[Congressional Record Volume 154, Number 175 (Monday, November 17, 2008)]
[Senate]
[Pages S10549-S10550]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                FINANCIAL REGULATION REFORM ACT OF 2008

  Ms. COLLINS. Mr. President, throughout the past few months, I have 
had the opportunity to talk to literally thousands of Mainers, and the 
No. 1 issue that has been on their mind is the financial crisis, the 
poor state of the economy.
  Public confidence in our Nation's financial system has been shaken 
badly by the extent, the scope, and the rapidity of the financial 
meltdown. As a former financial regulator in the State of Maine, a 
position I held for 5 years, I have become convinced that significant 
regulatory reforms are required to restore public confidence and to 
ensure that the absence of regulation does not allow a crisis like the 
one we are engulfed in now to happen ever again.
  Therefore, today I will introduce a bill that would close two 
dangerous gaps in the Government's system for overseeing financial 
markets. The bill would also establish a formal process for developing 
additional, comprehensive reforms of our financial regulatory system.
  Our economy has struggled with a credit crisis spawned by mortgage 
defaults in the subprime mortgage market and their ripple effects 
throughout markets for mortgage-backed securities. Complex financial 
instruments that were poorly understood, not transparent, and, in many 
cases, not regulated have exacerbated the crisis.
  What was once thought of as America's mortgage crisis has 
metastasized into a nightmare of converging forces that could lead to a 
deep and global recession. As we have so painfully learned, financial 
markets are truly global, and the hopes and fears that affect these 
markets move with the speed of light through electronic communications 
and electronic trading.
  The consequences in our country have been dire: falling home prices, 
rising foreclosure rates, plunging consumer sales, increased 
unemployment, a tremendous erosion of retirement savings, and billions 
of dollars for emergency stabilization programs. We are even looking at 
a Federal deficit that could reach the extraordinary figure of $1 
trillion.
  The Maine lobster industry, the paradigm of hardy, small town 
entrepreneurship, has also felt the blows of the crisis in high finance 
and a terrible economy. It is not only that consumers have reacted by 
reducing their purchases of lobsters--although that is one factor--it 
is also that the lobster industry is an innocent victim of the global 
financial crisis.
  It is extraordinary that the global financial crisis is putting the 
very existence of Maine's centuries-old lobster industry in jeopardy.
  Here is what happened. In addition to plunging demand, many 
lobstermen in Maine send their lobsters to Canadian processors. Well, 
it turns out that those Canadian processors are, in turn, financed 
largely by financial institutions in Iceland--in Iceland.
  When the Iceland financial system collapsed, credit was terminated to 
the Canadian processors, which, in turn, stopped processing Maine 
lobster. Who would have guessed that the failures of banks in Iceland 
would claim as victims the lobstermen in the State of Maine? But that 
shows how integrated our financial system is worldwide. A lobster 
dealer in my State said:

       This is as devastating to the State of Maine as Hurricane 
     Katrina washing away all the boats and blowing down all the 
     wharves.

  Nor is the fallout from the financial crisis confined to our shores. 
This past weekend, leaders of the G-20 nations who represent 85 percent 
of the world's economic activity met in Washington to address this 
crisis. Clearly, we need a coordinated global response to the downturn, 
but we also must take action to right our own ship. As we close out the 
110th Congress and prepare to reconvene for the 111th, we must consider 
how to protect our financial system from the shortfalls in regulation, 
reporting, and transparency that helped lay the groundwork for a sudden 
and traumatic onslaught of bad economic news.
  Consider that less than a year ago, the American financial system 
boasted five huge investment bank holding companies: Bear Stearns, 
Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley. 
Today, those institutions no longer exist as we had long known them. 
They have failed or are being acquired or, as Goldman Sachs and Morgan 
Stanley demonstrate, have converted themselves to bank holding 
companies subject to Federal Reserve supervision. What is astonishing, 
however, is that current Federal law assigns no agency responsibility 
for supervising these enormous institutions, even though experience has 
shown their safety and soundness could have vast implications for the 
financial system and the broader economy. Think about that. Your local 
credit union, your small community bank is subject to safety and 
soundness regulations, but these enormous Wall Street financial 
institutions that arguably have a far greater impact on our economy 
have not been subject to safety and soundness regulations. Instead, 
they participated in a completely voluntary program of the Securities 
and Exchange Commission--a program that was later deemed as inadequate 
by the SEC Chairman as he canceled it this fall.
  My legislation would apply safety and soundness regulation to 
investment bank holding companies by assigning the Federal Reserve this 
responsibility. Although the five big firms have left the field, this 
is a necessary step. Any new investment bank holding company that might 
be organized would fall into the same regulatory void as its 
predecessors. The SEC would be able to regulate its broker-dealer 
operations, but no Federal agency would have the explicit authority to 
examine its operations for safety and soundness or for systemic risk. 
The collapses at Bear Stearns and Lehman Brothers illustrate the 
tremendous hardship that can result under the recent voluntary system.
  Federal financial officials have also pointed to a ``massive hole'' 
in their ability to monitor and manage systemic risk. That is the 
rapidly expanded markets in private, over-the-counter contracts known 
as ``credit default swaps.'' These are contracts that involve paying 
for protection against

[[Page S10550]]

default, loss of value, or another credit event that might affect a 
financial asset such as a government or corporate bond or a mortgage-
backed security.
  As government officials and financial experts have pointed out, there 
is nothing perhaps inherently wrong with such contracts. The problem, 
however, is that credit default swaps are not traded on regulated 
exchanges, are not officially reported to our Nation's financial 
regulators, and are not even subject to recordkeeping requirements. 
Some are visible to bank examiners who may take them into account when 
considering a bank's risk exposure and others are summarized in 
voluntary publications, but that is only a partial glimpse into a 
market whose total national value has been estimated as high as $60 
trillion.
  As the cases of Lehman Brothers and AIG insurance holding company 
showed this year, serious problems can arise when a major credit event 
suddenly reveals that massive claims for collateral posting or payment 
are converging on credit default swap parties who cannot meet their 
obligations. But under the current system, it is often impossible for 
regulators and even market participants to know in advance how all the 
tangled webs of contract commitments overlap and affect any particular 
party. This leaves regulators unable to take action against excessive 
debt, inadequate reserves, or other threats.
  For example, Bear Stearns had a financial leverage ratio of 35 to 1. 
In other words, the firm borrowed $35 for every dollar of its own 
money. That level of debt financing can generate fabulous profits for 
shareholders and mind-boggling bonuses for top executives when 
investments flourish but can whipsaw disastrously if they drop in 
value. If your equity capital is $1 and you borrow $35 more to buy an 
asset worth $36 and the value of that asset declines by only $2, to 
$34, you are insolvent.
  Although credit default swaps are contracts rather than asset 
purchases, they can also overwhelm sellers and leave buyers unable to 
get payment for the protection they thought they had secured. Excessive 
leverage and excessive risk exposure can combine to ruin even giants 
such as Lehman Brothers and AIG.
  The fallout from such collapses extends far beyond the firms' 
investors, employers, and business partners--and this is the important 
point. It would be one thing if the bad decisions made by Wall Street 
firms only affected those firms, but that is not the case, as we have 
learned all too well. People in Maine and other Main Street Americans 
have felt shock and despair in reviewing the statements for their 
401(k) accounts. For these people, the fact of their loss is far more 
important than its cause. But for us who are assigned the role of 
policymakers, understanding the cause of the problem is critical if we 
are to prevent its recurrence.
  We now know that a fundamental source of trouble was the lack of 
effective oversight, of regulation for safety and soundness for the 
highly leveraged investment bank holding companies. And we know that 
the second problem is the lack of transparency and coordination in the 
enormous market for credit default swaps.
  My bill would address the second problem in two ways. First, it sets 
a reporting requirement. For any U.S. entity that buys or sells a 
credit default swap contract, it must report that fact to the Commodity 
Futures Trading Commission. This simple step will go a long way to 
increasing the transparency and allowing us to identify potential 
risks. Second, my bill would add the force of law to the clearinghouse 
initiative being jointly pursued by the Federal Reserve Bank of New 
York, the SEC, and the CFTC.
  The clearinghouse, however, should be codified. We can't rely on a 
voluntary arrangement. The SEC's top risk-management official 
recommends such a statutory mandate to ensure participation, and that 
is what my bill would do. As two NYU finance professors wrote in a 
recent essay for Forbes: It is time to ``lift the veil'' from these 
derivatives with more reporting and with centralized clearing 
operations.
  Correcting those gaps are important steps toward preventing 
repetition of the painful financial collapses we have seen. But we must 
also look in the long term at comprehensive financial reform. The 
Emergency Economic Stabilization Act that was signed into law last 
month calls for two reports to advance that goal. One is due in January 
and one in April. Those will be useful, but I believe our deliberations 
would benefit from having the advice not only of a small panel on a 
short deadline and of the new administration but also from a special 
commission modeled on the one created to examine the terrorist attacks 
of September 11, 2001. Fortunately, a plan for such a commission 
exists. It has been developed by my colleagues, Senator Lieberman and 
Senator Cantwell, and that has been incorporated into my bill as well.
  I believe this issue of restoring confidence to our financial markets 
through a strong and effective regulatory reform bill is so critical to 
our Nation--critical for promoting growth and job creation, for 
protecting retirement savings and public services, for restoring credit 
to households and small businesses, and for promoting transparency and 
accountability in financial markets--that we should focus on it in a 
special session in December.
  But regardless of the decisions made by our leadership on that issue, 
I hope the introduction of the Financial Regulation Reform Act of 2008 
will prompt a much-needed debate on the fundamental changes needed to 
modernize and strengthen our system for monitoring and regulating the 
immensely complicated financial markets that supply the lifeblood for 
growth for our country.
  Madam President, I suggest the absence of a quorum.
  The PRESIDING OFFICER (Mrs. Stabenow). The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. WHITEHOUSE. Madam President, I ask unanimous consent that the 
order for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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