The nation’s economic policy heads outlined sweeping recommendations to strengthen the nation’s credit markets, calling for stronger licensing standards for mortgage brokers, more due diligence from credit-rating agencies and stronger trading systems for complex instruments in an effort to avoid another credit meltdown.“Regulation needs to catch up with innovation and help restore investor confidence, but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it,” Treasury Secretary Henry Paulson said during a speech at the National Press Club. “We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need those institutions to continue to lend and facilitate economic growth.”
Paulson, who heads the President’s Working Group on Financial Markets, said that the recommendations emanate from seven months’ work by the group, which is comprised of the heads of the Treasury, the Federal Reserve Board, the Securities and Exchange Commission, the New York Federal Reserve Board and the Commodity Futures Trading Commission.
Specifically, the PWG recommended strengthening the credit markets in the following areas: transparency and disclosure, risk awareness, risk management, capital management, regulatory policies, and market infrastructure.
Paulson stressed that state and local regulators need to strengthen oversight of mortgage originators, while credit rating agencies must “perform robust due diligence” of originators of assets that are securitized or used as collateral for structured products.
Federal Reserve Chair Ben Bernanke called the recommendations an “appropriate and effective response to deficiencies in our financial framework that contributed to the current turmoil in financial markets,” in a statement.
Securities and Exchange Commission Chairman Christopher Cox said that the agency would use its new authority to address rating agency issues to restore investor confidence.
“This effort is not about finding excuses and scapegoats. Those who committed fraud or wrongdoing have contributed to the current problems; authorities need to and are prosecuting them. But poor judgment and poor market practices led to mistakes by all participants,” Paulson said.
