[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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