[Congressional Record Volume 140, Number 53 (Thursday, May 5, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: May 5, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                         FINANCIAL DERIVATIVES

  Mr. DORGAN. Madam President, in today's Wall Street Journal there is 
an article entitled, ``GAO Report Urges Controls For Derivatives.''

       GAO warns of derivatives risks, recommends direct 
     regulation. GAO says Congress should review whether 
     commercial banks that engage in proprietary trading or 
     trading derivatives and other financial instruments for 
     profit should have the benefit of deposit insurance and the 
     Federal safety net.

  Most people will not know the difference between a derivative and a 
garden hose. A derivative is a term that means nothing to most people 
in this country. It is in fact a term that covers a wide range of 
hedging, laying off risk, speculating, and in some cases flatout 
gambling in various kinds of financial instruments.
  In the Fortune magazine of March 7, the cover says, ``The Risk That 
Won't Go Away.''
  ``Financial derivatives are tightening their grip on the world 
economy, and nobody knows how to control them.''
  In that same Fortune magazine, it talks about who are the ``big boys 
in the big business,'' and lists the largest dealers in swaps and other 
species of derivatives: Chemical Bank, Bankers Trust, Citicorp, Chase 
Manhattan. I do not have to go much further. You get the drift.
  We are at it again: Same old story, excess of America's financial 
markets in a manner designed to lay off the risk to the American 
taxpayer.
  It was not too many years ago that I stood on the floor of the House 
of Representatives and offered an amendment that finally pulled the 
center pole out of the tent on all the speculation and junk bonds. We 
all know what happened with junk bonds. We had a bunch of sharp-eyed 
dealers who were making millions of dollars. One was making $100,000 an 
hour; $500 million in a year he made trading in junk bonds.
  They found a way to cleverly in the 1980's to lay off junk bonds on 
the American taxpayer. How did they do it? They found a way to sell 
junk bonds to savings and loans, of course, where deposits are insured. 
And when the savings and loans purchased the junk bonds and the junk 
bonds did not perform or turned out to be worthless, the savings and 
loans went belly up. And the American taxpayer got stuck with the junk 
bonds.
  Let me give you the ultimate paradox, the ultimate absurdity of the 
1980's, the hood ornament that describes the excess of the 1980's. The 
American taxpayers ended up owning junk bonds in the Taj Mahal Casino 
in Atlantic City, NJ. How would the American taxpayers end up owning 
junk bonds? Because the Taj Mahal, the largest, glitziest casino at 
that point was built by floating bonds that were not investment grade. 
Therefore, they were called junk bonds. Who were the purchasers of junk 
bonds? Some of the savings and loans purchased the junk bonds because 
the investment bankers and others had a cozy relationship and they 
pawned them over to the S&L's. The S&L's went broke. The junk bonds did 
not perform, and the U.S. Government ended up owning junk bonds in the 
Taj Mahal Casino.
  That it seems to me is the hood ornament on everything that was wrong 
with financial excesses of the 1980's.
  I went on the floor of the House, and an amendment was passed that I 
offered that became law that says no S&L in this country shall buy 
another junk bond, and all the S&L's that have junk bonds shall sell 
the junk bonds they owned. It, in part, collapsed the junk bond market. 
But I guarantee that when that became law, we took the S&L's out of the 
junk bond business. No longer were sharp-eyed dealers searching for 
profits for themselves going to lay their risk off on the American 
taxpayer. We lost literally billions of dollars as taxpayers because we 
found that institutions whose deposits are insured ultimately by the 
Federal Government and ultimately by the taxpayer were buying junk 
bonds. They could have just as well taken the taxpayers' money to the 
casino table and put it on red or on 15, or went to the blackjack table 
and tried their luck there. It is the same type of gambling.

  Why do I describe that story? Because I remember how tough it was to 
do what I did on the floor and what ultimately became law. It was 
taking on the entire Wall Street crowd who wanted to continue this 
binge of excess that caused the collapse of so many savings accounts 
for so many American families. Here it goes again. But financial 
institutions are not buying junk bonds, thanks to that amendment--and, 
hopefully, most of that era is over. But now we see that financial 
institutions are gambling in derivatives. Derivatives now account for a 
substantial portion of the assets of the Nation's largest banks. It is 
not just derivatives to hedge risk--I understand hedging is perfectly 
legitimate and a perfectly appropriate way of laying off some risk --
but this is proprietary, often highly-leveraged trading in derivatives 
as a line of business to try to make money. It is, in some countries, 
called betting. Here it is called derivatives.
  We should not have institutions in this country whose deposits are 
insured by the Federal Government, and ultimately the taxpayer, 
involved in gambling. Just as they should not have been involved in 
buying junk bonds, so now they should not be involved in proprietary 
trading in derivatives.
  I came to the floor only to say that I intend to offer legislation 
that I am now beginning to prepare that will do exactly the same in 
this circumstance as I tried to do with respect to junk bonds.
  The question that the GAO asks is not a question that takes more than 
a microsecond to answer.
  The GAO says:

       Congress should review whether commercial banks that engage 
     in proprietary trading, or trading derivatives, and other 
     financial instruments for profit, should have the benefit of 
     deposit insurance and the Federal safety net.

  It does not take a mental giant to answer that question. Of course, 
not. We have been down this road, and we have seen the taxpayers bilked 
for billions of dollars with junk bonds. I do not intend to see them 
bilked again for gambling losses in proprietary trading in derivatives 
with the same kind of financial excess that got us in trouble before 
and will again.
  I think the GAO is prepared to release a report that includes some 
excellent work in this area. I commend to my colleagues, who do not 
know much about derivatives, a Fortune magazine article, which I think 
has plowed some new ground. When you conclude reading it, you will 
understand that once again we have found that there are some among us 
who would like very much to lay off enormous risks of what most people 
would call gambling on institutions whose deposits are insured. In 
fact, the brassy behavior these days is that the institutions 
themselves have set up a business internally to effectively gamble in 
order to make money. That is at odds with everything we understand and 
know about the sound principle of banking, which is that the principle 
of safety and soundness is preeminent. The principle of safety and 
soundness and the perception of whether the people think the 
institution is safe and sound is what determines whether our financial 
institutions succeed.
  You cannot, in my judgment, merge something so inherently speculative 
and risky as a proprietary way of doing business to make money, such as 
the trading of derivatives on a proprietary basis, with the ordinary 
business of banking. You cannot do that, and do anything but injure 
American banks.
  So I, once again, indicate that I intend to offer some legislation in 
the coming weeks that will attempt to pierce this practice or this 
behavior, just as I attempted to do--and in that case successfully 
did--with respect to junk bonds and savings and loans in the 1980's.
  I yield the floor and suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. METZENBAUM. Madam President, I ask unanimous consent that the 
order for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

                          ____________________