Treasury's Paulson Wants To Bailout Hedge Funds
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WASHINGTON (Thomson Financial) - U.S. Treasury Secretary Henry Paulson said on Tuesday the United States needs a combination of tighter regulation and improved market discipline in order to minimize the risk of future economic shocks, and assured financial market participants in New York he is working on both.
"Looking forward, we must balance two very important priorities -- better regulation through a more effective updated regulatory structure on the one hand and market discipline to limit moral hazard on the other," Paulson said in remarks made available in Washington.
"Market discipline plays an enormous role in curtailing excessive risk-taking, a role that neither can nor should be completely executed by regulators."
Since joining the Bush administration, Paulson has worked to improve the rules to which financial market participants must adhere, and on Tuesday repeated that improving financial market practices is key to the stability that everyone seeks.
"Improved infrastructure will add to market stability and mitigate the likelihood that a failing institution can spur a systemic event," he said. "We also need additional powers to manage the resolution, or wind-down, of large non-depository financial institutions, such as larger hedge funds, so as to limit the impact of a failure on the broader financial system."
Further, he said these changes would help the United States get to a point where "complex financial institutions are not perceived to be too big or too interconnected to fail."
In the short term, Paulson reiterated his belief that it will take more time to work through the current market turmoil, and while he did not specify how much longer it would take, he again tied the turmoil to the health of the housing market.
"We have been experiencing more bumps recently, and until the housing market stabilizes further we should expect some continued stresses in our financial markets," he said.
Over the past few months, members of the Federal Reserve and other economists have said improvements will come in 2009, rather than the second half of 2008 as originally predicted.
Although he said more bumps in the road are likely, Paulson downplayed strains in the banking industry.
"The American people have every reason to remain confident that the U.S. banking system is sound," he said. Paulson noted that while the IndyMac Bank failed last week, the Federal Deposit Insurance Commission took it over smoothly, which means "no one has [lost] or will lose a penny of insured deposits."
Paulson reiterated the need for the continued operation of Fannie Mae and Freddie Mac, which hold and back billions of dollars worth of U.S. mortgages and whose stock prices have been extremely volatile in the last few weeks.
"Now, more than ever, we need Fannie and Freddie out there, financing mortgages," he said. "That means we must, in the short term, take steps to boost confidence in the GSEs, while also taking steps to address the potential systemic risk they pose."
Along these lines, Paulson repeated his plan to pass legislation that temporarily allows the two government-sponsored entities (GSEs) to borrow more from the Treasury, or have the Treasury buy equity in the two companies. Congress is widely expected to approve these new authorities in a housing bill that is under consideration.
Paulson again said Treasury has no plans to use either of these authorities, and that if these steps were needed, they would be done under "terms and conditions that protect the U.S. taxpayer."
Paulson's plan has been criticized by members of Congress, and the Treasury Secretary on Tuesday seemed to acknowledge that these steps would not be needed in a perfect world.
"I would rather not be in the position of asking for extraordinary authorities to support the GSEs," Paulson said. "But I am playing the hand that I have been dealt." pete.kasperowicz@thomsonreuters.com pik/wash/wj |
