Treasury Secretary Henry Paulson told The Wall Street Journal today that the recommendations of the President's Working Group on Financial Markets, which he leads, include strengthening state and federal oversight of mortgage lenders and brokers. The group also recommended implementing what he termed "strong nationwide licensing standards" for mortgage brokers, a move that will probably require legislation.
The group also proposed directing credit-rating firms and regulators to differentiate between ratings on complex structured products and conventional bonds. In addition, it wants rating firms to disclose conflicts of interest and details of their reviews and to heighten scrutiny of outfits that originate loans that are enveloped by various securities.
Another recommendation from the panel is to push issuers of mortgage-backed securities to disclose more about "the level and scope of due diligence" and about the underlying assets of the securities. The panel also seeks disclosure of whether "issuers have shopped for ratings" -- that is, have had to go to more than one credit-rating firm before getting the triple-A stamp of approval.
The panel alsol urged global bank regulators to revisit the latest version of bank capital requirements, known as Basel II for the Swiss city where they were negotiated, so that banks that take on risks hold sufficient capital. The panel also wants regulators to complete updated standards for how banks manage liquidity.
Federal Reserve Chairman Ben Bernanke called the recommendations an "appropriate and effective response to deficiencies in our financial framework that contributed to the current turmoil in financial markets," in a release accompanying the working group's policy statement.
Securities and Exchange Commission Chairman Christopher Cox said the agency will use its new authority to address rating agency issues to restore investor confidence. The group is made up of the heads of the Treasury, the Fed Board, the SEC, New York Fed and the Commodity Futures Trading Commission.