Thursday, April 10, 2008
In a speech today, Addressing Weaknesses in the Global Financial Markets: The Report of the President's Working Group on Financial Markets, Ben S. Bernanke offered some preliminary conclusions about the causes of the current turmoil and identified some measures to strengthen the global financial system. Although noting that many factors contributed to the current problems, he identified as a primary cause the implementation of the "originate-to-distribute" approach to credit extension. This ultimately led to a variety of undesirable consequences, including the compromise of underwriting standards at the point of origination, the general erosion of market discipline, underpricing of risk, and insufficient attention by investors to the quality or riskiness of the investments they purchased (including overreliance on credit rating agencies).
His recommendations include:
- Weaknesses in the origination stage must be corrected
- Better consumer protections and disclosures
- Greater supervisory scrutiny of the originators' processes and their incentives
- Improved methods and greater transparency from credit rating agencies
- Strengthening risk management practices
In addition, investors must take responsibility for developing independent views of the risks of these investments.