Remarks by Treasury Secretary Paulson

Mar. 13, 2008

Remarks by Secretary Henry M. Paulson Jr. on Recommendations from the President's Working Group on Financial Markets

WASHINGTON—Thank you. I appreciate this opportunity to talk with you about Treasury's work on financial markets. As you know, since the market turmoil began last summer we have been closely monitoring and taking steps to address current market conditions.

We are working to get through the current period of market turmoil while minimizing its impact on our economy. And, as we do so, risk is being re-priced and markets are de-leveraging. This is creating liquidity challenges and, as a result, credit markets are not functioning as normal. We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need these institutions to continue to lend and facilitate economic growth.

As we continue to address current market stress, we must also examine the appropriate policy responses. The President's Working Group on Financial Markets, the PWG, has been reviewing policy issues to help reduce the likelihood that mistakes of the past are repeated. The objective here is to get the balance right—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.

The focus of my remarks will be the PWG recommendations being released today as part of the policy review. We are at the end of the beginning of that review, and moving forward to the next phase –implementation. Clearly, that implementation must be consistent with today's environment, recognizing that all market participants are under stress and acting prudently to address current strains. We will pursue implementation in a measured way, so as not to impose burdens which might exacerbate the present situation.

And let me be clear: The PWG will stay on top of this. We will continually assess, consider further steps, report as we proceed, and issue a summary progress statement in the fourth quarter of 2008.

Many of these issues are as global as our markets, and we are also working closely with the Financial Stability Forum (FSF) as they prepare their report and recommendations. The FSF efforts, under the leadership of Mario Draghi, will bring a globally coordinated response.

Market Innovation and Complexity

Innovation is a hallmark of our capital markets. Securitization of credit is one example of an innovation that has made more, more flexible and lower-cost capital available to consumers and companies, and stimulated competition.

Financial innovation has brought these and other benefits. Financial innovation has also brought, inevitably, the challenge of complexity. In my judgment, some financial products have become overly complex. Excessive complexity is the enemy of transparency and market efficiency. Investor sentiment has swung hard to risk aversion, and now markets are punishing not only complex, but non-complex products as well.

Complexity is one of the many excesses that exacerbated the current market turmoil—turmoil that was triggered by the dramatic weakening of underwriting standards for U.S. subprime mortgages. Weaker subprime credit standards were part of a much broader erosion of standards throughout corporate and consumer credit markets. We have had a number of years of benign economic financial conditions and abundant liquidity; investors reached ever further for yield, and market participants and regulators became complacent about all types risks.

As we did our contingency planning at Treasury prior to this period of market turmoil, we recognized the need to be continually vigilant because financial shocks or disruptions are a fact of life, and our markets seem to experience them every six to eight years. In our planning, we also recognized that the precipitating factor of any shock is virtually impossible to predict, except in hindsight, and we didn't try to do so. We did turn our attention to certain risks surrounding hedge funds, and to systemic risk and investor protection.