Congressional Record, Volume 145 Issue 65 (Thursday, May 6, 1999)

[Congressional Record Volume 145, Number 65 (Thursday, May 6, 1999)]
[Senate]
[Pages S4839-S4845]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

FINANCIAL SERVICES MODERNIZATION ACT OF 1999

The Senate continued with the consideration of the bill.
Mr. GRAMM. Mr. President, I ask unanimous consent that when Senator
Shelby offers an amendment related to operating subsidiaries there be 2
hours equally divided in the usual form prior to a motion to table, and
that no amendments or other motions be in order to the amendment prior
to the vote on tabling.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. GRAMM. I 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. DORGAN. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. DORGAN. Mr. President, I have sought recognition, because I
intend to offer a couple of amendments to the pending legislation. I
would like to discuss the underlying bill just a bit more, and then
also offer the amendments and discuss the amendments.
I spoke earlier today about this legislation, which is called the
Financial

[[Page S4840]]

Services Modernization Act of 1999, and said then that I am probably
part of a very small minority in this Chamber, but I feel very strongly
that this is exactly the wrong bill at exactly the wrong time. It
misses all the lessons of the past and, in my judgment, it creates
definitions and moves in directions that will be counterproductive to
our financial future.
What does this bill do? It would permit common ownership of banks,
insurance, and securities companies, and to a significant degree
commercial firms as well. It will permit bank holding companies,
affiliates, and bank subsidiaries to engage in a smorgasbord of
expanded financial activities, including insurance and securities
underwriting, and merchant banking all under the same roof.
This bill will also, in my judgment, raise the likelihood of future
massive taxpayer bailouts. It will fuel the consolidation and mergers
in the banking and financial services industry at the expense of
customers, farm businesses, family farmers, and others, and in some
instances I think it inappropriately limits the ability of the banking
and thrift institution regulators from monitoring activities between
such institutions and their insurance or securities affiliates and
subsidiaries raising significant safety and soundness consumer
protection concerns.
This morning I described what is happening in the financial services
sector by showing a chart of big bank mergers just in the last year.
You couldn't help but to have picked up a daily paper at some point
last year and read a headline about another bank deciding to combine or
merge with another large bank.
April 6, Citicorp decided it was going to grab up Travelers Group and
have a $698 billion combined asset corporation--not exactly a mom and
pop, but two big very successful companies decide they want to get
hitched.
NationsBank apparently fell in love with BankAmerica. Bank One
decided it wanted to be related to First Chicago, and Wells Fargo likes
NorWest. So we have merger after merger, buyout after buyout, and the
big banks get bigger.
We already have a circumstance in this free market economy of ours in
which you ought to have easy entry and easy exit into the marketplace
and the right to make money and to lose money. We already have a
circumstance in banking called ``too big to fail.'' If you are big
enough, the ordinary market rules don't apply to you. You have the old
Federal Reserve Board out there. And the Fed says we have a list of
banks that are ``too big to fail,'' meaning they have become so big
that if they were to fail and made some pretty dumb decisions, lose a
lot of money, that their failure would be so catastrophic and such a
shock to the economic system in this country that we couldn't possibly
let that happen. So we have a list of banks at the Federal Reserve
Board. That list says these banks are ``too big to fail''--no-fault
capitalism. But the list is growing. That list of ``too big to fail''
banks in America is growing because the big banks are getting bigger,
and this record-breaking orgy of mergers in our country moves now at an
accelerated rate unabated.
In the context of all of this--it is not just with banks but all
financial services companies--at a time when banks, investment banks,
underwriters of securities, insurance, and others are showing very
handsome profits in our country, we are told, ``You know, what is
really wrong here with America is we need to modernize this system. The
lack of modernization is hurting us. In fact, some U.S. banks are able
to do things overseas they can't do here. What a shame. It is awful to
hold them back,'' we are told. ``So let us modernize.''

In ranching parlance, this would be like if the horse gets out of the
barn, you decide, ``Let's find out where the horse is and build a new
barn around the horse.'' That is what this is all about. Where I grew
up we raised horses. When a horse got out of the barn, you know what we
did. We went and chased the horse, caught the horse, and brought the
horse back to the barn. That is not rocket science. I didn't have to
take a lot of school courses to teach me that. You go bring the horse
back.
But now, what they have decided is no. We will just decide, all
right, the horses are out of the barn, and in the way things are
supposed to work, in a manner that preserves safety and soundness of
our banks, in a manner that preserves separation of certain kinds of
activities--some that are inherently risky as opposed to those that
require safety and soundness--things have happened. We are persuaded to
get rid of all of the old rules, and we will rewrite them in a way that
circumstances and activities have been happening in our country. We'll
say those who have done it, OK, that is where you are, a new day, we
will call it modernization. We will just say it is just fine. Well, it
is not fine with me.
It is interesting that we live in 1999, now in the month of May,
having experienced this remarkable economy. I am one who, with all of
my colleagues, would say what a remarkable opportunity, to live in an
economy that has virtually no inflation, has virtually full employment,
seems to have economic growth that continues unabated, and whose stock
market continues to set new records--23 days, another 1,000 points. You
get the feeling, gee, the stock market is like one of those slot
machines that pays off every time you pull the handle. Every time you
put a quarter in you get a return back beyond what you put in.
There are people who have begun to invest in this economy of ours
through mutual funds, and in the markets and so on who apparently
believe there is only one direction for our economy and only one
direction for our markets, and that is up, and single digit returns are
not sufficient. Returns are now expected of 15, 20, 25, 30 percent a
year. Of course, that will not continue.
We want a country with the twin economic goals of stable prices, full
employment, and economic opportunity and growth. But we have been
through periods in this country where when you sit down and add things
up somehow the answer doesn't seem correct. This isn't all going to
continue. One day in one way there will be adjustments. Companies
selling 300 and 400 times earnings, we think that is going to continue?
I don't think so.
What has happened in recent years in this country, despite all of the
good news, is a series of economic activities by firms that 20 and 40
years ago would never have thought of engaging in those activities, and
those activities which really represent kind of a new form of gambling
by firms that should not be involved in gambling represents now an
acceptable kind of behavior.
Let me give you some examples of some of it. I started this morning.
But I am going to read a bit more, because I think it is important for
everybody to understand and hear this.
I mentioned ``too big to fail''--big banks that have become so big
that our Government says they can't be allowed to fail. Of course, we
continue then every day to see more mergers to allow more banks to join
that ``too big to fail'' list.
It is not just the banks. I want to read the story again of Long Term
Capital Management in an article from the Wall Street Journal last
fall, because I think it is illustrative of not just what is happening
at this moment in this chapter of our history but also what happened in
1994 with the massive losses across our country in derivatives
described in this Fortune article, ``The Risk That Won't Go Away,''
``Financial derivatives tightening their grip on the world economy, and
no one knows how to control them.''
Derivatives, unregulated hedge funds, banks, holding companies that
now fuse and merge, banks underwriting securities, insurance--is all of
that a cause for concern?
Let me read a couple of things and see whether perhaps this can be
interpreted in a manner differently than those who have drafted the
current legislation.
It is not a secret that I have said I think this current bill, the
underlying bill, financial modernization for 1999, is a terrible bill.
I don't mean disrespect to either the chairman of the committee or the
ranking member of the committee. I don't mean any disrespect to them.
This is moving this country in the wrong direction. This is terrible
legislation to be considering at this point.
Long Term Capital Management is a private company; big investors, all
rich. You have to be rich to invest in

[[Page S4841]]

Long Term Capital Management. You have to be smart. A smart operator
with lots of money formed a private company called Long Term Capital
Management and began betting. I will describe the bets in a moment.

It was Aug. 21, [last year] a sultry Friday, and nearly
half the partners at Long-Term Capital Management LP were out
of the office.

Inside, the associates that day logged on to their computer and they
saw something that began to strike some fear in their hearts:

U.S. Treasuries were skyrocketing, throwing their
relationship to other securities out of whack. The Dow Jones
Industrial Average was swooning--by noon, down 283 points.
The European bond market was in shambles. LTCM's [Long-Term
Capital Management, this hedge firm, their] bets were blowing
up, and no one could do anything about it.
By 11 a.m. [in the morning] the fund had lost $150 million
in a wager [they made] on the prices of two telecommunication
stocks engaged in a takeover. Then, a single bet tied to the
U.S. bond market lost $100 million. Another $100 million
evaporated [the next hour] in a similar trade in Britain. By
day's end [this private hedge company] LTCM had hemorrhaged
half a billion dollars. Its equity had sunk to $3.1 billion--
down a third for the year.

This is the Wall Street Journal's recount of the story:

Partners scrambled out of their offices and onto the
trading floor as associates stared at their screens in
disbelief. Making frantic phone calls around the globe, they
reached John Meriwether, the fund's founder, at a dinner in
Beijing. He boarded the next plane to the U.S. Eric
Rosenfeld, a top lieutenant, called in from Sun Valley,
Idaho, where he was settling in for a vacation. He left his
wife and children behind and made an all-night trip back to
Greenwich.

Then the brass assembled the next morning. It is 7 o'clock now, 7
a.m. on Sunday.

One after another, LTCM's partners, calling in from Tokyo
and London, reported that their market had dried up. There
were no buyers, no sellers. It was all but impossible to
maneuver out of large trading bets [that they had.] They had
seen nothing like it.
The carnage that weekend set off events unprecedented in
the world of high finance, culminating with a $3.625 billion
bailout funded by a consortium of 14 Wall Street banks and
engineered by the Federal Reserve [Board.] LTCM lost more
than 90 percent of its assets by the time it was bailed out,
and the markets were roiled for weeks. Longer term, it forced
many of the world's most sophisticated institutional
investors to redefine the ways they manage risk and triggered
calls for tougher regulation of hedge funds, those
freewheeling investment pools that cater to the wealthy.

Here is a company that lost $3.6 billion. What happened? It gets
bailed out in a consortium of banks investing at the behest of the
Federal Reserve Board at meetings arranged by the Federal Reserve
Board.
We will hear a bit more about this case because it relates to an
amendment I will be offering.

In an industry populated by sharp money managers, LTCM had
the most renowned of all--including Nobel Prize winners
Robert Merton and Myron Scholes. But in the end, it wasn't
all rocket science. It was about smart marketing-appealing to
a wealthy clientele who wanted to be able to say their money
was being managed by a passel of Ph.D.s. And it was about
massive borrowing, up to $50 for every dollar invested. Long-
Term Capital Management was, ultimately, like a supermarket--
a high-volume, low-margin business, trying to eke out
small profits from thousands of individual transactions.
``Myron once told me they are sucking up nickels from all
over the world,'' says Merton Miller, a University of Chicago
business professor and himself a Nobel Prize winner in
economics.

Continuing the quote:

``But because they are so leveraged, that amounts to a lot
of money.''
All of which helps to explain how so many geniuses,
sometimes overcoming divisions within their ranks, got it so
wrong. And all the while, vanity, greed and a cult of
personality blinded some of the world's most reputable
financial institutions, from Wall Street stalwarts to Swiss
banks, to the pitfalls inherent in such a strategy.

The reason I offer this is to say we are now talking today on the
floor of the Senate about a strategy that says we want to ignore the
lessons of history. We want to ignore the fact that in the go-go 1920s,
everybody was making money at about everything, and banks decided to
fuse their activities and be involved not just in banking, but also in
underwriting securities and a range of other very risky enterprises. We
are going to ignore those lessons we learned during that period.
When studies were done to determine what happened in the 1920s, one
of the things they discovered was what you expect. If you have
something called banks whose perception of safety and soundness is at
the root of their stability and viability, when banks are fusing their
activities with inherently risky activities--underwriting securities,
for example--ultimately those kinds of risks, those bets that exist,
overcome the perception and the reality of safety and soundness, and
people begin getting worried and nervous and pulling their money out of
banks and we have bank failures.
So the Congress in the 1930s passed a bill called Glass-Steagall
which said: Learn the lessons; my gosh, let us not put activities
together with banks that are so inherently risky. We should separate
them forever.
So we did. And we prohibited certain kinds of investment and
acquisition by banks and required that certain enterprises do business
and compete in their own sphere. Banks were prohibited from being
involved in most of the securities issues, underwriting securities and
insurance and more.
Over the years that served this country pretty well. Banks have made
the case in recent years--and they are right about this--everybody else
has wanted to invade their territory. Everybody now wants to be a bank.
If you are selling cars, you want to finance the cars; you want to be a
bank. Everybody wants to create some sort of homogenized one-stop
station where people can buy their insurance, buy their home, finance
it. So banks say people are intruding on their turf and the only
conceivable way we can compete is if we can compete on their turf as
well. They want Glass-Steagall repealed.
Guess what? Here it is. The bill that sits on the floor of the Senate
today repeals Glass-Steagall. It forgets apparently 60 or 70 years of
history. It will all be all right. Don't you see, the economy is
growing, unemployment is down, inflation is down, the stock market is
up. Don't you understand, Senator Dorgan?
I guess not. Maybe I am hopelessly old fashioned. I think it is a
fundamental mistake to decide to repeal Glass-Steagall and allow banks
and all of the other financial industries to merge into a giant
smorgasbord of financial services. Those who were around to vote to
bail out the failed savings and loan industry, $500 billion of the
taxpayers' money, are they going to want to be around 10 or 15 years
from now when we see bailouts of hedge funds putting banks at risk? Or
how about the banks not just bailing out a hedge fund but banks having
the ownership of the hedge funds?
That is what we have now. This bailout of Long Term Capital
Management says we have significant investments by some of the largest
banks in these hedge funds.
Or how about derivatives? I am not an expert in this area, but I
wonder how many Members of this body know about derivatives. How many
know that banks in this country are trading in derivatives--not for
customers, but in their own proprietary accounts? They could just as
well set up a bingo parlor in their lobby. They could just as well
decide to have a casino somewhere in their lobby. The kind of betting
and wagering that is going on in proprietary trading of derivatives in
an institution whose assets are guaranteed by the taxpayers of this
country is just wrong. Someday somebody is going to wake up and say:
Why didn't we understand that? Why didn't we understand the
consequences of hundreds of billions of dollars or, yes, even trillions
of dollars of wagers out there with deposits at risk? Why didn't we
understand that did not make any sense?
I wrote an article about this in 1994 that was published in the
Washington Monthly. At that point there were $35 trillion in
derivatives being traded. Now it is $70 trillion. It is hard for me to
even say the number; $70 trillion in derivatives. Does anybody here
know the exposure that exists in the largest banks of proprietary
trading on derivatives? I will bet not. Does anybody understand what
this bill does in these areas? It says: Hedge funds, we don't want to
manage those; let them go, let them do what they will. How about
derivatives? It doesn't do anything.
This is a GAO report from May, 1994. It is 5 years ago: ``Financial
Derivatives, Actions Needed To Protect The

[[Page S4842]]

Financial System.'' That report has been available for 5 years to all
of the Members of Congress. If this legislation really was a
modernization bill for financial institutions, you would have a
solution to this issue in it. It would include my amendment that says
no institution whose deposits are guaranteed by the American taxpayer
will trade derivatives in their proprietary accounts--none of them. We
will not allow gambling in the bank lobby. But of course the bill does
not have that, so I will offer the amendment and it will be defeated
because it is not in vogue, it is not in fashion. This bill moves in
the other direction. It says, not only are things not wrong, don't be
alarmed by hedge funds and derivatives; it says, let's just do more of
what we have been doing that has caused some of this alarm.
As I mentioned, the piece of legislation before us repeals provisions
of the Glass-Steagall Act that restrict the ability of banks and
security underwriters to affiliate with one another. The bill repeals
provisions in the Bank Holding Company Act by allowing a new category
of financial holding company. This structure allows for a wide range of
financial services to be affiliated, including commercial banking,
securities underwriting, and merchant banking. And the new financial
holding companies, by the way, may engage in the following: Lending and
other traditional banking activities, insurance underwriting and agency
activities, provide financial investment and economic advisory
services, issue instruments representing interests in pooling of assets
that a bank may own directly, securities underwriting and dealing, and
mutual fund distribution, merchant banking. I think most listening to
me understand my concern and deep reservations about the direction we
are heading.
What about timing? This bill almost came to the floor of the Senate
last year. I was one of those who objected, and as a result the
legislation was not enacted. In fact, some of the folks who bring it to
the floor today also objected because of some other issues. But it is
now on the floor. It is in a different form than was passed out by the
committee last year. But what about timing? It seems to me the past
experiences we have had with banking and financial conglomerates in
this country in this century, whose collapse has led to the adoption of
the very financial protection laws they seek to repeal today, ought to
be a cautionary note to those of us in Congress and to the American
people. It seems to me the recent experiences we had with a nearly
$500-billion bailout of a collapsed savings and loan industry ought to
have some consequences, at least in terms of awareness of those in
Congress who had to go through that experience.

It seems to me the question marks that hang over the international
marketplace and the international economy ought to give pause to some--
a very difficult collapsed economy in some parts of Asia, a Russian
economy that has virtually collapsed, economic problems in other parts
of the world, a description in the country of Japan of the keiretsu--
the circumstances in a market system in Japan where a keiretsu allows
the combining of virtually all economic activities into four or five
firms that work together as partners to accomplish ends; you put the
bank and the manufacturer all together.
What has happened as a result of that Japanese experience? Would we
want to trade our economy for the Japanese economy? I don't think so.
One would think that would give some folks pause.
Or how about the red flags that ought to have been flying for all of
us with respect to the regulators' recent experiences dealing with
excessive risk-taking in our system? Does it give anybody pause that on
a Sunday night some of the smartest folks, the folks who were viewed as
geniuses in New York, who put together this hedge fund, they had to be
bailed out by the Federal Reserve Board running some folks across the
street to convene an emergency meeting and then sitting there,
apparently convening a group in which substantial numbers of large
banks ante up billions of dollars to bail out a private firm? Is that a
red flag for anybody? It suggests a conflict of interest for the
Federal Reserve Board, of course, because they regulate the very banks
that were incentivized to ante up money to bail out a private firm in
order to avoid some sort of economic catastrophe, an economic
catastrophe for the country. That is why the Fed was involved--because
this private firm, too, was too big to fail. Does that raise any red
flags with anybody? It does with me.
Or we are told, if we do not do this, it is going to be a
disadvantage. To whom? Are the banks doing well in this country? You
are darned right they are doing well, making lots of money. Security
underwriting firms, merchant banking firms, are we doing well?
America's corporations, are they doing well? Sure. Look at the stock
market. Look at the profit reports. When we pass this bill, everybody
in this Chamber knows what is going to happen. The first thing that is
going to happen is, we are going to have more and more and more mergers
because this turns on the green light at the intersection. It says if
you all want to get together and just get into one big financial swamp
here and have a smorgasbord of financial services, then buy each other
up, that's just fine. This orgy of mergers we have already seen will
simply accelerate. Will that be good for this country? Of course not.
Those who preach the loudest about the free market system do the
least to protect it. I guarantee it is true. It has been true ever
since I came to the Congress. Those who bellow the loudest about the
free market do the very least in this country to protect it. We are
going to have a fight a little later this year about antitrust
enforcement. One way to be sure the free market remains free, open to
fair, competitive competition, is to make sure you enforce your
antitrust laws against cartels and monopolies. Interestingly enough,
those, again, who talk a lot about the free market are the least likely
to be supportive of aggressive antitrust enforcement, to make sure the
market is free, open, and competitive.
This is a highly complicated issue. I know there are big stakes all
around. We have the biggest economic interests in the country working
very hard to see their interests are served versus other interests.
I understand all that, and I understand my view is not the prevailing
view. George Gobel once said: ``Did you ever think the world was a
tuxedo and you were a pair of brown shoes?'' I feel like George Gobel
on this issue.
I understand this bill is on the floor, and it is going to get passed
by the Congress. People do not want to entertain this notion, that,
gee, there might be some inherent risk out here. This is a case, as I
said earlier, of deciding this is where the industry has decided it
wants to go, so let's go ahead and put a lodge up so we can accommodate
all their interests and where they want to be.
We have been through this before. Where they want to be is not
necessarily where this country ought to have them. This country ought
to be concerned about safety and soundness of its financial
institutions first and foremost. That does not fit--it has never fit--
with the understanding that you can merge the interests of banks and
other financial and economic activities that are risky.
When you put things together that require safety and soundness with
enterprises that have an inherent high risk, you are begging for
trouble, and this country will get it. Our banks say to us, ``Well,
others have done it; you can do it in other countries.'' Do you want to
trade our economy for any other country at the moment? I don't think
so. What they are doing in other countries is not the litmus test for
what we decide as Americans to do to strengthen our economy, and this
bill, in my judgment, if passed, will represent a giant step backward
for our economy.
Let me ask one additional question. With all of the debate that I
have heard since this legislation came to the floor of the Senate, do
you know I have not heard anything about whether or why or if this bill
is good for people. Nothing. I wonder if anybody can describe one
single thing in this legislation that will be helpful to ordinary
folks?
This morning, I talked about the fact we have banks and credit card
companies that are saying to their customers these days--it is 1999, so
things have changed. I wonder what my grandmother would think if she
heard me

[[Page S4843]]

say there are banks and credit card companies saying to customers: If
you pay off your bill every month, we are going to penalize you.
Isn't that Byzantine--we are going to penalize you for paying off
your bill. In the old days, you got penalized for not paying your bill.
No, the way you make money is for people to carry over a balance and
charge a high interest rate. People who use a credit card to purchase
every month and pay the full bill off every month are not very good
customers; credit card companies do not want those folks around.
I read some examples this morning of companies that say, ``Well, you
people, if you're going to pay off your bill like that, shame on you,
we're going to charge you a service charge.''
Shame on them. What has financial service come to with this sort of
behavior?
Another point. We have a circumstance in this country where --we are
going to have a bankruptcy bill later this year, and we will have this
discussion later--credit cards, of course, are distributed to everybody
in America. I have a 12-year-old son. His name is Brendon. He is a
great young guy, a wonderful baseball player. He is a great soccer
player. He is a good student. For his benefit, I should say a great
student, but he is a good student.
I can describe how wonderful he is in a thousand different ways, but
he is only 12. He received a letter in the mail one day from the Diners
Club. The Diners Club said: Brendon Dorgan, we want to send you a
preapproved Diners Club credit card. So my 12-year-old son appreciates
Diners Club. I am sure he has an appetite to spend money. I see it from
time to time. It is normally not on big purchases. Normally it is
something sweet or something that fizzes at the 7-Eleven, but my son
does not need a Diners Club card.

Why would a 12-year-old get a Diners Club card? Why would Diners Club
send my son a card? Because they send everybody a card. I assume it was
a mistake, he got on the wrong list someplace. They send cards to
college kids who have no income and no jobs and say, here is a
preapproved bunch of credit for you; here is a card. It is just like a
check. You go spend the money. We don't care you don't have a job. We
don't care you don't have an income. Here is our card. Take it, please.
That is what is going on in our country today--penalizing people for
paying their bills, sending credit cards to 12-year-old kids, sending
credit cards to people who have no income or no job. Why, my
grandmother would be mortified to think that is the ethic we think
makes sense in this kind of an economy.
We cannot correct all of that in this discussion, but we can correct
a couple things. I described not my son's credit card solicitation; I
described derivatives traded on proprietary accounts in banks. I
described potential regulation of risky hedge funds. Those are two big
issues and very complicated issues. We can correct that.
I intend to offer two amendments. I will send the first amendment to
the desk and then ask that it be set aside by consent, and then I will
send to the desk the second one and describe it. The committee chairman
and ranking member will then proceed with the bill. They have other
amendments I know they are going to have to consider today. I know they
want to move ahead and finish whatever business they have with this
legislation.
My hope of hopes is enough Members of the Senate will take a look at
this bill in final form and say this is a terrible bill, a terrible
idea coming at a terrible time, and enough Members would vote against
it to say: This is not modernization, this is a huge step back in time,
and a huge pit in which we have lost the lessons that we learned
earlier in this century. I do not have great hope that will happen,
but, who knows, lightening strikes and perhaps at the end of this day,
Members of the Senate will say: You know, this wasn't such a good idea
after all.

Amendment No. 312

(Purpose: To prohibit insured depository institutions and credit unions
from engaging in certain activities involving derivative financial
instruments)

Mr. DORGAN. Mr. President, the first amendment that I send to the
desk is an amendment dealing with derivatives. I ask for its immediate
consideration.
The PRESIDING OFFICER. The clerk will report the amendment.
The legislative assistant read as follows:

The Senator from North Dakota [Mr. Dorgan] proposes an
amendment numbered 312.

Mr. DORGAN. Mr. President, I ask unanimous consent that the reading
of the amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:

At the appropriate place, insert the following:

SEC. __. LIMITATION ON DERIVATIVES ACTIVITIES.

(a) Insured Depository Institutions.--The Federal Deposit
Insurance Act (12 U.S.C. 1811 et seq.) is amended by adding
at the end the following new section:

``SEC. 45. DERIVATIVE INSTRUMENTS.

``(a) Derivatives Activities.--
``(1) General prohibition.--Except as provided in paragraph
(2), neither an insured depository institution, nor any
affiliate thereof, may purchase, sell, or engage in any
transaction involving a derivative financial instrument for
the account of that institution or affiliate.
``(2) Exceptions.--
``(A) Hedging transactions.--An insured depository
institution may purchase, sell, or engage in hedging
transactions to the extent that such activities are approved
by rule, regulation, or order of the appropriate Federal
banking agency issued in accordance with paragraph (3).
``(B) Separately capitalized affiliate.--A separately
capitalized affiliate of an insured depository institution
that is not itself an insured depository institution may
purchase, sell, or engage in a transaction involving a
derivative financial instrument if such affiliate complies
with all rules, regulations, or orders of the appropriate
Federal banking agency issued in accordance with paragraph
(3).
``(C) De minimis interests.--An insured depository
institution may purchase, sell, or engage in transactions
involving de minimis interests in derivative financial
instruments for the account of that institution to the extent
that such activity is defined and approved by rule,
regulation, or order of the appropriate Federal banking
agency issued in accordance with paragraph (3).
``(D) Existing interests.--During the 3-month period
beginning on the date of enactment of this section, nothing
in this section shall be construed--
``(i) as affecting an interest of an insured depository
institution in any derivative financial instrument that
existed on the date of enactment of this section; or
``(ii) as restricting the ability of the institution to
acquire reasonably related interests in other derivative
financial instruments for the purpose of resolving or
terminating an interest of the institution in any derivative
financial instrument that existed on the date of enactment of
this section.
``(3) Issuance of rules, regulations, and orders.--The
appropriate Federal banking agency shall issue appropriate
rules, regulations, and orders governing the exceptions
provided for in paragraph (2), including--
``(A) appropriate public notice requirements;
``(B) a requirement that any affiliate described in
paragraph (2)(B) shall clearly and conspicuously notify the
public that none of the assets of the affiliate, nor the risk
of loss associated with the transaction involving a
derivative financial instrument, are insured under Federal
law or otherwise guaranteed by the Federal Government or the
parent company of the affiliate; and
``(C) any other requirements that the appropriate Federal
banking agency considers to be appropriate.
``(b) Definitions.--For purposes of this section--
``(1) the term `derivative financial instrument' means--
``(A) an instrument the value of which is derived from the
value of stocks, bonds, other loan instruments, other assets,
interest or currency exchange rates, or indexes, including
qualified financial contracts (as defined in section
11(e)(8)); and
``(B) any other instrument that an appropriate Federal
banking agency determines, by regulation or order, to be a
derivative financial instrument for purposes of this section;
and
``(2) the term `hedging transaction' means any transaction
involving a derivative financial instrument if--
``(A) such transaction is entered into in the normal course
of the institution's business primarily--
``(i) to reduce risk of price change or currency
fluctuations with respect to property that is held or to be
held by the institution; or
``(ii) to reduce risk of interest rate or price changes or
currency fluctuations with respect to loans or other
investments made or to be made, or obligations incurred or to
be incurred, by the institution; and
``(B) before the close of the day on which such transaction
was entered into (or such earlier time as the appropriate
Federal banking agency may prescribe by regulation), the
institution clearly identifies such transaction as a hedging
transaction.''.
(b) Insured Credit Unions.--Title II of the Federal Credit
Union Act (12 U.S.C. 1781 et

[[Page S4844]]

seq.) is amended by adding at the end the following new
section:

``SEC. 215. DERIVATIVE INSTRUMENTS.

``(a) Derivative Activities.--Except as provided in
subsection (b), neither an insured credit union, nor any
affiliate thereof, may purchase, sell, or engage in any
transaction involving a derivative financial instrument.
``(b) Applicability of Section 45 of the Federal Deposit
Insurance Act.--Section 45 of the Federal Deposit Insurance
Act shall apply with respect to insured credit unions and
affiliates thereof and to the Board in the same manner that
such section applies to insured depository institutions and
affiliates thereof (as those terms are defined in section 3
of that Act) and shall be enforceable by the Board with
respect to insured credit unions and affiliates under this
Act.
``(c) Derivative Financial Instrument.--For purposes of
this section, the term `derivative financial instrument'
means--
``(1) an instrument the value of which is derived from the
value of stocks, bonds, other loan instruments, other assets,
interest or currency exchange rates, or indexes, including
qualified financial contracts (as such term is defined in
section 207(c)(8)(D)); and
``(2) any other instrument that the Board determines, by
regulation or order, to be a derivative financial instrument
for purposes of this section.''.
(c) Bank Holding Companies.--Section 3 of the Bank Holding
Company Act of 1956 (12 U.S.C. 1842) is amended by adding at
the end the following new subsection:
``(h) Derivatives Activities.--
``(1) In general.--A subsidiary of a bank holding company
may purchase, sell, or engage in any transaction involving a
derivative financial instrument for the account of that
subsidiary if that subsidiary--
``(A) is not an insured depository institution or a
subsidiary of an insured depository institution; and
``(B) is separately capitalized from any affiliated insured
depository institution.
``(2) Applicability of section 45 of the federal deposit
insurance act.--Section 45 of the Federal Deposit Insurance
Act shall apply with respect to bank holding companies and
the Board in the same manner that section applies to an
insured depository institution (as such term is defined in
section 3 of that Act) and shall be enforceable by the Board
with respect to bank holding companies under this Act.
``(3) Derivative financial instrument.--For purposes of
this subsection, the term `derivative financial instrument'
means--
``(A) an instrument the value of which is derived from the
value of stocks, bonds, other loan instruments, other assets,
interest or currency exchange rates, or indexes, including
qualified financial contracts (as such term is defined in
section 207(c)(8)(D)); and
``(B) any other instrument that the Board determines, by
regulation or order, to be a derivative financial instrument
for purposes of this subsection.''.

Mr. DORGAN. Mr. President, I will not explain this in great detail,
except to say, as I described in my earlier remarks, my intention is to
say it is inconsistent with the obligations and our expectations of
institutions whose deposits are insured by depository insurance and, in
fact, guaranteed by the American taxpayer for them to be trading in
derivatives on their own proprietary accounts.
I understand banks being a conduit for the trading of derivatives for
customers, but for banks in their own proprietary accounts to be taking
the kinds of risks that exist in derivatives I think exposes all
taxpayers in this country who are the guarantors of that deposit
insurance to those kinds of risks. They may just as well put some kind
of a slot machine in the lobby of a bank if they are going to trade in
derivatives on their own account.
I say to the people who own the capital in these banks, if you want
to gamble, go to Las Vegas. If you want to trade in derivatives, God
bless you. Do it with your own money. Do not do it through the deposits
that are guaranteed by the American people and by deposit insurance. My
amendment prohibits the trading of derivatives on their proprietary
account.
I ask unanimous consent that the amendment be set aside.
The PRESIDING OFFICER. Without objection, it is so ordered.

Amendment No. 313

(Purpose: To subject certain hedge funds to the requirements of the
Investment Company Act of 1940)

Mr. DORGAN. Mr. President, I send a second amendment to the desk and
ask for its immediate consideration.
The PRESIDING OFFICER. The clerk will report the amendment.
The legislative assistant read as follows:

The Senator from North Dakota [Mr. Dorgan] proposes an
amendment numbered 313.

Mr. DORGAN. Mr. President, I ask unanimous consent that the reading
of the amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:

At the end of title III, insert the following:

SEC. 312. TREATMENT OF LARGE HEDGE FUNDS UNDER INVESTMENT
COMPANY ACT OF 1940.

Section 3(c) of the Investment Company Act of 1940 (15
U.S.C. 80a-3(c)) is amended--
(1) in paragraph (1), in the first sentence, by inserting
``, which has total assets of less than $1,000,000,000, and''
after ``hundred persons''; and
(2) in paragraph (7), in the first sentence, by inserting
``which has total assets of less than $1,000,000,000,'' after
``qualified purchasers,''.

Mr. DORGAN. Mr. President, I want to tell a story as I describe this
amendment. About 10 years ago, I was serving in the House of
Representatives on the Ways and Means Committee. Ten years ago, as you
might recall, in this country we had the marketing of junk bonds; that
is, noninvestment grade bonds by Drexel Burnham and Michael Milken.
Junk bonds were used increasingly for hostile takeovers. It was a go-go
economy. They held conferences and talked about how you could turn a
minnow into a whale and arm a minnow with junk bonds and they will go
and bite the tail off the whale. You had little companies buying big
companies. It was a remarkable thing to see.
One of the things that occurred to me was how unhealthy and unholy it
was in this country that junk bond sellers were parking junk bonds with
savings and loans. Our savings and loans, whose deposits were insured
by the Federal Government, were then ending up with junk bonds,
noninvestment-grade bonds, in their portfolios, so that if the
enterprise went belly up, the American taxpayers would end up paying
the bill.
Let me give you the creme de la creme, the hood ornament on the
excess. The hood ornament was that we had one of biggest casinos in the
country built in Atlantic City, glitzy and big. Junk bonds were for the
casino, noninvestment-grade bonds. With junk bonds they build the
casino. The junk bonds get parked with the savings and loan. The
savings and loan goes belly up. Guess who ends up with the junk bonds
that are nonperforming and a big casino. The American taxpayer. The
U.S. Government and the American taxpayer end up holding junk bonds
that are nonperforming junk bonds in a casino.
How did that happen? Because it was all right according to our
regulators, and all right according to law, for our savings and loans
to go out and buy junk bonds and load up. One California S&L had, I
think, nearly 60 percent of its assets involved in junk bonds.
So I got an amendment passed. It is now law. Some people have never
forgiven me for it, because I got an amendment passed that said savings
and loans--that is, those whose deposits are insured by the Federal
Government--cannot purchase junk bonds and must divest those they have.
I had a devil of a time getting it passed, just an awful time. I got
it passed. It became law and caused all kinds of chaos for those who
were parking all these bonds at S&Ls, playing the financial roulette
game they were playing. It was the right thing to have done for the
taxpayers of this.
I mention that only because financial institutions will do what they
must and will do what they can under the rules as long as we are
looking the other way. I am not saying they are all irresponsible. I am
saying they are all going to try to pursue the largest rate of return
they can possibly pursue, especially if you have the deposits
underwritten. Those institutions are going to take advantage of these
opportunities. It was true in the 1980s; it will be true in the next
decade as well.
The lesson with respect to junk bonds, the lesson with respect to
derivatives and hedge funds, is that we have to be vigilant. Did the
bank regulators jump on this and deal with it? No. In fact, the
Secretary of the Treasury would come to the Ways and Means Committee. I
would say: Mr. Secretary, we have a crisis going on here. What on earth
are you doing? Sitting on your hands? Oh, no, Congressman Dorgan, there
isn't a crisis at all; there's no problem. There is no problem here at
all.
Well, the problem turned out to be hundreds of billions of dollars
for the American taxpayer, because those who were supposed to be
involved in regulation looked the other way.

[[Page S4845]]

As we pass this piece of legislation today, we would do ourselves a
favor, I think, passing an amendment that would prohibit proprietary
trading in derivatives by banks and also passing the amendment I just
sent to the desk that would provide regulation for risky hedge funds
that have at least $1 billion or more in assets. It is a handful of
hedge funds, perhaps fewer than 50. They have aggressive leverage. It
seems to me that while I would like to be more aggressive in the
regulation of hedge funds, at least this should be a start in dealing
with this issue.
Mr. President, I will not offer a third amendment. I will offer only
these two amendments. I believe that the legislation is inappropriate
at this time, and I intend to vote against the legislation on final
passage. As I have said on a couple occasions this afternoon, I think
this is a giant step backward. I think it is exactly the wrong
direction for our country. I think it does nothing for ordinary people,
does not address any of the issues. It is something that will make a
number of the largest enterprises in this country that are already
making substantial profits very, very happy. I guarantee every Member
of this body that if this legislation is passed, when you wake up day
after day, week after week, and month after month, you will read the
news of more and more and more mergers and greater concentration.

Then don't you come to the floor of the Senate and talk to me about
competition and don't you come to the floor of the Senate and started
preaching about free markets. The opportunity to respond to real
competition and free markets, in my judgment, is, by turning this
legislation down, enforcing strong antitrust enforcement, and being
thoughtful about the things we have to do in the future to preserve the
safety and soundness of our banks and, yes, to encourage investment and
encourage economic activity in other sectors of our economy.
Let me conclude by saying I am not someone who thinks that big firms
are bad. I don't believe that at all. Nobody is going to build a 757
jet airplane in the garage in Regent, ND. Economies of scale are
important. Some of the largest enterprises in our country have
contributed mightily to this country and its economy. But I also
believe that what contributes most to this country is good old-
fashioned healthy competition, broad-based economic ownership. I know
it is a timeworn and, some consider, old-fashioned Jeffersonian notion
of democracy that broad-based economic ownership is what eventually
guarantees economic freedom and what eventually underscores and
guarantees political freedom as well. That is something that is very
important to this country's future.
We do not advance in that direction by passing legislation that will
further concentrate and further provide inducements for more mergers
and bigger, more concentration and bigger companies. That will not
advance this country's interests.
Mr. President, I yield the floor, and I suggest the absence of a
quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative assistant proceeded to call the roll.
Mr. GRAMM. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. GRAMM. Mr. President, our current blueprint is that we are going
to vote on the unitary thrift amendment at 3:45. Each side will have 3
minutes to speak on that issue. I will ask Senator Gorton to speak on
behalf of the majority.
At the conclusion of that vote, the Shelby amendment will be
considered. That is the amendment which would allow banks to provide
broad financial services within the structure of the bank rather than
through the holding company. We have agreed to a 2-hour debate on that
amendment. If we were on that amendment, say, at 10 after 4, we would
be through with that amendment at 10 after 6.
I do not know of another major amendment. I urge my colleagues who
have amendments, since we have a lot of Members hoping not to be here
tomorrow--Members walking by do not object to that, I assume--who would
like to catch a flight back to their States at a reasonable hour, if
they could, not to convenience me or to convenience my colleague,
Senator Sarbanes, but to convenience all 100 Members of the Senate, I
urge Senators who have amendments to come to the floor and present
them. Please don't show up at 6:10 and say, oh, by the way, I just had
an idea last night while I was having dessert that I would like to redo
the whole banking system of the United States of America and I would
like to change the number of people on the Federal Reserve Bank board
and I talked to the newspaperman today and he thought it was a great
idea.
If you have an amendment, I hope you will come and let us look at it
and talk about it. Hopefully, we can take some of these amendments and
save time. I urge my colleagues, for the convenience of all of our
Members, if you have amendments, to come down here before 4 and let us
talk about them.
Please don't show up when the Shelby amendment is finished at 6:10
and say I have all these ideas and I want to deal with them.
I thank my colleagues in advance for their cooperation.
Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative assistant proceeded to call the roll.
Mr. GRAMM. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. GRAMM. Mr. President, I ask unanimous consent that the pending
unanimous-consent agreement that we are operating under be temporarily
set aside so that Senator Schumer can offer an amendment. If I
understand the amendment correctly, I intend to accept it, and I assume
Senator Sarbanes will accept it. I think it is important to go ahead
and get that amendment out of the way. Whenever he is ready, I wanted
to be sure that we were in a position that he could be recognized
without undoing any of the agreements on the vote at 3:45, or the
unanimous-consent request on the Shelby amendment, starting whenever
that vote is finished.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. GRAMM. Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER (Mr. Fitzgerald). The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. BYRD. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.

____________________