US treasury defends its stewardship

US treasury defends its stewardship
By Eoin Callan, Jeremy Grant and Krishna Guha in Washington
Copyright The Financial Times Limited 2007
Published: August 17 2007 03:00 | Last updated: August 17 2007 03:00


The US treasury on Thursday defended its oversight of the financial system amid one of the most severe periods of market turbulence in the past decade, but promised fresh steps to restore liquidity to mortgage markets.

The basic infrastructure of US financial markets was coping well and there were no signs of problems in trading or settlement and clearing of transactions, Robert Steel, a senior Treasury official, said in an interview.

The former Goldman Sachs executive acknowledged that the troubles in credit markets would have an impact on economic growth but said this would not derail the economy.

"I think it would be naive to think they will have no effect. But our impression here at treasury is that the effect will be modest," he said.

He defended the move this year to allow banks to take a leading role in surveillance of hedge funds, despite calls for more regulation to manage systemic risks.

"I think that it's times like this that make me feel that our strategy of good disclosure to counterparties and vigilance on the part of regulators and investors are the right [approach] to bring to these dynamics," he said. "My conversations with the prime brokerage industry give me comfort that we are on the right path on this process."

The stress in the mortgage market was in the "subprime and jumbo market", he said, referring to high-risk loans and mortgages amounting to more than $417,000, which are too large to be purchased by government-supported lenders Fannie Mae and Freddie Mac.

"We're working on things now to bring liquidity to those areas," he said, but declined to give specifics.

Jeoff Hall, economist at Thomson Financial, said the treasury had historically been able indirectly to influence demand for securities via its control of government bond issues. It was now likely to re-evaluate plans to curtail supply of some treasury bonds, he said.

Mr Steel said the key difference between the current credit crunch and shocks to the financial system such as that in 1998 was that the US and world economy were very strong. "I think that we are really going through a re-pricing of risk in the markets and it's a bit uncomfortable as we work through it."