Paulson's Mortgage Fix

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For a while it looks as if his tenure as Treasury Secretary would be remembered chiefly for his repeated and apparently fruitless trips to China to persuade authorities there to do something about their huge trade surpluses with the U.S. Now it's becoming clear that Henry Paulson's legacy will be determined instead by his success or failure in navigating the financial crisis that began earlier this year in the U.S. subprime-mortgage market and has since spread around the globe.

His current focus--what's becoming known as the Paulson Plan, although it was first floated in October by Federal Deposit Insurance Corp. chair Sheila Bair--is an effort to get lenders and loan servicers to freeze interest rates on some of the 2 million subprime mortgage loans that are due for sharply upward rate resets in the next two years. Paulson has said the five-year freeze would apply to borrowers "with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate."

This is the boldest move yet from an Administration that had been tentative in its response to the mortgage crisis, and the plan has drawn fire from two directions. Free-market types say it's a bailout for the irresponsible, while nonprofit groups that work with borrowers fear it won't help many people. Meanwhile, Paulson's past as chief executive of Goldman Sachs--he retired in July 2006 to go to Treasury--is becoming a political issue. Goldman was a big player in the business of packaging subprime mortgages for sale to investors. Now Senate Banking Committee chairman Chris Dodd, who also happens to be running for President, says he wants answers from Paulson on Goldman's role in the current mess. Political posturing? Sure. But it still means less time for trips to China.