Henry Paulson, the US Treasury Secretary, struggled to win hearts and minds on Wall Street yesterday with a set of proposals that, according to analysts, did little to address the root causes of America's financial crisis.

All Mr Paulson's plans - announced in a speech yesterday afternoon - are laudable and sensible, but they are aimed at preventing the mortgage crisis that is dragging America into a recession from being repeated in the next economic cycle and they do nothing to address the severe borrowing problems that Wall Street banks are experiencing now.

Mr Paulson said yesterday that he wants to increase the power of state and federal regulators who oversee mortgage lenders and brokers. Part of his plans include introducing “strong, nationwide licensing standards” for mortgage brokers in an attempt to end the lending practices seen over the past ten years, in which Americans with low incomes and poor credit histories were encouraged to take out mortgages that they did not understand and which they could not afford. Such a move to introduce stringent licensing would probably require new legislation - unlike most of Mr Paulson's proposals.

During the past two years, as the housing market slumped, there has been increasing evidence that many Americans on low incomes who were sold mortgages over the past decade had not been asked for documentary proof of their income and had been encouraged to borrow far more than they could afford. Many were sold adjustable-rate mortgages on which monthly payments increased over the life of the mortgage, and many of those borrowers defaulted on their home loans, rendering worthless the mortgages and bonds issued on the back of them.

Mr Paulson is also proposing to reform the way in which credit rating agencies, which assess the perceived risk of default of securities such as bonds, do business.

The Treasury Secretary wants the agencies, such as Fitch, S&P, and Moody's to disclose more information about the quality of mortgage debt that underlies the complex securities issued on them. Part of the reason that America's investment banks have been unable to sell the mortgage-backed bonds stagnating on their balance sheets is because the pools of mortgages that backed the bonds were a mixture of both prime and sub-prime debt - mortgages that were issued to reliable borrowers and mortgages issued to those who were likely to default on repayments.

Mr Paulson is also trying to address the criticism by Wall Street of credit- rating agencies and accusations that they are dangerously conflicted when they rate a security. After the credit crisis erupted last summer, many investors attacked the rating agencies, claiming that they were less likely to place a lower rating on a bond because the issuer of the debt was paying them a fee for their services. Yesterday Mr Paulson said that he wanted the rating agencies to reveal their conflicts of interest. That could include an agency being forced to admit at the bottom of a research note how much the issuer of the security it is rating had paid it.

More worryingly, the Treasury Secretary is also urging banks to increase the amount of cash that they hoard on their balance sheets. Although such a recommendation is prudent in the midst of a credit crisis and an expected US recession, his insistence that banks should refinance today was widely perceived by Wall Street experts as a tacit admission that the US Treasury believes that there is an increased risk that the banks may not be able to raise new capital tomorrow, as credit conditions worsen.

Mr Paulson is also urging the banks to “review” their dividend policy - put bluntly, to cut dividend payments to shareholders and preserve capital. Even though the Treasury Secretary issued a veiled threat that regulators would be monitoring closely how far his proposals were implemented, Wall Street analysts pointed out that he neither has the authority to dictate the dividend policy of a publicly listed bank, nor is he likely to still be in office to try to enforce it, with US elections looming in November.

Mr Paulson's reforms are undoubtedly designed to nurture confidence in the credit markets and America's system. Had they been implemented ten years ago, they would have done this admirably. Unfortunately, none of the proposals addresses how Wall Street's banks can rid themselves of the billions of dollars of toxic mortgage-backed bonds on their balance sheets, which is bringing into doubt their own valuations and their ability to borrow money.

Paulson attempts to close the stable door, but is the horse still inside?

What is Mr Paulson trying to do?

Restore confidence in America's banking system and mortgage industry

How is he planning to do it?

— Impose strict licensing of mortgage brokers, effectively blocking lax lending practices of the recent past, when customers with bad credit histories borrowed more than they could afford, with little or no deposit, and without providing proof-of-income documents

— Force credit rating agencies to confess to conflicts of interest to strengthen the value of ratings placed on securities such as mortgage-backed bonds.

— Force credit rating agencies to find out and reveal more information about the quality of debt that underpins securities, such as collateralised debt obligations (CDOs)

— Urge banks to refinance now and hoard more cash on their balance sheets

— Urge banks to “review” the amount they pay shareholders in dividends to preserve capital

Will he succeed?

Expected to get his way with mortgage broking reforms and credit rating agency prosposals. The banks will probably ignore him.

What was the reception on Wall Street?

Scorn.
“This is a classic case of trying to close the stable door after the horse had bolted.”
Ian Shepherdson, chief US economist at High Frequency Economics

“We need the Treasury Secretary to focus on current issues. We thought as an ex-Goldman's man he would have been more on the ball. What's clear today is that he is just another bureaucrat.”
Chris Whalen, at Institutional Risk Analytics, the Wall Street consultancy

Explore Economics

• Autumn Budget 2007

• Budget 2008

• World Economic Forum

• The Times MPC

Times Recommends

• B&B shareholders forced into funding rescue
• John Lewis department store sales plunge 8.3%
• Families turn to credit to cover mortgage bills