[Congressional Record Volume 155, Number 49 (Monday, March 23, 2009)]
[Senate]
[Pages S3611-S3613]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. COLLINS:
  S. 664. A bill to create a systemic risk monitor for the financial 
system of the United States, to oversee financial regulatory activities 
of the Federal Government, and for other purposes; to the Committee on 
Banking, Housing, and Urban Affairs.
  Ms. COLLINS. Mr. President, at the heart of the deep recession is a 
crisis in our financial system that has choked off credit upon which 
the health of our economy depends. With their jobs disappearing and 
their life savings evaporating, the American people rightly ask why the 
Federal Government failed to protect them from Wall Street's greed, 
unwise decisions, and manipulations that have caused so much harm.
  As a former Maine financial regulator, I am convinced regulatory 
reform is essential to restoring public confidence in our financial 
markets. America's main street small businesses, homeowners, employees, 
savers, and investors deserve the protection of a new regulatory system 
that modernizes regulatory agencies, sets safety and soundness 
requirements for financial institutions to prevent excessive risk-
taking, and improves oversight, accountability, and transparency.
  To achieve those goals, I am introducing the Financial System 
Stabilization and Reform Act of 2009. This legislation will 
fundamentally restructure our financial regulatory system. It will 
strengthen oversight and accountability in our financial markets, and 
it would help rebuild the confidence of our citizens in our economy and 
help restore stability to our financial markets.
  Mr. President, as financial institutions speculated in increasingly 
risky products and practices, not one of the hundreds of Federal and 
State agencies involved in financial regulation was responsible for 
detecting and assessing the risk to the system as a whole. The 
financial sector was gambling on the rise of the housing market, yet no 
single regulator could see that everyone, from mortgage brokers to 
credit default swap traders, was betting on a bubble that was about to 
burst. Instead, each agency viewed its regulated market through a 
narrow lens, missing the total risk that permeated our financial 
markets.
  In order to prevent this problem from recurring, a single financial 
regulator must be tasked with understanding the full range of risks our 
financial system faces. This regulator also must have the authority to 
take proactive steps to prevent or minimize systemic risk.
  This is an urgent need. Unemployment reached 7.8 percent in my home 
State in January. Last month, the national unemployment rate hit 8.1 
percent, the highest in 25 years. Earlier this month, the Federal 
Reserve reported that the net worth of American households plummeted by 
more than $11 trillion in 2008, a staggering drop of nearly 20 percent, 
the most in 63 years. And, at the same time, court proceedings and 
congressional hearings on the Bernie Madoff case revealed that this 
multibillion-dollar Ponzi scheme of nonexistent transactions and 
fraudulent statements was perpetrated for

[[Page S3612]]

years under the very noses of the Federal agencies that should have 
stopped it.
  The American people need more than words of optimism or promises of a 
turnaround. With their jobs lost or in jeopardy, with their financial 
plans in ruin, and now with their hard-earned tax dollars on the line 
to clean up the mess, they need reforms. They need action.
  The American people are angry, and rightfully so. They are angry 
because the current crisis was not created from their own bad 
investments or decisions, but by those on Wall Street who concocted 
complicated financial instruments that ended up backfiring. Investment 
firms borrowed to the hilt when they did not have the resources to do 
so.
  When the average American decides to purchase a security on credit, 
margin requirements dictate that he or she put up at least 50 percent 
of its value in cash. But investment banks did not have to play by the 
same rules when they bought for their own accounts. And they took 
advantage of this system.
  Indicative of the extent of the borrowing, Bear Stearns had a 
leverage ratio of 35 to 1, which means the firm borrowed $35 for every 
dollar of its own money. For example, suppose your net worth is a 
dollar and you combine that dollar with $35 in borrowed money to buy an 
asset worth $36. If the value of that asset declines by only $2, to 
$34, you are now bankrupt. This is exactly what happened to Bear 
Stearns and other investment banks.
  Since last spring, the Homeland Security and Governmental Affairs 
Committee, on which I serve as ranking member, has held a series of 
hearings on the roots of the present crisis. We began by looking at the 
derivatives and commodity markets and more recently looked at the steps 
that can be taken to protect our Nation's financial system as a whole 
by creating a systemic-risk regulator. The many expert witnesses who 
have appeared before us have described how our financial system was 
destabilized by a combination of reckless lending, complex new 
instruments, securitization of assets, poor disclosure and 
understanding of risks, excessive leverage, and inadequate regulation.
  Our witnesses were in wide agreement that the mounting risk went 
virtually undetected by the vast network of Federal and State 
regulatory agencies. As the Government Accountability Office put it in 
a recent report to the committee, ``it has become apparent that the 
regulatory system is ill-suited to meet the nation's needs in the 21st 
century.'' To meet this challenge, Federal Reserve Chairman Bernanke 
said recently:

       We must have a strategy that regulates the financial system 
     as a whole, in a holistic way, not just its individual 
     components.

  This statement confirms a view that I find inescapable, our current 
system suffers from regulatory gaps that pose enormous risks to our 
entire economy. The holistic approach recommended by Chairman Bernanke 
is the guiding principle of the comprehensive legislation I introduce 
today. Like legislation I introduced last fall, this bill would also 
regulate Wall Street investment banks for safety and soundness and 
close the gap that has allowed credit default swaps and other financial 
instruments to escape regulation by both Federal and State regulators.
  To ensure a systemic approach to Federal financial regulation, this 
legislation calls for the creation of an independent financial 
stability council to serve as a ``systemic-risk regulator.'' The 
council would maintain comprehensive oversight of all potential risks 
to the financial system, and would have the power to act to prevent or 
mitigate those risks. The financial stability council would be composed 
of representatives from existing Federal agencies which now have the 
responsibility to oversee segments of the financial system--the Federal 
Reserve; the Treasury Department; the Securities and Exchange 
Commission; the Commodity Futures Trading Commission; the Federal 
Deposit Insurance Corporation; and the National Credit Union 
Administration.
  The council would be led by a chairman nominated by the President and 
confirmed by the Senate, with the responsibility for the day-to-day 
operations of the council. The chairman would be required to appear 
before Congress twice a year to report on the state of the country's 
financial system, areas in which systemic risk are anticipated, and 
whether any legislation is needed for the council to carry out its 
mission of preventing systemic risks.
  Witnesses who have appeared before our committee have stressed the 
need to ensure that the systemic-risk regulator has the responsibility 
and the authority to ensure that risks to our financial system are 
identified and addressed. If it is not clear who has that 
responsibility, then agencies will dig in their heels and resist 
changes they do not agree with, and engage in finger-pointing when 
things go bad. At the same time, other witnesses have stressed the 
dangers of consolidating too much power in the hands of a single 
regulator and the need to maintain the level of oversight Congress has 
historically exercised with respect to financial market regulation.
  The financial stability council created by this legislation balances 
these concerns. As Damon Silvers, the AFL-CIO representative on the 
TARP congressional oversight panel, testified before our committee 
earlier this month:

       [T]he best approach is a body made up of the key 
     regulators. . . . It is unlikely a systemic risk regulator 
     would develop deep enough expertise on its own. . . . To be 
     effective it would need to cooperate. . . . with all the 
     routine regulators where the relevant expertise would be 
     resident. . . .

  Former Senator John Sununu, another member of the congressional 
oversight panel, recognized that ``systemic risk can materialize in a 
broad range of areas within our financial system. . . . Thus, it is 
impractical, and perhaps a dangerous concentration of power, to give 
one single regulator the power to set or modify any and all standards 
relating to such risk. Systemic risk oversight and management must be a 
collaborative effort. . . .''
  The financial stability council will be the primary entity 
responsible for detecting systemic risk and implementing the steps 
necessary to protect against that risk. The key to such a structure, I 
believe, is to ensure that the council is headed by a chairman 
confirmed by the Senate and subject to oversight by Congress, who is 
dedicated entirely to the mission of the council, and who does not 
carry a bias in favor of any particular agency on the council.
  Some have suggested that the Federal Reserve play the role of 
systemic-risk regulator. That is not what my bill contemplates. The 
chairman of the Federal Reserve will be a member of the council, and of 
course, the Nation's top banker will play a critical role in how the 
council discharges its responsibilities. But in my view, the Federal 
Reserve already has enough on its plate, and does not need additional, 
heavy responsibilities. I should add that nothing in my bill alters the 
Federal Reserve's role with respect to monetary policy in any way.
  This bill, however, 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 would fall into the same 
regulatory void as its predecessors. The SEC would be able to regulate 
its broker-dealer operations, but no 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 costs that can be inflicted if these 
investment banks are not regulated for safety and soundness. Under this 
legislation, the council's role as the systemic-risk regulator will 
support the critical importance of the Federal Reserve's safety and 
soundness duties.
  Under my bill, whenever the financial stability council believes that 
a risk to the financial system is present due to a lack of proper 
regulation, or by the appearance of new and unregulated financial 
products or services, it would have the power to propose changes to 
regulatory policy, using the statutory authority provided to our 
existing Federal financial regulatory agencies.
  The financial stability council will have the power to obtain 
information directly from any regulated provider of financial products 
and, in limited form, from State regulators regarding the solvency of 
State-regulated insurers.

[[Page S3613]]

The council will also be able to propose regulations of financial 
instruments which are designed to look like insurance products, but 
that in reality are financial products which could present a systemic 
risk. But--and I want to stress this point--my bill does not preempt 
State law governing traditional insurance products.
  In keeping with the recommendations of the experts who testified 
before our committee, the bill provides the council with the power to 
adopt rules designed to address the ``too big to fail'' problem. How 
often we have heard that term lately. We hear financial experts and 
Federal officials telling us we have to continue to bail out large 
institutions like AIG because they are ``too big to fail.'' We need to 
remedy this problem so we don't find ourselves in the same situation a 
decade from now. This bill provides the council with the power to adopt 
rules designed to discourage financial institutions from becoming ``too 
big to fail'' or to regulate them appropriately if they become what we 
call ``systemically important financial institutions.'' The need to 
regulate how these systemically important financial institutions, or 
``SIFIs,'' invest their own capital was not previously recognized. 
Indeed, the prevailing attitude was that if firms failed because of bad 
investments, possibly bringing some of their creditors down with them, 
that was how the market was supposed to work. In true Darwinian 
fashion, eliminating firms with less investment acumen would only serve 
to strengthen American capitalism. We now know the fallacy of that 
reasoning, and it has been a very painful lesson, for it is not just 
the large investment houses that are hurt, but average Americans from 
Maine to California also suffer.
  Under this legislation the council would help make sure financial 
institutions do not become ``too big to fail'' by imposing different 
capital requirements on them as they grow in size, raising their risk 
premiums, or requiring them to hold a larger percentage of their debt 
as long-term debt. The TARP congressional oversight panel adopted this 
position, explaining:

       We should not identify specific institutions in advance as 
     too big to fail, but rather have a regulatory framework in 
     which institutions have higher capital requirements and 
     pay more on insurance funds on a percentage basis than 
     smaller institutions which are less likely to be rescued 
     as being too systemic to fail.

  I want to make clear, though, that the power this bill provides to 
the council is not meant to restrict financial institutions from 
growing in size, but rather from becoming risks to the system as a 
whole.
  The bill also provides the council with authority to address so-
called regulatory ``black holes,'' created by new and imaginative 
financial instruments that do not fall within the jurisdictional 
authority of any Federal financial regulatory agency. Credit default 
swaps are a perfect example of this problem. Prior to 2000, credit 
default swaps existed in a regulatory limbo. Neither the SEC nor the 
CFTC were willing to exert authority over the credit default swap 
market. As a result, they fell through the jurisdictional cracks. 
Congress then compounded the problem by explicitly exempting credit 
default swaps from regulation under the Commodity Futures Modernization 
Act of 2000.
  As was the case with AIG, 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 because the market was bilateral and 
over-the-counter, it was often impossible for regulators--and even 
market participants--to know in advance how all the tangled webs of 
contract commitments overlapped and affected any particular party. 
Under the current system which lacks a systemic-risk regulator, 
regulators at times lack the authority to take action against excessive 
debt, inadequate reserves, and other threats, even when they see them 
occurring.
  This legislation specifically addresses the credit default swap 
problem by repealing the exemption from regulation that Congress 
created for these instruments in 2000, and by setting up a government-
regulated clearinghouse.
  But beyond credit default swaps, risky new financial instruments 
could still avoid the reach of our regulatory system. For that reason, 
my legislation provides the council with the power to propose 
regulations and legislation governing the sale or marketing of any 
financial instrument which would fall into a ``black hole,'' and would 
otherwise present a systemic risk to the financial systems of the 
United States if left unmonitored.
  Professor Howell Jackson, the acting dean of Harvard Law School, 
discussed this ``black hole'' problem in his testimony to our committee 
early this year. He stated that the underlying issue is that ``well-
advised financial services firms are capable of exploiting the 
legalistic boundaries of jurisdictional authority that characterize our 
system of financial regulation. Without broad jurisdictional mandates, 
our financial regulators will remain at a serious disadvantage in 
setting policy for new financial products and risks.''
  Finally, my bill will merge the Office of Thrift Supervision, OTS, 
into the Office of the Comptroller of the Currency, OCC. Secretary 
Paulson recommended this merger in the plan he released last year, and 
2 years ago, John Dugan, the U.S. Comptroller, said that such a merger 
would be ``appropriate and healthy.'' There are currently at least four 
agencies involved in bank regulation, including the FDIC, the Federal 
Reserve, and the OCC and OTC. Consolidating and reducing the number of 
banking regulators would improve the efficiency and effectiveness of 
this system.
  OTS is the best candidate for several reasons, including that many of 
its largest regulated entities, thrifts, have either collapsed or been 
acquired in the midst of the financial crisis--such as Washington 
Mutual and Indy Mac. And in the last 4 months, the inspector general 
for Treasury has raised serious questions about the objectivity and 
effectiveness of OTS's supervision of the largest thrifts.
  Mr. President, the regulatory reforms in this legislation are 
absolutely essential to restoring public confidence in our financial 
markets. We have relied too long on a patchwork of regulatory agencies 
that is incapable of understanding or controlling risks to the system 
as a whole. The overarching purpose of this legislation is to ensure 
that, as the financial-services industry becomes ever more global and 
complex, those in government, responsible for overseeing the system's 
stability, can see the whole picture. We are in this crisis precisely 
because firms, whether for good or bad, exploited legal boundaries, 
risky financial instruments fell beyond the reach of regulators, and 
institutions doomed to fail grew too big to fail.
  Honest savers, borrowers, investors, Main Street businesses, and 
responsible financial institutions deserve a regulatory system suited 
to demands of modern times, where dangerous gaps are closed, and where 
risky transactions are indentified and controlled before they pose a 
threat to the markets as a whole. These reforms must be made to restore 
the confidence necessary to stabilize our financial markets. That is 
what this legislation aims to do, and I urge my colleagues to support 
it.
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