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Paulson outlines fix-it plan for credit crisis

Treasury secretary calls for tighter reins on financial markets as mortgage turmoil continues.

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Investors are somewhat sanguine about the efforts.

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"I think it's a first step," says Doug Roberts, chief investment strategist at Channel Capital Research Institute, based in Shrewsbury, N.J. "There is not a short-term fix; this will go on for several years."

However, Mr. Roberts is pleased to see Paulson looking more deeply into the potential for systemic risk. "People have alluded to it but not dealt with it directly," he says. "Paulson is saying we have to constantly reevaluate risk."

One of the elements of the White House plan is to increase the regulation of companies that had fallen through the regulatory cracks but had been aggressively making loans. Last March, for example, the second-largest issuer of subprime mortgage loans – New Century Financial – collapsed. It has $35 billion in claims.

"It was not regulated by anyone," says Mr. Zandi. "It was nominally regulated by the [Securities and Exchange Commission], but that agency was not focused on capital adequacy."

The plan also tries to deal with failure of the credit agencies to adequately monitor the complex financial products being sold to investors. Critics have complained that the rating agencies get paid by the issuers of the securities. However, the agencies point out that if the ratings are paid for by investors, there is a potential for conflict as well. Paulson mainly wants the rating agencies to improve the quality of their analysis, particularly of complex investments called "structured products."

The Paulson effort received some grudging praise from Congress.

"The good news is they're beginning to put their toe in the water when it comes to government involvement to help the economy," Sen. Charles Schumer (D) of New York said in a statement. But he added, "The bad news is they're going to have to do a lot more than that to address the problem."

John Taylor, president of the National Community Reinvestment Coalition, says the Paulson effort is not going far enough. "I was glad to hear him say the market was complacent about risks," he says. "We need to clean up this market once and for all and that requires new laws."

He also says the administration and Congress need to expand emergency-loan programs for homeowners since foreclosures continue to soar. "They are up 60 percent over last year, which was a dismal year," says Mr. Taylor. "Paulson's proposals won't do anything relative to the current foreclosures."

Staff writer Mark Trumbull contributed from Boston.