Treasury Secretary Henry Paulson and other regulators yesterday called on credit rating agencies to better clarify differences between ratings on municipal bonds and those for structured credit products and said they will form a private-sector group to develop further recommendations on the rating process.

"The credit rating process needs to clearly differentiate between structured products ratings and ratings for corporate and municipal securities," Paulson said in remarks delivered at the National Press Club.

The recommendation was one of several issued by the President's Working Group on Financial Markets, which includes Paulson as well as the chairmen of the Federal Reserve Board, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.

The proposals were unveiled in an effort to improve oversight of the nation's financial markets, which have been rocked by the subprime mortgage crisis. The problem stems from a record number of defaults on subprime mortgages that were used to back debt securities, such as collateralized debt obligations, which have lost considerable value.

Credit rating agencies, which are paid by debt issuers for ratings, issued relatively high ratings on the subprime debt, and now some observers have raised questions about the veracity of the structured debt ratings process.

The issue has also raised concerns about ratings on municipal bonds, which typically are a much less risky security compared with structured debt. So regulators called for improved clarification of the differences between rating the two types of debt in an attempt to improve the rating process overall, a Treasury official said yesterday.

"Credit rating agencies play a major role in financial markets, and their ratings products must provide information investors need to make more fully informed decisions about risk," Paulson said. "This will require reforming structured credit product rating processes to ensure integrity and transparency, and improving the quality of data, models, and assumptions. Credit rating agencies must enforce policies and procedures that manage and disclose conflicts of interest, and implement changes suggested by SEC review of conflict of interest issues."

The private-sector group will consist of representatives of investors, issuers, underwriters, and rating agencies and will develop recommendations that will ensure the integrity and transparency of ratings, and foster appropriate use of ratings in risk assessment.

"We will continually assess, consider further steps, report as we proceed, and issue a summary progress statement in the fourth quarter of 2008," Paulson said.

Market participants welcomed the regulators' input.

"We commend the President's Working Group on their thoughtful observations on the market events of the past several months," said Fitch Ratings president and chief executive officer Stephen W. Joynt. "We will continue, on our own and with our industry, to work with regulators, investors, and other market participants to ensure that our ratings are the most transparent, useful and accurate that they can be."

Tim Ryan, president and CEO of the Securities Industry and Financial Markets Association said: "Combined with private sector efforts already underway, we expect Treasury's proposals will help steer the American economy back on course."

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