We’ll quote at length because it’s a lengthy list of regulations from the free-marketeers:

Mr. Paulson told The Wall Street Journal that the recommendations of the President’s Working Group on Financial Markets, which he leads, include strengthening state and federal oversight of mortgage lenders and brokers. The group will also recommend implementing what he termed “strong nationwide licensing standards” for mortgage brokers, a move that will probably require legislation.

The group also will propose directing credit-rating firms and regulators to differentiate between ratings on complex structured products and conventional bonds. In addition, it wants rating firms to disclose conflicts of interest and details of their reviews and to heighten scrutiny of outfits that originate loans that are enveloped by various securities.

Another recommendation from the panel is to push issuers of mortgage-backed securities to disclose more about “the level and scope of due diligence” and about the underlying assets of the securities. The panel is also seeking disclosure of whether “issuers have shopped for ratings”—that is, have had to go to more than one credit-rating firm before getting the triple-A stamp of approval.

And the panel will urge global bank regulators to revisit the latest version of bank capital requirements, known as Basel II for the Swiss city where they were negotiated, so that banks that take on risks hold sufficient capital. The panel also wants regulators to complete updated standards for how banks manage liquidity.

This doesn’t go far enough—it’s our opinion that the credit-rating model is hopelessly conflicted and needs to be dismantled, for instance—but it’s better than the laissez-faire fundamentalism we might expect to hear (though we understand that’s political poison these days and the Bush administration is in part playing catch-up to congressional Democrats). Still, we’re especially glad to see that Treasury agrees about the need to put a check on the scandalous mortgage-broker industry. We imagine markets will be comforted, too.

The WSJ also says Paulson will call for Fannie Mae and Freddie Mac to raise more capital and cut their dividends.

Bear-Turned-Leper

In an interesting Heard on the Street column, the WSJ reports on C1 that Wall Street is treating one of its own—Bear Stearns—as if it has a contagious disease.

Bear swears it doesn’t have any cash problems, but the Street ain’t so sure:

Traders handling certain long-term transactions, such as credit-default swaps, said they are being extra cautious when Bear is the counterparty. In some cases, traders are seeking higher-ups’ permission before acting

Credit-default swaps are bets investors make as insurance against a company’s going broke. Essentially, what the WSJ is saying here is that investors are skeptical about buying swaps from Bear Stearns because they wonder if the company itself might go broke.

Some hedge funds that use Bear as a prime broker also have been shifting portions of their business to other firms in recent weeks, according to hedge-fund managers and consultants who help pension funds and wealthy people choose where to place their money. A similar shift occurred last summer, but Bear soon recovered much of the lost business.

The WSJ says Bear Stearns has thirty-three times more debt than equity, a ratio that readers who’ve had their coffee will recognize as even higher than that of the soon-to-be-former Carlyle Capital mentioned above.

Screw the Shareholders

The Journal’s David Wessel, in his A2 Capital column, discusses the coming massive federal bailouts and what those might look like.

Wessel quotes Myron Scholes, a Nobel-winning hedge-fund manager, saying the government should pour capital into the banking system. That would bail out current debt and shareholders.

We agree with the Princeton finance professor quoted toward the end of the story who says these investors need to be wiped out before any taxpayer money is put into these companies. The government shouldn’t subsidize the risk-taking of these shareholders and bondholders.

Tofu, Anyone?

In non-financial (but even more stomach-turning) news, the Los Angeles Times reports on the California meatpacker who testified before Congress yesterday about what led to the massive recall last month of more than 140 million pounds of beef.

Steve Mendell, the president of Westland/Hallmark Meat Co., initially denied that so-called “downer” cows—sick ones that aren’t supposed to be slaughtered for food—were killed for meat. But Congress went to the videotape, the exec hung his head, admitted it was true and said “my life is up in smoke.” The WSJ reports the Humane Society worker who went undercover to report on the doings says he worked at the plant for six weeks without training.

Mendell’s firm is not the only one doing this, of course. It just got caught. These are problems that are going to come with the structure of our current factory-food system. (Cue promo for one of our all-time favorite pieces of journalism, “Fast Food Nation”). If you can stomach watching the video embedded in the LAT story, do so. We’re not veggie burger fans—yet. But keep trying us, meat industry.

Bad Moon Rising

In economic news, Reuters reports a measure of retail sales fell 1.1 percent in February, according to MasterCard. That’s the steepest drop since the credit-card company started keeping track in 2003. January registered an anemic, but still positive gain of 0.2 percent.

Most chief financial officers think the country is in recession and won’t emerge until next year at the earliest. Just 13 percent said they expect the economic downturn to end in 2008, nearly as much as think it will extend into 2010 and beyond.

That finding suggests that the U.S. is in for a more serious downturn than the last two recessions, each of which lasted eight months…

About one-third of the finance chiefs said their companies are feeling the effects of the problems in the lending markets directly, either through the reduced availability of credit or higher credit costs. Three-quarters said the U.S. Federal Reserve’s interest-rate cuts haven’t helped their firms.