05 September 2007

Steel: Testimony on recent events in the credit and mortgage markets

Robert Steel, Under Secretary of the US Treasury, presented the Department's perspective on the recent events in the credit and mortgage markets and their impact upon consumers and the economy and gave a brief description of the events leading to the crisis situation.

“The recent market events have revealed potential complexities in the securitization model”, Steel said. “In some cases, risk evaluation of securitized products can be difficult. In mortgage-backed securities and mortgage-backed collateralized debt obligations, the performance of the underlying assets, particularly many of the innovative subprime mortgage products, may not have been properly understood, or investors may have failed to perform adequate due diligence prior to their investment decision. At the same time, mortgage originators may have possessed less incentive to perform appropriate levels of due diligence because of their distributing their loans and the attendant risks through securitization.

The President's Working Group on Financial Markets will examine some of the broader market issues underlying the recent market events, including the impact of securitization and the role of rating agencies in the credit and mortgage markets.

The Treasury Department will also be releasing early next year a blueprint of structural reforms to make financial services industry regulation more effective, taking into account consumer and investor protection and the need to maintain U.S. capital markets competitiveness.

“The recent volatility in the credit and mortgage markets reflects a reassessment of risk across a broad spectrum of securities”, steel concluded and warned that this process is far from over. “It will take more time to play out and certain segments of the capital markets are stressed. Risk is being repriced. This repricing will lead to a reevaluation of assets. This reevaluation will inevitably impact the balance sheets of financial market participants.”

“It is critical that policymakers understand these issues and their underlying causes and continue to enhance the capital markets regulatory structure to adapt to market developments”, Steel said.

Full speech

© Graham Bishop