Posted on 03/13/2008 9:51:17 AM PDT by TigerLikesRooster
Paulson urges banks to raise more capital
By Krishna Guha and James Politi in Washington
Published: March 13 2008 15:42 | Last updated: March 13 2008 15:42
Hank Paulson on Thursday called on financial institutions to raise more capital and reduce their dividends in order to strengthen their balance sheets as he set out the US government’s regulatory response to the credit crisis.
The US Treasury secretary backed plans to make it easier for banks to issue “covered bonds” to finance mortgages kept on their own books as an alternative to selling them on to investors as mortgage-backed securities.
He said the Treasury was aware that “a number of hedge funds are now facing difficulty” and was monitoring the sector closely.
“We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies,” Mr Paulson said. “We need these institutions to continue to lend and facilitate economic growth.”
He laid out a set of policy recommendations designed to avoid a repetition of the credit crisis that was expansive in scope, but rejected calls for regulators to break up credit-rating agencies, force banks originating mortgage-backed securities to maintain a stake in the securities they issue, or regulate bankers’ pay.
Rather than single out the rating agencies as the culprits of the credit crisis, Mr Paulson argued that all participants in the financial system – including investors and regulators – had contributed to the debacle and had to change their practices.
“There is no single simple solution to the problems that have emerged from the mortgage securitisation process,” Mr Paulson said. “Yet we have determined that market participants’ behaviour must change.”
US regulators had concluded that mortgage brokers need to be subject to a nationwide licensing system and tougher nationwide enforcement.
Credit-rating agencies would be required to disclose conflicts of interest and distinguish more clearly between the ratings they gave to structured credit products and ordinary debt.
Issuers of mortgage securities would have to provide additional information as to the extent of the due diligence they perform on loans that they bundle up and sell on to investors. Investors would have to improve risk management practices and rely less on credit ratings.
Regulators, meanwhile, would review the way in which credit ratings are embedded in regulations, and “at a minimum” would distinguish in regulations between similarly rated structured credit products and ordinary debt.
Banking regulators will revisit Basle 2 bank capital rules to make sure they deal appropriately with bank’s off-balance-sheet exposures to vehicles such as conduits and structured investment vehicles (SIVs) and strengthen guidance on liquidity risk.
Mr Paulson also called for the creation of a “dedicated industry co-operative” to improve market infrastructure in the over-the-counter derivatives market, similar to the existing Depository Trust and Clearing Corporation, that would promote standardisation of OTC products and more efficient settlement.
The Treasury secretary said that ultimately, the top management of financial groups was responsible for managing their risks and establishing the correct incentives for decision-makers. He rejected a role for government in this, saying the market would deliver the right outcomes.
Meanwhile, Barney Frank, chairman of the House financial services committee, proposed new legislation that would permit the Federal Housing Administration to provide up to $300bn to help troubling borrowers refinance their mortgages and avoid foreclosure.
Mr Frank claimed the proposal could lead to the refinancing of between 1m and 2m mortgages. Lenders would have to accept a substantial write-down of the value of the mortgage, in exchange for a payment from the new FHA loan.
The bill aims to tackle the problem of ”negative equity”, where the value of a borrower’s home is lower than the mortgage. Ben Bernanke, Federal Reserve chairman, last week highlighted the problem, urging banks to forgive chunks of loans to troubled borrowers.
What? The printing machine broke?
>> “a number of hedge funds are now facing difficulty”
Then maybe, just maybe, they should FAIL.
Maybe, just maybe, losers who invested money in them should LOSE IT.
Maybe... just possibly, know what I’m saying?... it’s THEIR PROBLEM, not the Fed’s, not the taxpayer’s.
Just a thought.
It does appear the govt is taking all of the fun out of speculation these days
How are they supposed to do that? Lock the Money Fairy in the vault overnight?
>> It does appear the govt is taking all of the fun out of speculation these days
Well, there’s always the casinos...
>> If that fails, there is always a Russian roulette.
Messy, but final, and the outcome can’t be disputed!
Speaaking of ways banks could get better balance sheets:
1.Reduce exec pay from hundreds of millions and cut out golden parachutes.
2.Put photos on all credit cards at bank expense, reducing fraudulent use by hundreds of millions per year. You can get a photo on your card now—if you are willing to pay for it. Does that make sense.
While I agree with your sentiment, I would just NB for you that many public and private pension funds are now invested in hedge funds.
If the public pension funds lose significant amounts of money due to hedge fund margin call collapse, guess who is going to pay for that?
You and me and all other taxpayers.
Good point. Banks also lend to hedgies. Would not be good for the USA if significant number of banks go under. Especially considering the FDIC doesn’t have enough money.
Heard there are over 104,000 very wealthy foreigners waiting in line to help the banks raise capital as the banks have decide to turn around and issue $10k limit credit cards to 4 year olds that are at least potty-trained and can talk for the next boom-bubble-bust Ponzi scheme.
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