[Congressional Record Volume 140, Number 140 (Friday, September 30, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: September 30, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
      INCREASING CONCERN WITH STRUCTURED NOTES IN BANKING INDUSTRY

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Texas [Mr. Gonzalez] is recognized for 5 minutes.
  Mr. GONZALEZ. Mr. Speaker, at the time I was elected chairman of the 
Committee on Banking, Finance and Urban Affairs on the first occasion, 
which was January 1989, I came to the well and promised to keep the 
Members of the House informed on questions then agitating the minds not 
only of the Congress but of the whole country, and I did, and 
subsequent to that I have attempted to.
  Today I rise in pursuance of that commitment in order to initiate 
what I hope to terminate next week, if we do adjourn a week from Friday 
sine die, in order to render an accounting in one of the most effective 
and yet very substantial issues that have been confronted by the 
Committee on Banking, Finance and Urban Affairs of the U.S. House of 
Representatives.
  Today I want to report letters I have written first to the Honorable 
Alan Greenspan, chairman of the Federal Reserve Board. The reason for 
that is because I have expressed grave concern for several years, but 
particularly during the last 2 years, at the amount of risk involving 
our insured depository institutions such as commercial banks, credit 
unions, and savings and loans, and also putting at risk, tremendous 
risk to the taxpayer in the ongoing what is in our opinion and in 
simple words nothing less than gambling and high-risk ventures in high 
volume and in such global terms that it defeats ability to explain 
fully in any program such as this.
  But in my letter to Chairman Greenspan I said I have become 
increasingly concerned about the use of structured notes. There is 
always a very, very great knack on the part of these enterprising risk-
takers to coin words, create terminology, a jargon. Structured notes is 
a fancy word for another form of what today is agitating and causing 
great concern and great loss to such things as political entities, 
Charles County in Maryland, a junior college in Texas, a county in 
Minnesota, and others where they have placed tax funds and revenue 
funds in the hands of these gamblers and have lost everything and find 
it difficult to meet the obligations of their political dependencies. 
This so-called structured note is just one form in which I fear the 
commercial banks and the savings and loans and others are exposing to 
great risk.
  So I continue and say I believe that the price volatility and the 
illiquidity of the many types of these derivatives, because that is 
what they are, call them structured notes or whatever, but they are so-
called derivative, and I have called this global tremendous thing that 
denies even explanation and even my colleagues on the Banking Committee 
do not grasp the volume. I have been trying to explain that even as I 
am speaking here right now today, what they use as terminology, ``a 
nanosecond,'' which means the speed of light, you may have not billions 
but trillions of dollars being transferred electronically, megabytes. 
But what kind of money is that? It totals now even, according to the 
Wall Street Journal, this unbelievable $38 trillion, and it is 
gambling. It is not in order to carry on the world's commerce, or 
purchase of goods, manufacture of goods or trade. It is gambling on 
such things as currency rate fluctuations, the value of the dollar, 
which incidentally ought to be our biggest concern because it is 
approaching a dangerous point where it could be debauched. What we have 
today compared to the baseline year of 1970 is a 10-cent dollar. This 
is why our constituents cannot explain why their dollars that they find 
it hard to earn nowadays cannot buy as much as they used to, and as I 
have constantly reminded the big panjandrums that govern these big 
things, the Chairman of the Federal Reserve, the big commercial 
bankers, groceries are costing more, utilities cost more, rent costs 
more. Where is inflation controlled?
  In this gambling, which I am attracting the interest and I hope the 
attention of the leading regulators, beginning with the Federal Reserve 
Board, I am hopeful they will do something, at least something about 
it.
  Mr. Speaker, I include for the Record the letters I previously 
referred to, as follows:

         U.S. House of Representatives, Committee on Banking, 
           Finance, and Urban Affairs,
                               Washington, DC, September 27, 1994.
     Hon. Alan Greenspan,
     Chairman, Board of Governors of the Federal Reserve System, 
         Washington, DC.
       Dear Chairman Greenspan: I have become increasingly 
     concerned about the use of structured notes by insured 
     depository institutions. Although most structured notes are 
     issued by Government Sponsored Enterprises and other 
     reputable institutions, I believe that the price volatility 
     and illiquidity of many types of these derivatives present 
     significant risks to the banks that have purchased them and, 
     by extension, to the Bank Insurance Fund.
       The cash flow characteristics of structured notes often 
     depend on the performance of one or more indices, such as 
     interest rates, prepayment rates, commodity prices, etc. 
     According to a recent Federal Deposit Insurance Corporation 
     memorandum to it regional directors, these cash flows ``can 
     be variable in the timing and amount of cash received by the 
     investor throughout the life of the security, making the 
     evaluation of cash flows and risks of these securities a 
     difficult process.'' Given these difficulties, I want to 
     ensure that banks which purchase structured notes are capable 
     of managing the risks they pose.
       To assist the Committee, please provide an overview of the 
     Federal Reserve's experience in regulating bank transactions 
     in structured notes. This should include the steps you are 
     taking to ensure that structured notes transactions are 
     consistent with safe and sound banking practices. I also 
     request an estimate of the losses caused by structured notes 
     at the banks the Federal Reserve regulates.
       Thank you in advance for your cooperation and attention to 
     this request.
       With best wishes.
           Sincerely,
                                                Henry B. Gonzalez,
                                                         Chairman.
                                  ____

                                     Committee on Banking, Finance


                                            and Urban Affairs,

                               Washington, DC, September 28, 1994.
     Hon. Andrew C. Hove, Jr.,
     Acting Chairman, Federal Deposit Insurance Corporation, 
         Washington, DC.
       Dear Chairman Hove: I have become increasingly concerned 
     about the use of structured notes by insured depository 
     institutions. Although most structured notes are issued by 
     Government Sponsored Enterprises and other reputable 
     institutions, I believe that the price volatility and 
     illiquidity of many types of these derivatives present 
     significant risks to the banks that have purchased them and, 
     by extension, to the insurance funds.
       The cash flow characteristics of structured notes often 
     depend on the performance of one or more indices, such as 
     interest rates, prepayment rates, commodity prices, etc. 
     According to a recent memorandum issued by your agency, these 
     cash flows ``can be variable in the timing and amount of cash 
     received by the investor throughout the life of the security, 
     making the evaluation of cash flows and risks of these 
     securities a difficult process.'' Given these difficulties, I 
     want to ensure that banks which purchase structured notes are 
     capable of managing the risks they pose.
       To assist the Committee, please provide an overview of the 
     Federal Deposit Insurance Corporation's (FDIC) experience in 
     regulating bank transactions in structured notes. This should 
     include the steps you are taking to ensure that structured 
     notes transactions are consistent with safe and sound banking 
     practices. I also request that you provide the Committee with 
     information on the number of FDIC-regulated banks that have 
     incurred losses caused by structured notes, as well as the 
     amount of the loss at each institution.
       Thank you in advance for your cooperation and attention to 
     this request.
       With best wishes.
           Sincerely,
                                                Henry B. Gonzalez,
                                                         Chairman.
                                  ____

                                     Committee on Banking, Finance


                                            and Urban Affairs,

                               Washington, DC, September 28, 1994.
     Mr. Jonathan Fiechter,
     Acting Director, Office of Thrift Supervision, Washington, 
         DC.
       Dear Director Fiechter: I have become increasingly 
     concerned about the use of structured notes by insured 
     depository institutions. Although most structured notes are 
     issued by Government Sponsored Enterprises and other 
     reputable institutions, I believe that the price volatility 
     and illiquidity of many types of these derivatives present 
     significant risks to the thrifts that have purchased them 
     and, by extension, to the Savings Association Insurance Fund.
       The cash flow characteristics of structured notes often 
     depend on the performance of one or more indices, such as 
     interest rates, prepayment rates, commodity prices, etc. 
     According to a recent Federal Deposit Insurance Corporation 
     memorandum to its regional directors, these cash flows ``can 
     be variable in the timing and amount of cash received by the 
     investor throughout the life of the security, making the 
     evaluation of cash flows and risks of these securities a 
     difficult process.'' Given these difficulties, I want to 
     ensure that thrifts which purchase structured notes are 
     capable of managing the risks they pose.
       To assist the Committee, please provide an overview of the 
     Office of Thrift Supervision's (OTS) experience in regulating 
     thrift transactions in structured notes. This should include 
     the steps you are taking to ensure that structured notes 
     transactions are consistent with safe and sound practices. I 
     also request that you provide the Committee with information 
     on the number of thrifts that have incurred losses caused by 
     structured notes, as well as the amount of the loss at each 
     institution.
       Thank you in advance for your cooperation and attention to 
     this request.
       With best wishes.
           Sincerely,
                                                Henry B. Gonzalez,
                                                         Chairman.
                                  ____

                                     Committee on Banking, Finance


                                            and Urban Affairs,

                               Washington, DC, September 28, 1994.
     Hon. Eugene A. Ludwig,
     Comptroller of the Currency, Washington, DC.
       Dear Comptroller Ludwig: I have become increasingly 
     concerned about the use of structured notes by insured 
     depository institutions. Although most structured notes are 
     issued by Government Sponsored Enterprises and other 
     reputable institutions, I believe that the price volatility 
     and illiquidity of many types of these derivatives present 
     significant risks to the banks that have purchased them and, 
     by extension, to the Bank Insurance Fund.
       The cash flow characteristics of structured notes often 
     depend on the performance of one or more indices, such as 
     interest rates, prepayment rates, commodity prices, etc. 
     According to a recent Federal Deposit Insurance Corporation 
     memorandum to its regional directors, these cash flows ``can 
     be variable in the timing and amount of cash received by the 
     investor throughout the life of the security, making the 
     evaluation of cash flows and risks of these securities a 
     difficult process.'' Given these difficulties, I want to 
     ensure that banks which purchase structured notes are capable 
     of managing the risks they pose.
       To assist the Committee, please provide an overview of the 
     Office of the Comptroller of the Currency's (OCC) experience 
     in regulating bank transactions in structured notes. This 
     should include the steps you are taking to ensure that 
     structured notes transactions are consistent with safe and 
     sound banking practices. I also request that you provide the 
     Committee with information on the number of OCC-regulated 
     banks that have incurred losses caused by structured notes, 
     as well as the amount of the loss at each institution.
       Thank you in advance for your cooperation and attention to 
     this request.
       With best wishes.
           Sincerely,
                                                Henry B. Gonzalez,
     Chairman.

                          ____________________