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ShareSteil: Parsing Paulson’s Reform Proposals
Benn Steil interviewed by Lee Hudson TeslikCFR’s Benn Steil examines proposals for a regulatory overhaul of the U.S. financial system put forth by Treasury Secretary Henry Paulson.
Interviewee: Benn Steil, Senior Fellow and Director of International Economics, CFR
Interviewer: Lee Hudson Teslik, Associate Editor, CFR.org
September 22, 2008
Following a tumultuous week on Wall Street that saw the collapse of Lehman Brothers, the sale of Merrill Lynch, and a federal bailout for the insurance giant AIG, the U.S. Treasury and Bush administration are pushing a massive financial rescue plan. The plan includes the formation of a government agency with the authority to buy up as much as $700 billion of distressed assets from private companies. Lawmakers on Capitol Hill are considering (WSJ) different versions of the plan.
Benn Steil, CFR's senior fellow and director of international economics, discusses what he sees as positive and negative aspects of the plan. Steil says the "basic idea" of establishing an institution along the lines of the Resolution Trust Corporation (which was created in 1989 to liquidate assets, including distressed mortgage loans, from troubled U.S. savings and loan institutions) is a good one. But he also points to several potential problems. First, he says, the bailout that's currently being proposed is "utterly enormous" and will add "very, very significantly to the U.S. national debt."
He says the fact that the Treasury is considering buying up all sorts of distressed assets is "quite dangerous," and the plan should be limited to debt from mortgages. "A lot of these assets [that the U.S. government might buy under the current plan] are very complicated and exceptionally difficult to value," he says, adding the plan "could wind up leaving very bad assets on taxpayers' balance sheet for a considerable period." This, he says, stands to have a broad impact on the valuation of the U.S. dollar, with potential ripple effects throughout the global economy.
Steil proposes a different plan. Under his plan, financial institutions that wanted to sell mortgages would come to the Treasury, ask for their mortgage-backed assets to be evaluated, and pay a fee to have them evaluated. The Treasury would then classify the assets based on the evaluation and would offer to buy the assets at prices based on what tier they are in. The firms holding the assets would then be able to choose whether to sell them to the federal government, or could attempt to sell them to other investors through the open market.
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CFR’s Benn Steil examines proposals for a regulatory overhaul of the U.S. financial system put forth by Treasury Secretary Henry Paulson.
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