Treasury Secretary Henry M. Paulson, Jr. Thursday released recommendations from
the President’s Working Group on Financial Markets (PWG.)
The PWG, headed by Paulson, is composed of the heads of the Federal Reserve Board,
the Federal Reserve Bank of New York, the Securities and Exchange Commission and
the Commodity Futures Trading Commission.
Paulson terms the release of the recommendation as the beginning of the end of
the policy review portion of the group’s assignment and the beginning of
the next phase, implementation.
To address the current financial situation and to guard against a repeat in
future years the PWG made six broad recommendations
- Stronger transparency and disclosure.
- Stronger risk awareness on the part of regulators and all market participants.
- Stronger risk management by all participants.
- Stronger capital management. Well-capitalized institutions are better prepared
to deal with challenges, foster economic growth, and enhance market confidence.
- Stronger regulatory policies.
- Stronger market infrastructure.
The Secretary got more specific in talking about segments and processes within
the industry he expected to be impacted by implementation of the recommendations.
Some of these are:
Mortgage Originators and Brokers
State and federal regulators should strengthen oversight of all originations
and state regulators should implement strong nationwide licensing standards
for mortgage brokers. Paulson said that at the end of the current comment period
he expects that the Federal Reserve will issue revised rules for consumer protection
and disclosure and Treasury plans to make additional recommendations to improve
the origination process.
Credit Rating Agencies
These agencies must provide the information that investors need to make more
fully informed decisions about risk. This will require reforming structured
credit product ratings to ensure integrity and transparency and to clearly differentiate
between structured products and ratings for corporate and municipal securities.
The PWG, Paulson said, has determined that there is no simple solution to the
problems now evident in the mortgage securitization process. He said, however,
that in addition to the recommendations for mortgage originators, lenders, and
credit rating agencies he expects that issuers of Mortgage-Backed Securities
will be required to disclose the level and scope of due diligence performed
on underlying assets and that investors will conduct more independent analysis
and be less reliant on ratings. Many of these investors, the Secretary said,
bought products they did not understand or bought products based solely on credit
ratings. These investors were complacent about risk and they have learned a
Supervisors, PWG, and Treasury
The PWG recommends that regulators take steps to ensure that investors improve
their due diligence and have greater risk awareness. Regulators must also closely
monitor that institutions address risk management weaknesses and take action
Paulson said that the current recommendations are part of a much larger effort.
His department has commissioned a study on the cause of financial restatements
and there is a financial regulatory review that will be released soon. There
are also private sector committees which are developing best practices for investors
and hedge fund managers.