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:

  1. Stronger transparency and disclosure.
  2. Stronger risk awareness on the part of regulators and all market participants.
  3. Stronger risk management by all participants.
  4. Stronger capital management. Well-capitalized institutions are better prepared to deal with challenges, foster economic growth, and enhance market confidence.
  5. Stronger regulatory policies.
  6. 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.

Securitization

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 costly lesson.

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 as needed.

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.