Right now, the question everyone is asking about the Paulson plan is: Will it pass? But the real question they should be asking is: Will it work? To read the headlines, you might figure the details had all been hashed out. But the deal is really just a blueprint for a program with a lot of blanks, to be filled in later.
In all fairness, details about derivative pricing aren't exactly Pelosi and Boehner's forte, and it's probably a good thing they've left them to the experts. But that leads us to detail number one: Who will be the experts actually shaping the program? Unlike the Resolution Trust Corporation, which commanded the Treasury to pull staff from the Federal Deposit Insurance Corp. to minimize the damage of the S&L crisis, this bill calls for the Treasury to hire a team of asset managers from wherever it pleases. With banks collapsing every week, they shouldn't be hard to find. But the important thing, particularly at the top, will be to hire people who have intimate knowledge of debt markets but aren't too in the tank with the industry side of things--a point made by the Journal's editorial board this morning.
Detail number two is: How do we figure out what the mortgage-backed securities and other distressed assets are worth? The legislation doesn't address the question, instead giving the Treasury 45 days to establish ground rules. As I discussed last week, there is a debate over how to value derivatives and other complex assets, pitting regulators, who favor mark-to-market pricing, against the industry, which largely favors mark-to-model. If mark-to-market prices them too low, then the program won't be putting enough money into the system. But if the Treasury prices them too high, it could soak taxpayers. Watch how this debate plays out, because it will make all the difference regarding the program's success.
Finally, the legislation is pretty vague about homeowner protection. A housing bailout was never going to happen, but it does seem unfair that the government is more willing to rescue banks than homeowners--in aggregate, both are vital links in our fragile economy. The important thing now is to make sure the Treasury follows through on the vague commitments in the bill "to implement a plan that seeks to maximize assistance to homeowners and ... minimize foreclosures." This could mean a lot of things, so homeowners should watch closely to see how it plays out.