Remarks by Treasury Secretary Paulson

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We examined issues such as disclosure and margin requirements and, in February 2007, issued principles and guidelines for addressing issues related to private pools of capital, including hedge funds. Subsequently, we established two private-sector committees to develop industry best practices.

There is a certain irony that during this period it has been the regulated financial institutions which have been the focus of our attention. With a few exceptions, the hedge fund sector thus far has proven resilient to market volatility and protracted illiquidity. We know that a number of hedge funds are now also facing difficulties, as some are missing margin calls, and we are monitoring that closely. However, for a number of months last year much attention was given to various banks' off-balance sheet exposures to conduits and structured investment vehicles (SIVs). This risk exposure was partially due to the opacity of conduits and SIVs; existing capital rules may have also failed to mitigate, or even amplified, the stress associated with these vehicles.

PWG Policy Review Recommendations

We must have better policies, processes and mechanisms to understand and manage complexity, to discourage its excess, and to better understand and manage risk. Hopefully, the PWG policy recommendations will make progress in doing just that. Our recommendations have six key objectives:

• One, stronger transparency and disclosure. The challenges of complexity were exacerbated by opacity. The best antidote to opacity is transparency and disclosure.

• Two, stronger risk awareness. Regulators and all market participants must be more aware of and better able to respond to risks. Credit rating agency practices must improve, and the users of their services must rely less on, and appreciate more the limitations of, ratings products.

• Three, stronger risk management. We need improved risk management practices by investors, issuers, financial institutions, rating agencies, and regulators alike. Risk management is everyone's business.

• Four, stronger capital management. Well-capitalized institutions are better prepared to deal with challenges, foster economic growth and enhance market confidence.

• Five, stronger regulatory policies. Regulatory policies, including capital requirements, must address risk management weaknesses and improve the safety and soundness of our institutions and financial system.

• Six, stronger market infrastructure. Perhaps the best example of innovation is the over-the-counter (OTC) derivatives markets. These markets have grown tremendously; but the infrastructure has not kept up—and it must.

This effort is not about finding excuses and scapegoats. Those who committed fraud or wrongdoing have contributed to the current problems; authorities need to and are prosecuting them. But poor judgment and poor market practices led to mistakes by all participants.

Let me now summarize how the PWG recommendations will impact some of the issues we are facing in the marketplace and certain market participants. I will briefly discuss mortgage origination, credit ratings, securitization, financial institutions, investors, credit default swaps and other OTC derivatives, and regulators.

Mortgage Originators and Brokers

The PWG is recommending three important changes for mortgage originators and brokers. First, federal and state regulators should strengthen oversight of all mortgage originators. Second, state financial regulators should implement strong nationwide licensing standards for mortgage brokers. Third, at the end of the current comment period, the Federal Reserve will issue revised rules for consumer protection and disclosure requirements. As part of a larger study of financial regulatory structure, Treasury will soon release additional recommendations to improve the mortgage origination process.

Credit Rating Agencies

Credit rating agencies play a major role in financial markets, and their ratings products must provide information investors need to make more fully informed decisions about risk.