Paulson seeks to restore credit faith

Treasury chief pushes regulatory fix for credit crisis, including more oversight of mortgage business and changes at rating agencies.

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By David Ellis, CNNMoney.com staff writer

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Treasury Secretary Henry Paulson said he believed that the policy recommendations made Thursday were "a good start" for change, even as the credit crisis continues to unfold.

NEW YORK (CNNMoney.com) -- Treasury Secretary Henry Paulson outlined a series of broad-based proposals Thursday aimed at restoring faith in the mortgage business and shoring up the battered financial services sector.

Paulson's recommendations, which were devised by the President's Working Group on Financial Markets, were detailed in a speech he gave in Washington.

"I believe today's recommendations put us on the path towards more transparent, better-functioning, and better-managed markets," Paulson said.

Paulson's remarks come as the nation's financial struggles show few signs of abating. Since erupting last summer, the credit crisis has spread far and wide.

Consumers have lost their homes, major U.S. financial institutions have suffered billions of dollars in losses and the municipal bond market has been thrown into turmoil. All the while, the broader economy has moved to the brink of a recession.

Calls for nationwide oversight

Among the biggest points of the plan Paulson outlined were calls for stronger state and federal oversight of all mortgage originators and establishing a nationwide licensing standard for mortgage brokers.

Credit rating agencies, which have borne some of the blame for the credit crisis by not warning investors who bought subprime mortgage securities, were encouraged to practice greater due diligence when passing judgment on bonds and other financial products.

The plan also urged the major financial institutions that packaged and sold the dicey home loans to improve how they assess investment risk, and disclose whether they shopped among different agencies to secure a top-notch rating. It also encouraged banks to continue to raise capital and even reconsider their dividend policies to shore up their balance sheets.

Paulson also had some stern advice for investors, who got burned after buying risky loans from banks. He told them to not rely only on the rating agencies, but to do their own independent evaluation.

While he even urged changes at the regulatory level, Paulson was careful not to levy blame on any one party in a crisis that has hurt everyone involved.

"This effort is not about finding excuses and scapegoats," said Paulson.

The President's Working Group includes representatives from some of the nation's top financial regulatory agencies, including the Treasury, the Federal Reserve and the Securities and Exchange Commission. Many of its proposals could be implemented with regulatory changes and not Congressional legislation.

Policy experts, however, were not convinced that the proposals would cure the systemic problems that fostered the credit crisis in the first place.

Jaret Seiberg, the financial services analyst for policy research firm Stanford Group, wrote in a report issued ahead of Paulson's speech that while some of the proposals were aggressive, they fell short overall.

"We see nothing here that would radically change any of the industries involved in the crisis," wrote Seiberg.

Despite the threat of greater regulation, some industry groups appeared to embrace the plan.

The Securities Industry and Financial Markets Association, which represents more than 650 firms, said it expected the proposals "will help steer the American economy back on course."

Other industries affected by the plan would probably willingly sign off on the proposals, given the damage to their reputation, said Dean Baker, co-director of the Center for Economic and Policy Research. "I think a lot of it will happen," he said.

Taking action, but not too fast

Paulson warned that the President's Working Group would move cautiously in implementing fixes, worrying that any sudden regulatory changes could aggravate an already difficult situation.

He said the recommendations are simply a starting point, and that the group would continue to assess and consider other changes as needed.

"Although we haven't yet worked completely through this period of market turmoil, and that is our highest priority today, it is not too early to suggest appropriate policy responses," said Paulson.

Indeed, the credit crisis appears far from over.

Most recently, a number of hedge funds have come under pressure, a development that Paulson said the group was "monitoring closely."

During a question-and-answer session, Paulson fielded a handful of questions about the economy, including one about the recent decline in the dollar, which fell to new lows Thursday morning.

"A strong dollar is in our national interest," he said. "Our economy, like any other, has got its ups and downs, but the long-term fundamentals are strong and I believe it will be reflected in our currency." To top of page

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