White House Offers Plan to Ward Off Credit Crises
Richard Moore
-rkm
http://www.nytimes.com/2008/03/14/business/14paulson.html
March 14, 2008
White House Offers Plan to Ward Off Credit Crises
By STEPHEN LABATON
WASHINGTON ‹ After months of watching a growing credit crisis made worse by steadily eroding home prices, the Bush administration responded on Thursday with the outlines of a plan that officials emphasized is meant more to prevent future crises than to address the current one.
The plan, which relies primarily on state regulators and private industry to tighten their oversight of financial markets, calls on states to issue nationwide licensing standards for mortgage brokers.
The plan would also require lenders to make more complete disclosures about payment terms to home buyers. And it would curtail possible conflicts of interest at companies that assign levels of risk to packages of mortgages that are sold to investors.
³This effort is not about finding excuses and scapegoats,² the Treasury secretary, Henry M. Paulson Jr., said in his most extensive comments to date about the credit and market problems. ³Poor judgment and poor market practices led to mistakes by all participants.²
But in many ways, the plan relies on the same market participants ‹ from mortgage brokers to credit-rating agencies and Wall Street firms ‹ that government officials and other experts blame for the current crisis.
Indeed, the announcement came with a fresh round of worsening economic news that is reinforcing the view that the economy has entered a recession.
Administration officials said most of the proposals would be executed in the coming months through regulations issued by federal banking and securities regulators, and by new committees run by industry executives. A few elements, like tightening rules for mortgage brokers, may require federal legislation. Bush administration officials said, to avoid burdensome regulation, the plan provides a limited role for the federal government.
Democratic lawmakers described the proposal as light and late, while industry representatives welcomed the initiative.
The dollar, meanwhile, dropped to new lows against the euro and weakened further against the yen. Lenders again raised interest rates on home mortgages. And fearful investors pushed the price of gold above $1,000 an ounce for the first time.
The continued erosion of consumer confidence was seen in a new report that retail sales fell last month.
The confluence of bad news is testing the administration and lawmakers as they struggle to respond to a slump that began with the mortgage market collapse.
At the news conference, Mr. Paulson said growing market problems were caused by a series of factors, including mortgage brokers who pushed risky loans on homeowners, conflicts of interest at credit-rating agencies, bond underwriters that loosened standards, and financial institutions that failed to adequately grasp the riskiness of the instruments they were buying and selling.
A report issued by an interagency group headed by Mr. Paulson also said that regulatory policies undertaken by the Bush administration had failed to adequately supervise the way financial institutions manage risk.
President Bush on Thursday held an unannounced meeting at the White House with four dozen executives from the Business Roundtable, a group representing the nation¹s largest companies. Along with some of his senior economic aides ‹ including the United States trade representative, Susan C. Schwab, and Carlos M. Gutierrez, the commerce secretary ‹ Mr. Bush made remarks and answered questions, a spokesman, Tony Fratto, said. He described the meeting as a routine opportunity to discuss the economy with business leaders.
³It was a chance for him to talk about how he views the economy," Mr. Fratto said of the president, who is scheduled to give a speech in New York City Friday.
Some Democrats suggested that the administration appeared to have made the financial regulatory proposals as a political effort to try to limit Congress from taking broader action.
On Thursday, Representative Barney Frank of Massachusetts and Senator Christopher J. Dodd of Connecticut, the two Democratic lawmakers who head Congressional committees that oversee markets, announced plans to provide billions of dollars to states to buy homes in foreclosure and encourage mortgage lenders to write down the value of mortgages in troubled areas.
The proposals, which face significant political obstacles, would permit the Federal Housing Administration to guarantee some loans that would be used to refinance troubled ones.
³We have to do something to prevent a deeper recession,² Mr. Frank said. He said the plan was a reasonable but small first step and was late in coming.
Democrats in the Senate agreed. ³It¹s a day late and a dollar short,² said Senator Charles E. Schumer, Democrat of New York and chairman of the Joint Economic Committee. ³These are the kinds of things that we were calling for a year ago. And the steps are so small that they don¹t do enough. They need to deal with the current crisis, not the next one.²
Others wondered why the administration was only now beginning to come to terms with such problems as opaque off-balance-sheet transactions at companies and potential conflicts of interest at credit-rating agencies. Such problems were identified in the early years of the Bush administration when Enron, WorldCom and other companies went into bankruptcy after accounting scandals involving similar issues.
In an interview, Mr. Paulson took issue with that, saying that financial shocks are part of the economic cycle and occur ³every six or eight years.²
Bristling at Democratic complaints that the plan was too light and that the administration was fundamentally hostile to taking bolder steps, he declared, ³I am not antiregulation.² But he said the administration had to be careful and not do anything that would be overly burdensome to markets at a time they are already under considerable stress. ³I have emphasized that when we implement these we will be doing it to not create a burden that exacerbates today¹s stresses,² he said.
Mr. Paulson offered few details on how the rules might work and some of his suggestions amounted to little more than demands that investors and financial institutions take greater care in analyzing and managing risks. The details, he said, remain to be developed. But he said after many hours of discussion, he had concluded there was no simple solution to such complex problems.
³No silver bullet exists to prevent past excesses from recurring,² he said, adding that the recommendations were a ³good start² and that the administration would release a ³regulatory blueprint² in the next few weeks.
The report, by the President¹s Working Group on Financial Markets, which Mr. Paulson heads, said the rating agencies should enforce policies about disclosing their conflicts of interest, an allusion to criticisms that the agencies were typically paid for their ratings by the investment banks but only once they had sold their securities to investors.
Mr. Paulson also said the president¹s group would push the rating agencies to ³clearly differentiate² between the ratings for complicated investment products, which investors may not have understood, and the ratings for more conventional corporate bonds and municipal securities.
Issuers of mortgage-backed securities, in turn, would be required to disclose ³more granular information² about the quality of the underlying loans and their procedures for verifying the information in those loans.
Industry groups praised the plan. ³Combined with private sector efforts already under way, we expect Treasury¹s proposals will help steer the American economy back on course,² said Tim Ryan, president of the Securities Industry and Financial Markets Association, a trade group that represents Wall Street in Washington. ³At a time when there is so much concern in the marketplace, Secretary Paulson¹s leadership and institutional knowledge are vital.²
Vikas Bajaj contributed reporting from New York and Steven Lee Myers from Washington.
Copyright 2008 The New York Times Company
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