Latest ‘Committee to Save the World’ Groping for Solutions

Latest ‘Committee to Save the World’ Groping for Solutions

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The regulatory might of the U.S. government gathered in public session Tuesday for only the second time under the auspices of the financial reform bill. Its overarching mission: create a regulatory system that prevents the kind of systemic failure that requires massive government bailouts.

The lineup sitting across the front of the ornate Cash Room at the U.S. Treasury was indeed impressive: Federal Reserve Board chairman Ben Bernanke, Treasury Secretary Timothy Geithner, Securities and Exchange Commission chairman Mary Schapiro, Federal Deposit Insurance Corporation chairperson Sheila Bair, Commodity Futures Trading Commission chairman Gary Gensler. And that was only half the roster of the Financial Stability Oversight Council, Washington’s latest version of “the committee to save the world.”

Those with long memories will recall when Time Magazine used that phrase on its cover to describe the troika of Fed chief Alan Greenspan, then Treasury head Robert Rubin and his deputy Larry Summers. The year was 1999, also a time when the global economy, in an early warning of the destabilizing nature of excess leverage and deregulated financial institutions, teetered on the brink of collapse.

This latest and larger incarnation of the committee seemed far removed from solutions to the most pressing problems weighing down the financial system and the economy. The first subject on the agenda was the rapidly unfolding mortgage foreclosure crisis, which may have allowed thousands of Americans to be evicted from their homes illegally and without recourse to government aid programs.

Michael Barr, the assistant deputy Treasury Secretary in charge of its foreclosure task force, told the committee that government inspectors were hard at work examining the paperwork created by a home loan origination-and-securitization industry, some of which was bogus. “We sent a letter to the institutions in late October reminding them of their responsibilities,” he said.

Staff hopes to issue a report by late January, just in time for the next FSOC meeting. It will have to be delivered by someone other than Barr, since he announced last week that he is leaving the administration to return to teaching law at the University of Michigan.

Aid to homeowners, meanwhile, wasn’t discussed, perhaps because it isn’t this committee’s responsibility. The meeting quickly turned to making the world safe for derivatives traders by setting up clearing houses with capital requirements that would make these previously off-balance sheet two-party transactions transparent and, hopefully, backstopped. 

It’s too bad a few beleaguered homeowners weren’t in the room. They might have reminded the assembled regulators about the data in the latest Mortgage Bankers Association report on foreclosures, which was issued last week.

One in every 25 homes in America is now in foreclosure, about the same rate as last quarter and four times the historic average. If you add in the number of homes that are more than three months behind in their mortgage payments, the total is one home in every 12.

More disturbing, the composition of foreclosures is shifting. In 2007 and 2008 when the crisis first hit, it was the sub-prime and poorly documented loans (so-called Alt-A) loans that were going under. Now, it is mostly people with standard mortgages who simply have been out of work for so long that they can no longer afford to pay off their loans.

I left the FSOC meeting, whose public portion took all of 20 minutes, wondering where was the committee to save their world?

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spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.