Finance & Business World

Treasury Undersecretary Robert Steel said it's premature to say that financial market turmoil stemming from tightening credit conditions is near an end.

“This is going to take a while to work through, and the improvement from here won't be in a continual line,'' Steel said in an interview on Bloomberg Television's “Political Capital with Al Hunt,'' to be aired today. While progress is being made, he added, “there will be some bumps and fallbacks.''

Steel's remarks suggest he's less optimistic than Wall Street executives such as JPMorgan Chase & Co. Chairman Jamie Dimon, who have said the credit-market freeze is more than half over. Steel said it's “a bit simplistic'' to say the turmoil is closer to the end than the beginning, as Citigroup Inc. Chief Executive Officer Vikram Pandit did this week.

To help restore liquidity in capital markets, the government should consider easing limits on how much private- equity firms can invest in banks, Steel said in the interview. The Bush administration is also open to discussions with Congress on the creation of a federal agency to monitor financial market risk, he said.

Falling house prices and rising mortgage delinquencies have slowed U.S. growth, disrupted credit markets and led to $309 billion in credit losses and asset writedowns by the world's biggest banks and securities firms since the start of last year.

Fed's Response

As head of Treasury's domestic finance division, Steel has worked to contain damage from the collapse in the market for subprime mortgages. Former Federal Reserve Chairman Alan Greenspan said on April 8 that the decline in credit is worse than at any time in 50 years.

Since the Federal Reserve arranged an emergency loan on March 14 for Bear Stearns Cos., the Standard & Poor's 500 Index has risen 4.6 percent and the dollar is up 0.8 percent against a basket of currencies of U.S. trading partners.

“The essence of it is we're making good progress, and we're pleased with how things are going,'' Steel said.

Steel, 56, said a restriction on private-equity firms' investment in banks should be reconsidered if it can help banks raise needed capital. Under current law, prior approval from the Federal Reserve is required for any acquisition of 10 percent or more in a bank.

Treasury Secretary Henry Paulson has repeatedly urged financial institutions to raise as much capital as possible to cope with the credit and housing crises.

Private-Equity's Role

“In the last few recapitalizations where balance sheets have been strengthened for financial institutions, private equity has played an important role,'' Steel said payday loan. Changes to the current asset limit is “certainly something worth considering and looking at.''

Steel said it's “worth talking about'' a proposal by Massachusetts Rep. Barney Frank, the Democratic chairman of the House Financial Services Committee, to create a federal agency to regulate risk in financial markets.

Treasury's plan to overhaul regulation of Wall Street includes a financial stability regulator, “which has really the same idea'' suggested by Frank, Steel said. Treasury is still considering how best to alter the regulatory regime, he said, stopping short of a full endorsement of Frank's plan.

“We need to have a financial regulation system in our country that is effective, efficient and competitive,'' Steel said.

Support for Fed

Steel said he supported the Fed's March rescue of Bear Stearns from possible bankruptcy. The Fed's decisions to lend to Bear Stearns and other Wall Street firms at the same discount rate offered to commercial banks “were right for this time,'' he said.

“These were unusual times'' involving “tricky issues,'' Steel said. Support for Bear Stearns was necessary because turmoil on Wall Street impairs consumers' ability to borrow and spend. “This was not about Wall Street, this was about Main Street,'' he said.

Treasury opposes legislation that would give company shareholders the ability to cast nonbinding votes on executive pay, Steel said.

“Each company should decide that as opposed to legislation,'' Steel said. “In the end compensation is going to have to be managed from the board room.''

Steel, a former vice chairman of Goldman Sachs Group Inc., said Democrats' plans to aid homeowners who can't pay their mortgages “go a little bit too far.''

Frank's Plan

Frank on April 17 introduced legislation to have the Federal Housing Administration guarantee up to $300 billion in refinanced mortgages for owner-occupied homes.

“There's a fine balancing act between what FHA should do and how much they should be helpful and also protecting the taxpayers,'' Steel said.

He reiterated Treasury's commitment to a voluntary program to get lenders and borrowers to renegotiate loans. The priority for Congress should be to pass separate bills streamlining FHA and creating a tougher regulator for Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans.

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