We wanted to make it down to the Securities Industry and Financial Markets Association conference this morning to see Hank Paulson speak. But he was replaced at the last minute by Anthony Ryan (Acting Undersecretary for Domestic Finance) and when you combine that with the rain… well you get the idea. Fortunately, we have a copy of his remarks and it doesn’t sound like we missed that much new.
The gist: The Treasury is taking important steps to restore confidence and get money flowing, but we’re not out of the woods just yet.
On the government’s injection of capital into the banks, Ryan reiterated that it’s an “investment, not an expenditure”:
As Secretary Paulson said last week, this capital purchase program is an investment, not expenditure. This is an investment in Americans, in our community banks, credit unions, and main street banks.
As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy. It is in a strengthened institution’s best financial interest to increase lending once it has received government funding.
He also talked about future regulatory goals, but only in the blandest terms:
Our financial market system rests on a balanced tension between private-sector market discipline and public-sector regulatory oversight. However, that balance has been weakened by deficiencies on
both sides; market discipline failed and regulatory efforts were compromised. Rules, guidance, and oversight did not mitigate the failures of market discipline. From a public policy perspective, we
must restore equilibrium to financial markets, which in this context means market stability. We must strike the optimal balance between market discipline and supervision. Aligning the interests of the
private sector and the public sector is critical to the long term success of our economy. When discipline and oversight are balanced, market participants better manage risks, financial institutions
operate in a safer and sounder manner, and our economy is served by more competitive, innovative, and efficient capital markets. In March, Treasury released its Blueprint for a Modernized Financial Regulatory Structure. This report outlines a series of steps to improve the U.S.’s antiquated regulatory system. Both market practices and regulatory practices must be reviewed with a critical eye towards improvement and material strengthening. We need to focus on moving forward, with all parties contributing to the collective effort.
Acting Under Sec Ryan Remarks at the SIFMA Annual Meeting
October 28, 2008
Acting Under Secretary for Domestic Finance Anthony Ryan
Remarks at the SIFMA Annual Meeting
New York –
Good morning. I am pleased to represent the Treasury Department at the
Annual Meeting of the Securities Industry and Financial Markets
Association (SIFMA). I welcome this opportunity to update you on the
state of the capital markets and the global economy, and on Treasury’s
efforts to implement the Emergency Economic stabilisation Act, the
EESA, which was recently passed by Congress and signed into law by
Our primary focus at Treasury is to strengthen U.S. financial
institutions and restore the flow of financing that is necessary to
support and build our economy. This conference presents the ideal
venue and is particularly timely given the convergence of financial
market events, the critical contributions of private sector
participants, the broader policy perspectives that need to be
addressed, and the breadth of SIFMA’s reach to the financial
community. Moreover, this discussion is also opportune given SIFMA’s
mission to enhance the public’s trust and confidence in the markets,
to deliver an efficient, enhanced member network of access and
forward-looking services, and to be the premier educational resource
for professionals in the industry. We at Treasury appreciate SIFMA’s
efforts on disclosure, securitization, credit ratings, the restoration
of investor and public confidence, and securities fails in the
Treasury market. But the work is not complete. SIFMA must continue to
address the current challenges as well as provide material and
meaningful input to future policy issues.
The stresses on U.S. and world financial markets are the most serious
in recent memory. The disruptions of recent months have their roots in
the housing correction. As housing prices have declined and the values
of mortgage loans became more opaque, uncertainty spread to the
investors and institutions that owned these assets. While some argue
that this uncertainty has its roots in the subprime and the Alt-A
markets, there are numerous factors to review and to understand before
coming to any conclusions. Credit as a whole – not just in the housing
sector – has been plentiful over the past decade and we have benefited
by being able to finance the spectrum of assets and services, from
complex collateralized obligations, to tender option bonds, to student
loans, and to household spending with credit cards. Today, we are
experiencing the repercussions of this unbridled expansion and access
to credit. We needed to strike a balance between strong market
discipline and regulatory oversight and we have not. Investor
confidence was undermined, illiquidity then compromised our credit
markets, and now the housing and financial market turmoil has spilled
over into the rest of the U.S. economy.
Equity, credit, and funding markets remain under considerable strain,
as banks have been forced to delever aggressively and risk appetite
has abated. However, policy measures enacted by the Treasury, the
Federal Reserve, the FDIC, other U.S. policymakers and our
counterparts around the world have helped relieve some pressures in
the funding market.
For example, Treasury implemented the temporary Money Market Mutual
Fund Guarantee Program, which has been well received by funds and has
helped to relieve large-scale redemption pressure among money market
mutual funds–a key buyer of commercial paper. The Federal Reserve
also introduced three programs: (i) the Asset-Backed Commercial Paper
(ABCP) Money Market Liquidity Facility (AMLF) to provide investors the
opportunity to sell ABCP through broker/dealers to the Fed; (ii) the
Commercial Paper Funding Facility to enhance the availability of
90-day term funding for issuers of both secured and unsecured paper;
and (iii) the Money Market Investor Funding Facility to further
restore liquidity to the money market mutual fund industry by
purchasing commercial paper, certificates of deposits, and bank notes
with maturities of 90 days or less. The first two Fed facilities are
already operational, and indications are that they too are helping to
stabilise financial institutions’ access to the commercial paper
market. Accordingly, commercial paper yields are adjusting, volumes
across the maturity spectrum are expanding and maturities have
lengthened, although we are still far from what might be called
Several other funding market sectors, including London Interbank Offer
Rates (LIBOR), have also experienced improvements in response to the
passage of the EESA and the announcement of the FDIC’s guarantee of
short-term bank debt.
In the longer term credit markets; however, conditions remain quite
challenging and U.S. companies are finding it very difficult to issue
long-term debt at attractive rates.
Mortgage markets are also continuing to experience strain. While the
yield on the current coupon mortgage-backed security issued by Fannie
Mae and Freddie Mac has increased, overall consumer mortgage rates
have improved, and currently average around 6.04 per cent on fixed rate
30-year mortgages according to Freddie Mac’s weekly survey, down from
6.35 per cent before the GSEs were placed into conservatorship by their
regulator, the Federal Housing Finance Agency (FHFA).
It is important to remember that as part of the Treasury’s actions
regarding Fannie Mae and Freddie Mac and in consultation with FHFA,
the GSEs entered into a Preferred Stock Purchase Agreement with
Treasury that effectively guarantees all debt issued by the GSEs, both
existing and to be issued. The U.S. Government stands behind these
enterprises, their debt and the mortgage backed securities they
guarantee. Their mission is critical to the housing markets in the
United States and no one will deny the importance of these
institutions in assisting our housing markets in this downturn.
To further address other market issues and offer a comprehensive plan
for tackling challenges in the financial system, the President worked
with Congress over the past 21 days to move quickly to grant the
Treasury Department extraordinary authority to address these
unprecedented situations facing Americans. Congress recognised that
frozen credit markets pose a significant threat to our economy and to
all Americans. With unprecedented speed, Congress enacted a rescue
package with a broad set of tools —including authority to purchase
or insure troubled assets which in turn assists Americans by
permitting the extension of credit, and implementing temporary
increases in the FDIC deposit guarantee. These tools are being
deployed aggressively to strengthen large and small financial
institutions across the country that serve businesses and families and
directly impact the well being of Americans.
Treasury is moving rapidly to implement these and other programs and
is continuing collaborative efforts with the Federal Reserve, the
FDIC, and other financial regulators to address the many challenges we
Let me summarize our actions thus far and provide some additional details.
Treasury has moved quickly since the enactment of the EESA to
implement programs that will provide stability to the markets and help
enable our financial institutions to support consumers and businesses
across the country. We are focused on applying the authorities
Congress provided in ways that are highly effective and protect the
taxpayer to the maximum extent possible. As Interim Assistant
Secretary for Financial Stability Neel Kashkari recently testified
before the Senate Committee on Banking, Housing and Urban Affairs, we
have accomplished a great deal in a short time. A program this large
and complex would normally take months or years to establish. We don’t
have months or years and so we are moving quickly, and methodically,
to facilitate the necessary results. We are also moving with great
transparency, communicating with Congress and the oversight
authorities at every step.
Capital Purchase Program
Earlier this month we announced a capital purchase program under which
Treasury will purchase up to $250 billion of senior preferred shares
from qualifying U.S. controlled banks and financial institutions. Last
week Treasury and financial regulators outlined a streamlined,
systematic process for all banks wishing to voluntarily participate in
the capital purchase program. Since that time, we have seen a broad
range of interest. We signed final agreements with the initial nine
major financial institutions that hold 50 per cent of all U.S. deposits
over this past weekend, and directed our custodian to deliver the
capital to these institutions starting today. We also granted
preliminary approval to several more regional banks over the weekend.
There will be a rolling process for selecting financial institutions
for capital injections as we go forward.
This program is aimed at healthy banks, and provides attractive terms
to encourage lending. The minimum subscription amount available to a
participating institution is one per cent of risk-weighted assets. The
maximum subscription amount is the lesser of $25 billion or three
per cent of risk-weighted assets. Treasury intends to fund the senior
preferred shares purchased under the program by the end of this year.
We worked with the four banking regulatory agencies to finalise the
application process. Qualified and interested publicly-held financial
institutions will use a single application form to submit to their
primary regulator – the Federal Reserve, the FDIC, the OCC, or the
OTS. These regulators have posted this common application form on
As Secretary Paulson said last week, this capital purchase program is
an investment, not expenditure. This is an investment in Americans, in
our community banks, credit unions, and main street banks.
As these banks and institutions are reinforced and supported with
taxpayer funds, they must meet their responsibility to lend, and
support the American people and the U.S. economy. It is in a
strengthened institution’s best financial interest to increase lending
once it has received government funding.
Capital Purchase Program Disclosure
Treasury is committed to transparency and disclosure as we implement
this program. Once a financial institution is granted preliminary
approval, Treasury and the institution will work to complete the final
agreement and final authorization of payments. Once the payment is
authorised, within two business days Treasury will publicly disclose
the name and capital purchase amount for the financial institution. We
will disclose the names of financial institutions at the same time
every day with postings on our EESA website.
Financing the Financial Rescue Package
Let me now focus on another topic that is just as important – the
financing of the Troubled Asset Relief Program (TARP) as well as the
various initiatives implemented this past year.
As you know, we make announcements regarding debt management policy at
our Quarterly Refunding after consulting with our Treasury Borrowing
Advisory Committee as well as after significant internal consultation.
This year’s financing needs will be unprecedented. We firmly believe
that investors value greatly and pay a premium for Treasury’s
predictable actions, the certainty of supply, and the liquidity in the
market. To the very best of our ability, we intend to stay the course.
However, specific policy actions or market conditions have recently
caused us to take new actions.
For example, two weeks ago I stated that Treasury will continue to
increase auction sizes of our bills and coupon securities and continue
to issue cash management bills. As has been the case over the past
year, some of these cash management bills may be longer-dated.
Treasury is also considering its options regarding the frequency and
issuance of additional nominal coupons, including a possible
reintroduction of the three-year note, beginning in November 2008.
I noted at the time that the announcement was being made, outside the
customary Quarterly Refunding announcements, to allow Treasury to
adequately respond to the near-term increase in borrowing requirements
and to give market participants notice of the potential changes.
Specifically, Treasury may need to address many different policy
objectives, including TARP related programs and purchases, FDIC bank
resolution measures, liquidity initiatives conducted by the Federal
Reserve including the Supplementary Financing Program, the Agency MBS
program, student loan program, and the GSE Senior Preferred Stock
Agreement. All of these initiatives are not factored into the $482
billion FY 2009 deficit projected by the Office of Management and
Budget in July’s Mid-Session review. The potential for deterioration
in economic conditions given the contraction in credit may also affect
budget conditions this year.
In addition, Acting Assistant Secretary for Financial Markets Karthik
Ramanathan recently issued a statement regarding dislocations in the
Treasury market. Specifically, Treasury closely monitors conditions in
the Treasury securities market as well as financing markets, and
realises that the depth and liquidity of the Treasury market benefits
investors both domestically and globally. To address its borrowing
needs and further enhance liquidity in the Treasury market, Treasury
reopened multiple securities which relieved severe dislocations in the
market causing acute, protracted shortages. In addition, Treasury
stated that regulators will be monitoring situations in which aged
settlement fails are not cleared and will encourage actions by market
participants, including the use of netting and bilateral processes,
cash settlement, negative rate repo trading, margining of aged
settlement fails, and identifying pair-offs.
Once again, we are strongly urging the private sector to lead this
effort. We all benefit from a deep, liquid Treasury market, and SIFMA
and the Treasury Markets Practices Group have the opportunity to take
a leadership role in devising and implementing private sector
solutions to current challenges.
Efforts by the private sector to address challenges in the marketplace
will go a long way to strengthen market discipline, improve market
liquidity and enhance market confidence. It will also help build
credibility with market regulators.
Addressing the Challenges and Disequilibrium in the Markets
Our financial market system rests on a balanced tension between
private-sector market discipline and public-sector regulatory
oversight. However, that balance has been weakened by deficiencies on
both sides; market discipline failed and regulatory efforts were
compromised. Rules, guidance, and oversight did not mitigate the
failures of market discipline. From a public policy perspective, we
must restore equilibrium to financial markets, which in this context
means market stability. We must strike the optimal balance between
market discipline and supervision. Aligning the interests of the
private sector and the public sector is critical to the long term
success of our economy. When discipline and oversight are balanced,
market participants better manage risks, financial institutions
operate in a safer and sounder manner, and our economy is served by
more competitive, innovative, and efficient capital markets. In March,
Treasury released its Blueprint for a Modernized Financial Regulatory
Structure. This report outlines a series of steps to improve the
U.S.’s antiquated regulatory system. Both market practices and
regulatory practices must be reviewed with a critical eye towards
improvement and material strengthening. We need to focus on moving
forward, with all parties contributing to the collective effort.
President’s Working Group on Financial Markets
In order to address the unprecedented and extraordinary disequilibrium
and challenges that our financial markets have experienced, the
President’s Working Group on Financial Markets, or “PWG” as it is
known, has been taking proactive steps to mitigate systemic risk,
restore investor confidence, and facilitate stable economic growth.
The PWG issued a policy statement on the financial market turmoil last
March, which contained an analysis of underlying factors that
contributed to the market turmoil.
The PWG identified weaknesses in global markets, financial
institutions, and regulatory policies, and made a set of comprehensive
recommendations to address those weaknesses. The analysis focused on
six areas: mortgage origination, improving investors’ contributions to
market discipline, reforming the ratings process and practices
regarding structured credit products, strengthening risk management
practices, enhancing prudential regulatory policies, and enhancing the
infrastructure for the OTC derivatives market. The PWG’s
recommendations cover the practices of a broad array of market
participants, as well as supervisors, addressing all links in the
securitization chain: mortgage brokers, mortgage originators, mortgage
underwriters, securitizers, issuers, credit rating agencies,
investors, and regulators.
Since March, the PWG has worked to ensure implementation of its
recommendations, and issued an update just over two weeks ago on
progress to date. We noted that, while no single measure can be
expected to place financial markets on a sound footing, implementation
of the recommendations is an important step in addressing weaknesses.
Substantial progress has occurred, and more progress has been made in
some areas than in others as efforts have been prioritised to address
the most immediate problems. The pace of implementation must be
balanced with a need to avoid exacerbating strains on markets and
institutions. Still, further effort is warranted, and the PWG is
continuing to carefully monitor markets and implementation and will
not hesitate to make recommendations if necessary.
Another PWG effort, which pre-dates the current turmoil, concerns
private pools of capital, including hedge funds. recognising that
private pools of capital bring significant benefits to the financial
markets, but also can present challenges for market participants and
policymakers, the PWG in February 2007 issued a set of principles and
guidelines to address public policy issues associated with the rapid
growth of private pools of capital and to serve as a framework for
evaluating market developments, including investor protection and
systemic risk issues. These principles contained guidelines for all
links in the pooled investment chain: pool managers, creditors,
counterparties, investors, and supervisors. In September 2007, the PWG
facilitated the formation of two private-sector groups to develop
voluntary industry best practices: the Asset Managers’ Committee and
the Investors’ Committee. In April of this year, the two groups issued
draft best practices for hedge fund managers and for investors in
pools, and they expect to issue finalised practices very soon.
We remain vigilant as Americans face strong headwinds in this
challenging financial environment. We will focus on addressing or
mitigating immediate problems while being mindful that longer term
regulatory reform is critical to our continued status as the world’s
preeminent capital market. Our Blueprint and the PWG’s reports clearly
outlined some of the changes that need to be addressed. Maintaining
the balance between regulatory measures and market discipline is
critical to highly efficient markets. Most importantly, such a balance
fosters market confidence. There is important work for all of us and I
appreciate your efforts and dedication. Thank you.