Regulatory bill needs work

Opinion Journal:

...

We hope Republicans stick together, despite Mr. Obama's unpresidential catcalls, because Senator Chris Dodd's bill looks to us like a souped-up version of the Sarbanes-Oxley bill of 2002—that is, a collection of ill-understood reforms whose main achievement will be to make Wall Street even more the vassal of Washington, raise costs across the economy, and do little to reduce financial risks. The rush to pass it even before the Financial Crisis Inquiry Commission finishes its work is about claiming one more legislative victory before Democrats find their majorities reduced or gone in November.

We'd prefer to see Congress go back to the drawing board, but if we're going to get a bill then Republicans have an obligation to make it less destructive. The Democrats and their media allies seem to think the politics is on their side because they can link the GOP to the banks, and Republicans will splinter. They also said the same thing about health care, until more Americans understood the facts.

...

They offer some suggestions for changes to the bill and areas to support. So far no one is looking at the fundamental problem that caused the derivative market to seize up. It was not reckless gambling as the President suggests, but a fundamental problem with the way mortgage loans were approved after 1997. The people making the lending decision were no longer at risk for payments because the loans were sold to Fannie or Freddie and then repackaged and sliced and diced and monetized to provide "liquidity" to the mortgage market. Since the guy approving the loan made money regardless of the credit worthiness of the borrower, their standards went to zero or below.

The reform that is needed is at this level. Someone must be responsible for analyzing the rick of making the loan and also have something to lose if the borrower defaults. That is how the mortgage business survived for years without the kind of debacle we had in the housing market. If people have to make more responsible decisions in the loaning of money to buy a house, the exotic derivitive markets will not be much of a problem. Perhaps these markets need more regulation, but I think it should be about their risk analysis. The risk analysis done prior to the crash had several false assumptions. These same false assumptions tripped up the rating agencies too. Scrubbing those false assumptions from the decision process would solve most of the problems.