Paulson outlines fix-it plan for credit crisis
Treasury secretary calls for tighter reins on financial markets as mortgage turmoil continues.
By Ron Scherer | Staff writer of The Christian Science Monitorfrom the March 14, 2008 edition
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New York - Six months after the Enron scandal in 2001, Congress approved far-reaching legislation that restored public confidence in corporate America and helped send the stock market soaring.
Now, seven months after the start of the subprime mortgage crisis, financial markets are getting the equivalent of the post-Enron treatment. Regulators are trying to rein in the financial innovators. The result is likely to be more regulation and higher costs for business but also more disclosure, transparency, and oversight to help investors.
"Clearly the regulatory structure did not keep pace with the financial innovation that occurred in recent years," says Mark Zandi, chief economist at Moody's Economy.com. "This is an effort to catch up."
The latest plan – announced Thursday by the Bush administration – would affect a large swath of the credit market, ranging from mortgage lenders to the financial institutions that find innovative ways to sell those mortgages to sophisticated investors. Specifically, the proposal would boost oversight of all segments of the mortgage business, create licensing standards for mortgage brokers, and pressure credit ratings agencies, which decide the financial strength of companies, to improve their analysis.
"The objective here is to get the balance right," said Treasury Secretary Henry Paulson, who announced the plan in Washington. "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."
The proposal announced by Mr. Paulson, who chairs the presidential working group charged with recommending ways to deal with the ongoing financial crisis, is one of several plans. On Thursday, Rep. Barney Frank (D) of Massachusetts proposed legislation that would allow the Federal Housing Administration (FHA) to insure and guarantee refinanced mortgages that banks and investors have taken losses on. Other committees in Congress also are deeply involved in examining everything from the pay structure of executives in the mortgage business to predatory loans.
Similar reforms are under review in Europe, where banks have also faced big losses tied to US mortgage loans. European Union leaders, at a summit this week, are considering how regulators, banks, and credit-rating agencies can better guard against shocks.
The new regulatory proposals come at a time when the Federal Reserve is trying to stabilize the credit markets. On Tuesday, the Fed announced it would swap up to $200 billion in US Treasury securities for other debt including mortgage securities.
Investors are somewhat sanguine about the efforts.
"I think it's a first step," says Doug Roberts, chief investment strategist at Channel Capital Research Institute, based in Shrewsbury, N.J. "There is not a short-term fix; this will go on for several years."
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