgage crisis to ensure that "yesterday's excesses'' aren't repeated. He could be talking about himself and his former firm, Goldman Sachs Group Inc.

Paulson, 61, doesn't mention that Goldman still has on the market some $13 billion of almost $37 billion in bonds backed by subprime loans or second mortgages that it created while he was chief executive officer. Those bonds have an average delinquency rate of almost 22 percent, higher than the average of other subprime bonds from the period, according to data compiled by Bloomberg.

Goldman, the most profitable investment bank, was one of 14 primary dealers of U.S. Treasuries who contributed to a three- year binge as $1 trillion of subprime mortgages were packaged and sold to investors. The value of Goldman's outstanding subprime bonds trails Lehman Brothers Holdings Inc.'s $33 billion, out of $106.8 billion created during Paulson's years at Goldman, and Morgan Stanley's $28.8 billion, out of $82.5 billion.........

........Starting in March, Paulson said the damage was ``largely contained'' and was no risk to the larger economy. When other credit markets began to be affected, he and others began pushing for solutions.

"I can't help but notice that when middle-class homeowners were losing their homes to foreclosure, he was pretty nonchalant about it,'' Miller (North Carolina Representative, Democrat) said of Paulson. "But when Wall Street CEOs start seeing trouble in their absurdly complicated financial instruments built on the mortgages of middle-class homeowners, he feels their pain.'' ......

......While competitors reported losses from their subprime portfolios in recent months, Goldman said Sept. 20 that it profited from the market's decline by using derivatives to bet that mortgage securities would continue to fall.

Paulson's involvement in the subprime crisis "points out that there needs to be complete accountability up and down the system,'' said Allen Fishbein, the director of credit and housing policy at the Consumer Federation of America in Washington. "Goldman wasn't alone. All the brokerages did this.''

Goldman ranks 10th among 118 issuers, based on the amount of subprime loans still on the market. Bonds with a face value of $484.6 billion remain from those created in the years Paulson ran Goldman......

.......The House bill Miller introduced is backed by Representative Barney Frank, the Massachusetts Democrat who is chairman of the Financial Services Committee. One provision would make firms that package and sell subprime mortgages liable for damages if loans violate certain minimum standards, including ensuring a borrower's reasonable ability to repay.

Paulson criticized the liability idea in an Oct. 16 speech at Georgetown University in Washington.....

.....The House measure would "potentially paralyze securitization,'' which, Paulson said, has been "extremely valuable in extending the availability of credit to millions of homeowners nationwide and lowering the cost of financing.''... .
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