The WSJ Questions Obama’s Securitization Fix

The Wall Street Journal this morning zeroes in on a critical aspect of the Obama administration’s regulation proposals: What to do about securitization.

The paper hits the proposal pretty hard, saying it’s just a mix of existing plans. None of them are exactly radical, which is odd because, as the paper says, securitization is “chiefly responsible for the global credit crisis.”

The paper pulls the money quote from a Washington Post op-ed from yesterday by Tim Geithner and Larry Summers:

“By breaking the link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure,” Treasury Secretary Timothy Geithner and Lawrence Summers, director of the National Economic Council, wrote in an op-ed published in the Washington Post on Monday.

Securitization breaks the link by letting lenders make a loan and then slice it up and sell it off to investors. That leaves them with no skin in the game. That skews incentives and led lenders to hand out ever more nutso loans during the bubble since they figured if they went bad somebody else would suffer the consequences. It was a radical transformation of the centuries-old essence of banking.

The administration’s plan would force banks to keep 5 percent of a loan on their books. That doesn’t seem like much. And the paper raises the good point that it would be pretty difficult to prevent banks from hedging away that risk anyway.

The irritating thing about this story is its reliance on attribution to “analysts,” especially since it only quotes one by name. Why do you need to attribute this critical point to anyone, much less a nebulous blob of people?

Analysts also have said forcing lenders to keep “skin in the game” doesn’t address what upended banks in the first place. For one, they kept billions of dollars of high-quality securities in off-balance sheet structures, which they financed in the short-term debt markets.

Those are just facts.

I like to see the paper raising the credit-ratings issue, even if it does attribute the question to those same analysts:

Some analysts also wonder if the government is doing enough about the conflicts and other problems ratings agencies helped cause during the crisis, given that ratings agencies have implemented many of the administration’s proposals on their own over the past 18 months.

The plans to increase transparency at credit-rating companies will require rating services to address conflicts of interest and better explain their ratings, methodologies and what risks they are measuring, as well as providing detailed performance reports.

Is that really all that’s going to be done to rein in the credit raters, who after all were the key enablers of the whole crisis? Really?

The weird thing about this story is the lede. It frames these beefs as concerns of Wall Street, when I’m pretty sure they’re the last ones hankering for regulation:

The Obama administration’s planned revamp of securitization doesn’t go much beyond what is already in the works, raising doubts on Wall Street about whether the plan will fix the market chiefly responsible for the global credit crisis.

The only thing I can figure is that the securitization market is so screwed that Wall Street knows it needs a dose of strong medicine to be resuscitated.

If it’s true that the Street is questioning whether the Obama administration’s regulations are hard enough on it, then we’ve got more problems than we knew.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.