U.S. financial regulators pledged Thursday to toughen rules for mortgage brokers, lenders and credit agencies in a bid to ease a credit crunch and to try to restore investor confidence in markets.
Treasury Secretary Henry Paulson, unveiling a 20-page set of recommendations from the top-level President's Working Group, blamed a "dramatic weakening" of underwriting standards for lower-quality home loans for helping trigger turmoil in credit markets that raged on unabated as he spoke.
Stock prices tumbled on rising fears of U.S. recession, gold prices soared and the dollar's value plumbed fresh record lows as investors shunned it in favor of the euro and other stronger currencies.
Paulson, a Wall Street veteran before taking over the Treasury in mid-2006, said "financial innovation" -- like the practice of slicing up so-called subprime mortgages and using them as collateral for securities sold around the world -- had made the situation worse by introducing a baffling level of complexity.
In a speech at the National Press Club, Paulson appealed to banks and other lenders not to stop issuing loans and implied they should cut back on dividends paid to shareholders if
necessary to raise capital.
"We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need those institutions to continue to lend and facilitate economic growth," he said.
Among recommendations from a top-level Presidential Working Group that he heads, Paulson said he wanted "strong nationwide licensing standards" for mortgage brokers as part of an effort to ward off future housing crises and reassure investors.
Paulson said the focus of the Presidential Working Group's work since the current bout of market turmoil began last summer was to reduce the chance of repeating past mistakes.
"Regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," Paulson said.
The working group includes the heads of the Federal Reserve Board, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading
Commission as well as the Treasury. It issued recommendations that touch nearly every corner of the credit market, from Wall Street firms to credit rating agencies and regulators.
In a sign of the severity of the credit crunch stemming from U.S. subprime market woes, a European affiliate of a high-profile U.S. buyout firm revealed on Thursday that it has defaulted on $16.6 billion of debt and faced having its remaining collateral seized.
Carlyle Capital Corp, a fund listed in Amsterdam, said in New York late on Wednesday that talks with lenders had soured after a drop in the value of its mortgage investments, which it said would result in new margin calls on top of existing ones, implying its survival was at stake.
Paulson said state and local regulators need to toughen oversight of all mortgage originators. Sloppy lending practices including loans made to homeowners with no requirement of proof
of income, are widely blamed for a soaring tide of foreclosures, especially among subprime mortgages held by people with the shakiest personal credit.
Paulson said credit rating agencies need to make sure that securitized credit issuers -- like those who issue mortgage-backed securities -- "perform robust due diligence of originators of assets that are securitized or used as collateral for structured credit products."
Paulson said the working group was now ready to push for its recommendations to be put in place and vowed that it will "stay on top of this" while trying not to add to existing stress in markets.
"We are going to be mindful when we implement it to not create a burden," Paulson told the Wall Street Journal in an interview earlier. "But we think it's very appropriate to lay out some of the causes and some of the steps that need to be taken ... to minimize the likelihood of this happening again."
The report said various government bodies had worked on the recommendations for more seven months and that Paulson and Federal Reserve Chairman Ben Bernanke had "huddled" for half a
day early this month to review the details.