Credit rating agencies drew more fire on Wednesday as a powerful U.S. regulator said it was investigating if their judgment had been colored by money from customers selling subprime mortgages.
The rating agencies have been castigated for failing to sufficiently highlight risks in complex financial instruments secured by pools of mortgages, including subprime mortgages for U.S. home-loan borrowers with tainted credit.
The examination will seek to determine whether the (credit raters') role in the process of bringing residential mortgage-backed securities to market impaired their ability to be impartial, Christopher Cox, chairman of the U.S. Securities and Exchange Commission, told a Senate panel.
Problems in subprime mortgages triggered a global credit crunch when they inflicted losses in Europe and Australia last month, forcing central banks to flood markets with liquidity and the Federal Reserve to slash interest rates.
A top U.S. Treasury official said credit market conditions were recovering their poise.
I think really that we're seeing this start to turn around now, Treasury Under Secretary for Domestic Finance Robert Steel told CNBC television.
U.S. interest-rate and credit-default swap spreads tightened as equity markets took heart on Wednesday from a speedy resolution to the United Auto Workers' strike against General Motors Corp., which investors feared could have harmed U.S. growth if it had dragged on for a while.
The Dow Jones Industrial Average was up about 70 points at 13,848 in afternoon trading in New York, while U.S. Treasury bond prices were up slightly.
Steel conceded the credit crunch would deliver a temporary hit to U.S. growth, although he remained optimistic.
There is no question there will be a penalty to be paid for this. There is also no question that it will take a bit of time to work out, he said.
But ... we're in a period of very strong growth all over the world. The U.S. economy is strong and we're optimistic the penalty will be modest and we'll resume a period of growth in the second half of the year, he added.
German Finance Minister Peer Steinbrueck said that Europe could withstand the fallout of slower U.S. growth.
Despite the turbulence in financial markets, Europe's economic prospects are robust, Steinbrueck told business leaders in Hamburg. There has ... been a certain uncoupling from the American economy, he said.
That said, European money market rates had continued to tick higher with the overnight London interbank rate (LIBOR) for euro deposits moving up to fix at a fresh 3-week high of 4.3525 percent, compared with 4.24750 percent on Tuesday.
The high rate levels show banks are still reluctant to lend to each other despite the European Central Bank's best efforts to pump cash into the interbank market since August 9.
It allotted 50 billion euros of three-month refinancing on Wednesday at an average rate of 4.63 percent -- the highest since March 2001.
London markets were calmer, recovering from the first run on a major British bank for more than 140 years after mortgage lender Northern Rock had to seek emergency funds from the Bank of England on September 14 because of the credit crunch.
There were no bids at the Bank of England's 3-month cash auction where the central bank would have supplied funds at a penalizing rate of 6.75 percent. But dealers say that may be partly because banks fear they risk emulating Northern Rock if they are seen bidding for such funds.