[Congressional Record Volume 155, Number 43 (Wednesday, March 11, 2009)]
[Senate]
[Pages S3003-S3005]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]



                        Transportation Troubles

  Mr. DORGAN. Last evening, I was driving from the Capitol and 
listening to Jim Lehrer News Hour. They had a report about transit 
systems in this country that are facing significant financial problems. 
The report was fairly interesting. It turns out to be a subject with 
which I am fairly familiar. The report was that there are more than a 
couple dozen transit agencies in some of America's largest cities that 
are in deep financial trouble. Why? Because they had sold their subway 
system or bus system to a bank in order to raise needed revenue. Under 
what is called a SILO, a sale in/lease out transaction, a city can sell 
its property to a bank, so the bank takes title to the property. The 
bank then leases it back to the city, and the bank gets a big tax 
writeoff because it can depreciate the property. So the city still gets 
to use its subway system because they are leasing it back.
  All of a sudden, a couple dozen cities discovered that this 
transaction they entered into, which I think is kind of a scam, landed 
them in huge trouble because the transaction was insured with a 
derivative that went through AIG. AIG's credit rating collapsed, and 
now the banks are calling in substantial penalties on the part of the 
transit system that they cannot meet. So they are in trouble.
  Surprised? I am not particularly surprised. I have been on the floor 
of the Senate talking about what is happening with respect to these so-
called sale in/lease out, SILO practices. I have talked about banks and 
about Wachovia Bank, by the way, which was buying German sewer systems. 
I will describe a couple of these transactions. These are cross-border 
leasing provisions, sale and lease back.
  Wachovia Bank buys a sewer system in Bochum, Germany. Why? Is it 
because it is a sewer specialist? Do they have executives who really 
know about sewers in Germany? I don't think so. This is a scam. It has 
always been a scam. An American bank buys a sewer system in a German 
city so it can depreciate the assets of that sewage system and then 
lease it back to the German city. The Germans were scratching their 
heads, saying: This seems kind of dumb, but as long as we are on the 
receiving end of a lot of money, we are certainly willing to do it.
  I am showing this example of a bank called Wachovia, which used to be 
First Union, that originally started some of these transactions. I 
believe Wachovia itself, which was in deep financial trouble, has now 
been acquired by Wells Fargo. First Union was involved in a cross-
border lease of Dortmund, Germany, streetcars. What is an American bank 
doing leasing streetcars in a German city? To avoid paying U.S. taxes, 
that is why.
  We have seen all kinds of these transactions going on. I have 
described them on the floor of the Senate previously.
  This one is the transit system railcars in Belgium. Since many of 
these transactions are confidential, I don't know which American 
company bought Belgium National Railway cars. One of our corporations 
bought the Liefkenshoek Tunnel under the river in Antwerp, Belgium. 
Why? To save money on taxes. Some companies don't want to pay their 
taxes to this country.
  PBS Frontline's Hedrick Smith did a piece on it. The cross-border 
leasing contracts appear particularly hard to justify because all the 
property rights remain as they were even after the deal was signed. The 
Cologne purification plant keeps cleaning Cologne's sewage water. In 
the words of Cologne's city accountant:

       After all, the Americans should know themselves what they 
     do with their money.

[[Page S3004]]

     If they subsidize this transaction, we gratefully accept.

  I mention this because the tax shelters that big American banks and 
some cities have discovered are unusual and, I think, raise very 
serious questions about whether they are fair to do.
  Here is a Wall Street Journal article about how the city of Chicago 
actually sold Chicago's 9-1-1 emergency call system to FleetBoston 
Financial and Sumitomo Mitsui Banking. Why would a city sell its 9-1-1 
emergency call system? Why would somebody buy it? It is in order to 
avoid paying U.S. taxes.
  The reason I mention all of this is, last evening, I heard about the 
transit systems being in trouble in this country. Why? They are engaged 
in this. They were engaged in exactly the same thing. A transit system 
that is established by a city to provide transportation for folks in 
that city decides it wants to get involved in a transaction to sell its 
transit system to a bank someplace and then lease it back, allowing the 
bank to avoid paying U.S. taxes and, all of a sudden, they are in 
trouble. Do you know what? I do not have so much sympathy for people 
who are involved in those kinds of transactions. It reminded me, last 
evening, listening to this issue of cross-border leasing, SILOs and 
LILOs, and all these scams going on for a long time, many established 
by U.S. companies who apparently, in their boardrooms, are not only 
trying to figure out how to sell products but how to avoid taxes 
through very sophisticated tax engineering.
  I think it raises lots of questions about the issue of economic 
patriotism and what each of us owes to our country. It reminded me 
again of another portion of this financial collapse and financial 
crisis that we now face in this country. It reminded me of the work 
that the attorney general of New York, Andrew Cuomo, is doing and 
something he disclosed. We should have disclosed it, but we didn't know 
it. We know it because Andrew Cuomo, the attorney general of New York, 
dug it out. Let me tell you the story.
  Last year, Merrill Lynch investment bank was going belly up. So the 
Treasury Secretary arranged a purchase of Merrill Lynch by Bank of 
America in September to be consummated in January. And it happened. 
What we now understand and learn is that Merrill Lynch, which lost $27 
billion last year, in December, just prior to it being taken over by 
Bank of America, paid 694 people bonuses of more than $1 million each. 
I will say that again. They paid 694 people bonuses of more than $1 
million each, with the top four executives sharing $121 million.
  Moments later--that is, in a couple of weeks--the American taxpayers, 
through the TARP program, put tens of billions of dollars more into the 
acquiring company, Bank of America. At least a portion of that would 
have been attributable to the takeoff of Merrill Lynch, which just lost 
$15 billion the previous quarter. It appears to me that this was an 
arrangement, and Bank of America understood it was buying Merrill 
Lynch. Merrill Lynch lost a ton of money--$27 billion--last year but 
wanted to pay bonuses to its executives. So 694 of their folks got more 
than $1 million each--just prior to the American taxpayer coming in and 
providing the backstop to the acquiring company, Bank of America, at 
least in part because of the purchase.
  Is there any wonder the American people get furious when they read 
these kinds of things? The top four executives received $121 million. 
The top 14 received $250 million. I describe this because we didn't 
know this. We are the ones who are pushing TARP money. This Congress 
appropriated TARP money--now $700 billion. This Congress has 
appropriated that money, but we don't know what is going on. That is 
why I introduced, with Senator McCain, a proposal for a select 
committee to investigate the narrative of what happened with respect to 
this financial crisis. These tax scams are just a part of it. It is the 
way everything was happening around here, with some of the biggest 
institutions in the country.
  There is plenty of blame to go around. The Federal Government was 
running deficits that were far too large. Corporate debt was increasing 
dramatically. Personal debt, household debt, doubled in a relatively 
short time. It is not as if everybody doesn't have some culpability. 
Our trade deficit, $700 billion a year, is unsustainable. You cannot do 
that year after year. There were a lot of reasons.
  Then the subprime loan scandal--this unbelievable scandal. At the 
same time the subprime loan scandal ratchets up, we have a circumstance 
where regulators, who were appointed by the previous administration, 
essentially advertised they were willing to be willfully blind and not 
look. ``Self regulation'' is what Alan Greenspan called it.
  So then there grew a substantial pot of dark money that was traded 
outside of any exchanges. Nobody knew what they were. The development 
of newly engineered products, credit default swaps, CDOs--you name it, 
was very complicated--so complicated that many could not understand 
them. I was asked by a television interviewer 2 days ago: If you did a 
select committee to investigate all of this, with due respect, do you 
think Members of the Senate could understand these very complicated 
products?
  I said: I think if your question is could we understand them as well 
as the heads of financial institutions who steered their companies into 
the ditch with these products, can we understand them as well as they 
did, yes, I think so. I think we are capable of figuring out what 
caused all this, but we would not do it without looking. We would not 
do it, in my judgment, without the establishment of a select committee 
with subpoena power to develop the narrative of what happened, who is 
accountable, what do we do to make sure this never happens again.
  I believe we ought to go back a ways, go back to 1999, when the 
Congress passed something called the Financial Services Modernization 
Act that took apart the Glass-Steagall Act that was put in place after 
the Great Depression, and it separated banking from risk. It said you 
cannot be involved in deposit-insured banking and then involved in real 
estate and securities as well.
  In 1999, Congress passed legislation that said that is old-fashioned. 
Let's get rid of Glass-Steagall. Let's abolish Glass-Steagall. Let's 
create big financial holding companies for one-stop financial 
capabilities for everybody. I was one of eight to vote no. I said on 
the floor of the Senate 10 years ago that I think this will result in a 
big taxpayer bailout. I said that during the debate, not because I knew 
it but because I felt it. You cannot take apart the protections that 
existed after the Great Depression and somehow believe you are doing 
the country a favor. We were not.
  We have to reconnect some of those protections and separate banking 
from the substantial risks that are involved in things such as the 
derivatives and some of the complex products with great risk that now 
exist as something called toxic assets deep in the bowels of some of 
the largest financial institutions of our country.
  We have a lot to do and a lot to do in a hurry to try to fix what is 
wrong in this country. I said before that I do not think you can fix 
what is wrong unless you clean up the banking system. I understand a 
banking system is a circulatory system for an economy. You have to have 
a working system of finance.
  I was asked the other day: Do you believe in nationalizing the banks?
  I said: That is a word that is thrown around. I don't know what words 
to use. But I think perhaps for the biggest banks in the country that 
have failed that are loaded with massive, risky toxic assets and are 
now saying to the American taxpayers: Bail me out, but keep me alive 
because I have a right to exist because I am too big to fail, I said I 
think instead we ought to run it through a banking carwash. Start at 
the front end--I know ``banking carwash'' is a goofy idea--start at the 
front end and when they come out new, you have gotten rid of the bad 
assets, keep the good assets, change the name, perhaps change their 
ownership, put them back up. We need banks, I understand that. But 
there is no inherent right with all the banks with the current names to 
exist if they ran into the ditch, taking on very big risks and then 
decide the taxpayers have to retain them because it is their inherent 
right to exist. I don't believe that is the case.
  I do believe all of us have to find a way to put together this 
banking and financial system in a manner that

[[Page S3005]]

works because business cannot exist without credit. We have plenty of 
businesses out there right now that have the capability to make money, 
have the capability to survive and get through this but cannot find 
credit. We have to find a way to put that together so our financial 
system works.