[Congressional Record Volume 155, Number 29 (Thursday, February 12, 2009)]
[House]
[Pages H1279-H1281]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




            DON'T USE FEDERAL FUNDS TO BUY UP AT-RISK LOANS

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentlewoman from Ohio (Ms. Kaptur) is recognized for 5 minutes.
  Ms. KAPTUR. Madam Speaker, today the White House apparently made an 
announcement that they're considering a proposal to head off 
potentially millions of more home foreclosures by using Federal funds 
to buy up at-risk loans and apparently refinance them. It's one of 
several proposals that the White House is looking at.
  I would urge the new President of the United States not to allow the 
Federal Government to purchase toxic assets, and I'm placing in the 
Record an article from late last fall by William Isaac, the former head 
of the Federal Deposit Insurance Corporation during the 1980s, the 
early part of the eighties, late seventies, when over 3,000 banks in 
our country were resolved without going to

[[Page H1280]]

the taxpayers to bail out the problem loans.

 Primary Dealer List--Memorandum to all Primary Dealers and Recipients 
    of the Weekly Press Release on Dealer Positions and Transactions

       The latest list reflects the following changes:
       Effective February 11, 2009, Merrill Lynch Government 
     Securities Inc. was deleted from the list of primary dealers 
     as a result of the acquisition of Merrill Lynch & Co., Inc. 
     by Bank of America Corporation.
       List of the Primary Government Securities Dealers Reporting 
     to the Government Securities Dealers Statistics Unit of the 
     Federal Reserve Bank of New York:
       BNP Paribas Securities Corp.
       Banc of America Securities LLC
       Barclays Capital Inc.
       Cantor Fitzgerald & Co.
       Citigroup Global Markets Inc.
       Credit Suisse Securities (USA) LLC
       Daiwa Securities America Inc.
       Deutsche Bank Securities Inc.
       Dresdner Kleinwort Securities LLC
       Goldman, Sachs & Co.
       Greenwich Capital Markets, Inc.
       HSBC Securities (USA) Inc.
       J.P. Morgan Securities Inc.
       Mizuho Securities USA Inc.
       Morgan Stanley & Co. Incorporated
       UBS Securities LLC.
       Note: This list has been compiled and made available for 
     statistical purposes only and has no significance with 
     respect to other relationships between dealers and the 
     Federal Reserve Bank of New York. Qualification for the 
     reporting list is based on the achievement and maintenance of 
     the standards outlined in the Federal Reserve Bank of New 
     York's memorandum of January 22, 1992.
       Government Securities Dealers Statistics Unit Federal 
     Reserve Bank of New York, February 11, 2009.
                                  ____


               [From The Washington Post, Sept. 27, 2008]

                       A Better Way To Aid Banks

                         (By William M. Isaac)

       Congressional leaders are badly divided on the Treasury 
     plan to purchase $700 billion in troubled loans. Their angst 
     is understandable: It is far from clear that the plan is 
     necessary or will accomplish its objectives.
       It's worth recalling that our country dealt with far more 
     credit problems in the 1980s in a far harsher economic 
     environment than it faces today. About 3,000 bank and thrift 
     failures were handled without producing depositor panics and 
     massive instability in the financial system.
       The Federal Deposit Insurance Corp. has just handled 
     Washington Mutual, now the largest bank failure in history, 
     in an orderly manner, with no cost to the FDIC fund or 
     taxpayers. This is proof that our time-tested system for 
     resolving banking problems works.
       One argument for the urgency of the Treasury proposal is 
     that money market funds were under a great deal of pressure 
     last week as investors lost confidence and began withdrawing 
     their money. But putting the government's guarantee behind 
     money market funds--as Treasury did last week--should have 
     resolved this concern.
       Another rationale for acting immediately on the bailout is 
     that bank depositors are getting panicky--mostly in reaction 
     to the July failure of IndyMac, in which uninsured depositors 
     were exposed to loss.
       Does this mean that we need to enact an emergency program 
     to purchase $700 billion worth of real estate loans? If the 
     problem is depositor confidence, perhaps we need to be 
     clearer about the fact that the FDIC fund is backed by the 
     full faith and credit of the government.
       If stronger action is needed, the FDIC could announce that 
     it will handle all bank failures, except those involving 
     significant fraudulent activities, as assisted mergers that 
     would protect all depositors and other general creditors. 
     This is how the FDIC handled Washington Mutual. It would be 
     easy to announce this as a temporary program if needed to 
     calm depositors.
       An additional benefit of this approach is that community 
     banks would be put on a par with the largest banks, 
     reassuring depositors who are unconvinced that the government 
     will protect uninsured depositors in small banks.
       I have doubts that the $700 billion bailout if enacted, 
     would work. Would banks really be willing to part with the 
     loans, and would the government be able to sell them in the 
     marketplace on terms that the taxpayers would find 
     acceptable?
       To get banks to sell the loans, the government would need 
     to buy them at a price greater than what the private sector 
     would pay today. Many investors are open to purchasing the 
     loans now, but the financial institutions and investors 
     cannot agree on price. Thus private money is sitting on the 
     sidelines until there is clear evidence that we are at the 
     floor in real estate.
       Having financial institutions sell the loans to the 
     government at inflated prices so the government can turn 
     around and sell the loans to well-heeled investors at lower 
     prices strikes me as a very good deal for everyone but U.S. 
     taxpayers. Surely we can do better.
       One alternative is a ``net worth certificate'' program 
     along the lines of what Congress enacted in the 1980s for the 
     savings and loan industry. It was a big success and could 
     work in the current climate. The FDIC resolved a $100 billion 
     insolvency in the savings banks for a total cost of less than 
     $2 billion.
       The net worth certificate program was designed to shore up 
     the capital of weak banks to give them more time to resolve 
     their problems. The program involved no subsidy and no cash 
     outlay.
       The FDIC purchased net worth certificates (subordinated 
     debentures, a commonly used form of capital in banks) in 
     troubled banks that the agency determined could be viable if 
     they were given more time. Banks entering the program had to 
     agree to strict supervision from the FDIC, including 
     oversight of compensation of top executives and removal of 
     poor management.
       The FDIC paid for the net worth certificates by issuing 
     FDIC senior notes to the banks; there was no cash outlay. The 
     interest rate on the net worth certificates and the FDIC 
     notes was identical, so there was no subsidy.
       If such a program were enacted today, the capital position 
     of banks with real estate holdings would be bolstered, giving 
     those banks the ability to sell and restructure assets and 
     get on with their rehabilitation. No taxpayer money would be 
     spent, and the asset sale transactions would remain in the 
     private sector where they belong.
       If we were to (1) implement a program to ease the fears of 
     depositors and other general creditors of banks; (2) keep 
     tight restrictions on short sellers of financial stocks; (3) 
     suspend fair-value accounting (which has contributed mightily 
     to our problems by marking assets to unrealistic fire-sale 
     prices); and (4) authorize a net worth certificate program, 
     we could settle the financial markets without significant 
     expense to taxpayers.
       Say Congress spends $700 billion of taxpayer money on the 
     loan purchase proposal. What do we do next? If, however, we 
     implement the program suggested above, we will have $700 
     billion of dry powder we can put to work in targeted tax 
     incentives if needed to get the economy moving again.
       The banks do not need taxpayers to carry their loans. They 
     need proper accounting and regulatory policies that will give 
     them time to work through their problems.

  Essentially, the Federal Deposit Insurance Corporation used something 
called the net worth certificate program whereby they were able to 
resolve over $100 billion worth of insolvency in the savings banks for 
a total expenditure to them of less than $2 billion. The program 
involved no subsidy and no cash outlay. The FDIC purchased net worth 
certificates in troubled banks, and the agency determined then whether 
they could be viable over time, and banks entering the program had to 
agree to strict supervision from the FDIC.
  If such a program were enacted today, the capital position of banks 
with real estate holdings would be bolstered, giving those banks the 
ability to sell and restructure assets and get on with their 
rehabilitation. No taxpayer money would be spent, and the asset sale 
transactions would remain in the private sector where they belong.
  The banks do not need taxpayer money to carry their loans. They need 
for the FDIC, time-tested in what it has done in the past, to use 
proper accounting and regulatory policies that will give them time to 
work through all of these problem loans.
  When the FDIC handled the Washington Mutual situation in an orderly 
manner, there was no cost to the FDIC nor the taxpayers.
  What I'm fearful of is that the very same securities dealers on Wall 
Street that have benefited handsomely from the TARP and from all of the 
housing bubble of the 1990s are now going to find another way to put 
these same loans together and make more money off of us, the American 
people.
  And you know, they're so powerful, they even sit on the New York 
Federal Reserve Board up there in New York City, primary dealers whose 
names you will recognize: Goldman Sachs, JP Morgan, HSBC. The worst 
wrong-doers in the crisis are sitting right up there in New York City 
with their hands on the money spigots. They send their associates down 
here to head up the Treasury Department.
  And what was interesting is that Countrywide used to be on the Fed. 
They took them off a couple of years ago. I guess I complained too much 
because I don't see Countrywide. I guess they collapsed. They're not on 
the list anymore.
  You look down this list, Dresdner Kleinwort Securities over in 
Germany, that bank is on its knees. It's being bought by Commerzbank 
and then Commerzbank by the Allianz Insurance Group in Germany. They're 
on the list of our primary dealers in New York City at the Federal 
Reserve there. This is a closed circle.
  Over the next few days, I will be talking about what happened during 
the

[[Page H1281]]

1990s, where these very same Wall Street and money center banks, the 
very same ones on this list, planned to over-leverage the U.S. economy 
and housing market through such schemes as mortgage-backed securities, 
through which they benefited handsomely in home equity loans and they 
made extraordinary profits, their executives, their shareholders, their 
board members.
  And the net result of their combined actions has been to indebt our 
country on the private side and ultimately now try to shift all of that 
debt to us, to our children and to our grandchildren, and they sit on 
the board of the Federal Reserve Board up in New York, the 10 or 15 
primary dealers, the very same ones that did all of this damage? These 
same institutions lobbied all during the 1990s and in this decade to 
change Federal laws that aided and abetted their plan.
  In 1994, the Riegle-Neal Interstate Banking and Branching Act was 
passed into law that hastened all these mergers that made them bigger; 
and then in 1993 and 1994, changing the rules over at the Department of 
Housing and Urban Development to allow home builders like Countrywide 
to approve their own loans, they changed the underwriting and appraisal 
standards; and then, again, allowing lenders to select their own 
appraisers back in the early 1990s; and then in 1995 changed the 
Securities Litigation Act here; and finally the Graham-Leach-Bliley Act 
overturned in 1999.
  Madam Speaker, I have to tell you, the American people will begin to 
see how the pieces of this puzzle fit together and they all lead back 
to the Wall Street megacenter banks.
  Let's not reward Wall St. and the money center banks that have caused 
America and the world such great harm. How did they do it?
  In the 1990's--Plan is set in place by Wall Street and the largest 
money center banks--like JP Morgan Chase, Citigroup, Bank of America, 
HSBC, Wachovia, and Wells Fargo--to over-leverage U.S. housing market 
through such schemes as mortgage-backed securities and home equity 
loans to make extraordinary profits and enrich executives, Boards, and 
their shareholders. The net result of their combined actions has been 
to indebt the U.S. on the private side, and ultimately shift the cost 
of their excesses to the public side.
  These same institutions lobbied changes to Federal laws along with 
executive actions that aided and abetted their plan.
  1994--Riegle-Neal Interstate Banking and Branching Efficiency Act of 
1994 was passed into law with Congress hastening bank mergers with 
further concentration of financial power in large money center banks. 
The traditional concept of community banking where residential lending 
took the form of a ``loan'' which was made on the time-tested standards 
of character, collateral, and collectability was transformed to a 
``bond'' or ``security'' which was then broken into pieces and sold 
into the international market, largely through Wall Street dealers. 
Essentially, collateral was overvalued, risk was masked, and proper 
underwriting and oversight of the loan were dispensed with.
  1993-1994--HUD removes normal underwriting standards (HUD Mortgage 
Letter 93-2, ``Mandatory Direct Endorsement Processing'' gave authority 
to homebuilder owned lenders like KB Mortgage and affiliate lenders 
like Countrywide to independently approve their own loans; in 1994, 
Mortgage Letter 94-54 allowed lenders to select their own appraisers. 
Secretary of HUD, Henry Cisneros, upon departure from the Department 
became a KB Home Board Member as well as a Countrywide Board Member.)
  In 1995 the Private Securities Litigation Reform Act, the only bill 
ever passed over a Clinton veto and a part of the Contract with 
America, made securities class action law suits more difficult. 
Congressman Ed Markey offered an amendment to that bill that would have 
made those that sold derivatives still subject to class actions. The 
amendment failed.
  1999 Gramm Leach Bliley Act passed Congress and for the first time 
since the 1930's removed the regulatory barriers between banks, 
commerce, insurance and real estate. Over the next several years, the 
fury of an inflating housing market and mergers of financial 
institutions increased. Today, Dresdner, the second largest bank in 
Germany, has been victimized by the subprime crisis, and has been put 
up for sale, and is likely being acquired by Commerzbank which is owned 
by Allianz Insurance Group of Germany. Effective June 5, 2008, Dresdner 
Kleinwort Securities LLC was listed on the Federal Reserve Bank of New 
York ``Primary Government Securities Dealers.'' This means a foreign 
institution, with severe financial problems, is brought under the 
umbrella of the Federal Reserve. In addition, if one studies the 
Primary Dealer list, one will also note the presence of Countrywide 
Securities Corporation, one of the subsidiaries of Countrywide, the 
most egregious subprime lender in the U.S. The Federal Reserve has 
become an encampment for the most culpable.
  The Boards and executive staff of U.S. housing secondary market 
instrumentalities, like FNMA and Freddie Mac, further enflamed the boom 
housing market during the 1990's by masking risk and fraudulent account 
schemes. All the while, their Boards and executives were making 
handsome compensation and benefit packages.

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