[Congressional Record Volume 141, Number 47 (Tuesday, March 14, 1995)]
[Senate]
[Page S3889]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
ANTIDERIVATIVE LEGISLATION
Mr. DORGAN. Mr. President, I will soon introduce a piece of
legislation dealing with derivatives. The term ``derivative'' is not
readily understood by most.
We read in the newspapers and hear on television reports these days
about derivatives. The most recent news story, of course, was about a
28-year-old young fellow, an employee of the Barings Bank of England, a
230-year-old bank.
This young employee of the Barings Bank of England was stationed in
Singapore. In Singapore as an employee of an English bank he was
betting on the Nikkei index on the Japanese stock exchange. Turns out
that he lost $1 billion, and a 230-year-old British bank went under.
This is not the first time we have heard about derivatives. We heard
about derivatives with respect to Orange County, CA. We heard about
derivative failures across this country in recent years and it has
alarmed some people, and justifiably so. Some who thought their
retirement earnings were safe found out that the mutual fund they
thought they invested in was, in fact, leveraged with derivatives.
Schoolteachers, school districts, cities, elderly people who had
saved for their retirement, all have discovered in recent years the
risk and potential danger of derivative trading when they do not know
what they are doing. There are worldwide some $30 to $35 trillion in
derivative contracts.
Derivatives in another manner and another name can be simple hedging,
and hedging is a very customary thing to have happened. Banks hedge,
farmers hedge. Hedging is a customary transaction. I have no trouble
with that. Derivatives have become an international financial game and,
in fact, some countries call it wagering or betting.
In this country, we have some very large banks that have begun
trading in derivatives on their own account. They are involved in
proprietary trading and derivatives in their own account. Not for
customers.
The difficulty I have with that is when a financial institution whose
deposits are insured by the American taxpayers with Federal deposit
insurance, starts putting up a keno pit in their lobby and gambling
effectively on derivatives, believing if they lose their shirt, the
American taxpayers will pay. That is wrong. I do not believe financial
institutions whose deposits are insured by the Federal Government
should be involved in any case or under any conditions in trading for
their own proprietary accounts in derivatives. It is far too risky and
far too fraught with potential failure.
In this case, the failure will be underwritten by the American
taxpayers. We have seen a chapter of this in the past. It was called
junk bonds in savings and loans. Let us not see that repeat itself in
this country with banks and derivatives.
Now, most American banks are not involved in derivative trading.
Ninety-nine percent of them are not. But we have several very large
banks in the country, some of the largest, that are involved in
derivatives, with risks up to 500 percent of their entire capital
structure.
I will introduce legislation that I introduced in the previous
Congress. It is very simple. It does not prohibit traditional hedging
by financial institutions for the purposes of hedging risk. It does
prevent and prohibit institutions whose deposits are insured by the
Federal Government from trading on a proprietary basis in derivatives.
That makes no sense, and we ought to stop it.
The fact is we have Federal regulators involved in looking over their
shoulders on derivatives trading, but is like having traffic cops
involved in looking at computer crime. It simply does not work.
We have a $30 to $35 trillion dollar worldwide derivative business,
and we see what can happen. We see what happens when a 28-year-old,
working for a British bank, living in Singapore, bets on Japanese
stocks and loses $1 billion, and everyone stands around looking
surprised.
We saw everyone scratching their heads looking surprised that Orange
County went bankrupt. It is fine to stand up and decide that the
regulators have to do their jobs, and we as legislators ought to do
ours, and ours ought to be to say to all financial institutions in this
country, if you have Federal deposit insurance, you have no business
trading in derivatives.
The American taxpayers do not deserve to be stuck with your losses if
you want to gamble with their money. I hope some of my colleagues would
see merit in this legislation and help me pass it.
I recall the legislation that I offered that finally passed the
Congress prohibiting savings and loans from buying junk bonds. There
was a struggle to get that passed, but I finally did. The reason I got
it passed was, unfortunately, we had already lost a bundle by having
S&L's buy junk bonds. They are up to their neck in debt with junk
bonds.
It should never have happened. The ultimate absurdity was the Federal
Government ended up owning junk bonds in the Taj Mahal Casino because
an S&L that went bankrupt owned Taj Mahal junk bonds that were
nonperformers and the Federal Government ended up owning bank junk
bonds in a casino.
That is the absurdity where we got with junk bonds, and we will head
the same way with derivatives, mark my words, unless we decide that
institutions whose deposits are insured ought not to bet on
derivatives.
That is the purpose of my legislation. My hope is that several
colleagues will see fit to pass this legislation in the near future. I
thank may colleague from Ohio for indulging me with his statement.
Mr. GLENN. Mr. President, I suggest the absence of a quorum.
I ask that the time be charged to both sides.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. GLENN. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER (Mr. Grams). Without objection, it is so
ordered.
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