US financial chiefs urge overhaul of mortgage, credit markets
WASHINGTON (AFP) — America's top financial chiefs urged mortgage firms, credit rating agencies and banks to overhaul their practices Thursday as a spreading credit crunch rocks Wall Street and the US economy.
US Treasury secretary Henry Paulson, Federal Reserve chairman Ben Bernanke and Securities and Exchange Commission chairman Christopher Cox all endorsed a set of recommendations aimed at boosting business transparency and risk management.
"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," Paulson said.
The Treasury secretary, a former chief executive of Goldman Sachs, said regulation needs to catch up with market innovation and help restore investor confidence in America's battered financial markets.
Speaking at the National Press Club in Washington, Paulson said the President's Working Group on Financial Markets wanted mortgage firms, credit rating agencies and banks to reform their business practices to avert another liquidity crunch.
Among numerous recommendations backed by the panel was a call for federal and state regulators to strengthen oversight of mortgage lenders.
State regulators were also encouraged to implement "strong nationwide licensing standards" for mortgage brokers.
Analysts say lax lending standards led some mortgage firms to grant home loans to borrowers who did not have the means to meet their mortgage payments once interest rates increased.
Credit rating agencies such as Standard and Poor's, Moody's and Fitch Ratings were urged by the panel to improve their influential reports and assumptions about a wide range of securities and corporations.
Major banks meanwhile were encouraged to disclose more information about the securitization of complex credit instruments, such as mortgage loans, credit card loans and student loans, which they package or cut up and sell to other banks and investors.
The multiyear slump in the US housing market and a surge of home foreclosures has triggered widespread losses on mortgage-backed securities which Wall Street banks sold to institutions around the world.
Investors have shunned some securities, which were given top notch investment rankings by credit rating agencies, forcing banks such as Citigroup and JP Morgan to post multibillion dollar losses on their mortgage investments.
The credit crunch, housing downturn and rising job cuts have sparked worries the world's largest economy could be falling into a recession despite a flurry of Fed interest rate cuts and moves by the US central bank to boost liquidity in the banking system.
"The recommendations set out in the Working Group's statement constitute an appropriate and effective response to the deficiencies in our financial framework, that contributed to the current turmoil in financial markets," Fed chairman Bernanke said in a statement.
The measures unveiled by the financial regulators are not mandatory and call for voluntary compliance by state regulators, mortgage firms, credit rating agencies, banks and other financial market participants.
Paulson warned, however, that the government may "revisit the need for stronger oversight" if industry practices are not tightened up.
"I believe today's recommendations put us on the path towards more transparent, better-functioning, and better-managed markets," the former Wall Street bank CEO stressed.
But, he cautioned that "no silver bullet exists to prevent past excesses from recurring."
