[Congressional Record Volume 155, Number 67 (Monday, May 4, 2009)]
[Senate]
[Pages S5067-S5069]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEVIN (for himself and Ms. Collins):
  S. 961. A bill to authorize the regulation of credit default swaps 
and other swap agreements, and for other purposes; to the Committee on 
Banking, Housing, and Urban Affairs.
  Mr. LEVIN. Mr. President, I am introducing legislation today, along 
with Senator Collins, to strengthen the transparency, accountability, 
and stability of a key aspect of our nation's financial system. Right 
now, trillions of dollars in complex financial transactions known as 
swap agreements are being marketed, traded, and implemented by 
financial institutions operating in the U.S. without adequate oversight 
or regulation.
  Swaps are typically an agreement between two parties placing a bet on 
future cash flows. Some swaps bet on whether a stock price, interest 
rate, commodity price, or currency value will rise or fall; others bet 
on whether a company will default on payment of a bond. Stock price 
bets are referred to as equity swaps; bets on whether companies will be 
unable to pay their debts are referred to as credit default swaps.
  As of June 2008, according to data compiled by the Bank of 
International Settlements, worldwide swaps markets included credit 
default swaps with a total notional value of $57 trillion; commodity 
swaps with a notional value of $13 trillion; equity swaps with a 
notional value of $10 trillion; foreign currency swaps with a notional 
value of $62 trillion; and interest rate swaps with a notional value of 
$458 trillion. These multi-trillion-dollar swap transactions are going 
on full bore, without appropriate U.S. disclosure requirements, 
clearing requirements, capital or liquidity safeguards, or other 
measures to protect the U.S. financial system against systemic risk.
  Why? Because current law prohibits key Federal financial regulators--
including the Securities and Exchange Commission, SEC, and the 
Commodities Futures Trading Commission, CFTC--from exercising oversight 
or issuing regulations to ensure the safety and soundness of swap 
transactions. That prohibition has been in place for nearly 10 years 
now, since the year 2000; it has never made any sense; it helped cause 
the financial crisis that is engulfing the American economy; and it 
ought to be eliminated immediately.
  The bill we are introducing today, the Authorizing the Regulation of 
Swaps Act, would do just that. It would immediately repeal the 
statutory prohibition on the SEC and CFTC from regulating swaps. In 
addition, the bill would give authority to federal financial 
regulators, including bank, securities, and commodities regulators, to 
oversee and regulate all types of swap agreements, whether traded on an 
exchange or over-the-counter, including credit default, commodity, 
equity, foreign currency, and interest rate swaps. The bill would 
enable financial regulators, for the first time since 2000, to exercise 
oversight of the now largely hidden and unregulated swaps markets.
  To understand why this legislation is needed and should be enacted 
promptly without waiting for the larger financial reform bill that's 
coming, I want to review some history. Twelve years ago, in 1997, 
Brooksley Born, then the head of the CFTC, raised a red flag about the 
growing use of over-the-counter swaps and other derivatives that were 
being traded outside of regulated exchanges and outside of normal 
federal oversight. She called for a study of those over-the-counter 
transactions and for comments on whether they should be subject to some 
type of regulation.
  Her effort was immediately met with resistance, however, from not 
only the financial industry that profited from swaps trading, but also 
other Federal regulators then in office. For example, then Federal 
Reserve Chairman Alan Greenspan, then Treasury Secretary Robert Rubin, 
and then SEC Chairman Arthur Levitt all opposed her effort to even 
examine over-the-counter swap agreements. The dominant view at the time 
was that regulation was unnecessary and would only slow down a booming 
market.
  In 1998, at the urging of then Chairman Greenspan, Secretary Rubin, 
Chairman Levitt, and others, Congress enacted legislation which 
actually barred the CFTC from conducting the study that Chairman Born 
wanted and from developing any regulatory alternatives for over-the-
counter swaps.
  In 2000, Congress went farther. In late December, during the final 
days of the 106th Congress, legislation affecting a range of financial 
issues was slipped without notice into a conference report of an 
omnibus appropriations bill. That legislation, called the Commodity 
Futures Modernization Act, included provisions which together created a 
flat out prohibition on the regulation of every kind of swap the 
authors could

[[Page S5068]]

think of, including credit default, commodity, equity, foreign 
currency, interest rate, and even weather swaps. That type of sweeping 
statutory prohibition had never been included in any bill voted on by 
the Senate before being inserted into a must-pass appropriations bill 
in December 2000. That omnibus appropriations bill was approved by the 
Senate on a voice vote.
  Today we are living with the disastrous consequences of that ill-
conceived prohibition on the regulation of swaps.
  One example says it all: AIG. AIG is a financial holding company 
that, all by itself, has cost taxpayers more than $150 billion so far. 
Over a period of years, AIG had issued more than $400 billion in credit 
default swaps without setting aside sufficient capital or liquidity 
reserves. After its swaps began losing value, AIG's counterparties 
required AIG to post multi-billion-dollar collateral to secure payment 
on those swaps, and a credit rating downgrade threatened to increase 
its collateral calls, AIG came pleading for a taxpayer bailout. The 
$150 billion in taxpayer dollars was needed not only to keep AIG 
afloat, but also to bail out a dozen other large financial institutions 
that had purchased credit protection from AIG, including Goldman Sachs, 
Merrill Lynch, and Bank of America.
  Apparently, none of those credit default swap exposures had been 
known to Federal regulators until AIG informed the Federal Reserve on a 
Friday that it was likely to go out of business the following week 
unless provided billions in taxpayer support. When regulators 
understood how far in the hole AIG had fallen and how many financial 
institutions would be affected by its financial collapse, they 
determined that they had no choice but to prop up the whole mess with 
taxpayer dollars.
  AIG is not the only financial institution with risky credit default 
swaps. But even if federal regulators know of other high-risk problems, 
the law has tied their hands in terms of what steps can be taken in 
response. Even measures that most experts believe would reduce systemic 
risks, such as requiring companies to use credit default swap 
clearinghouses or requiring traders to disclose all credit default swap 
transactions, cannot be fully implemented, because Federal agencies 
lack the authority to regulate swaps.
  Seven months ago, during a Senate hearing in September 2008, 
Christopher Cox, then chairman of the SEC, testified that the credit 
default swap market was ``completely lacking in transparency'' and 
``ripe for fraud and manipulation.'' A few days later he called on 
Congress to take ``swift action'' to give regulators the authority to 
oversee credit default swaps. But the statutory barriers prohibiting 
swaps regulation have remained in place.
  Giving the regulators what they have asked for is long overdue. It 
does not make sense for Federal regulators to be statutorily barred 
from requiring disclosure of swap transactions, mandating use of 
clearinghouses, or imposing other safeguards particularly in light of 
the size of the swaps market with trillions of dollars in credit 
default swap, interest rate, commodity, equity, foreign currency, and 
other swaps.
  Even some past opponents of swaps regulation have rethought their 
opposition.
  Alan Greenspan acknowledged last October that there are ``serious 
problems'' associated with credit default swaps.
  Robert Rubin recently acknowledged that derivatives, which include 
swaps, ``create systemic risk.''
  Arthur Levitt said it was a mistake not to have regulated swap 
agreements.
  Top financial officials in the Obama Administration, including 
Treasury Secretary Tim Geithner, National Economic Council Chairman 
Larry Summers, SEC Chair Mary Schapiro, and CFTC nominee Gary Gensler 
have all called publicly for stronger regulation of over-the-counter 
transactions, including swap agreements.
  Congress and the Administration are now engaged in an effort to enact 
comprehensive financial reforms to safeguard our economy. While some of 
those reforms require a lot of time and deliberation to get right, 
others can--and should--be implemented more quickly. Removing the 
prohibition on regulating swaps is one of those reforms that can and 
should be done now, so our regulators can begin, without the hindrance 
of ill-conceived statutory barriers, to design a sensible regulatory 
framework for swaps.
  Here is what my bill would do. First, it would repeal about a dozen 
provisions in the Commodity Futures Modernization Act and other laws 
that prevent federal financial regulators from overseeing and 
regulating swap agreements. Second, it would give Federal financial 
regulators, including bank, securities, and commodity regulators, 
immediate authority to oversee and regulate swaps involving the 
financial institutions and exchanges that they already regulate. To 
ensure regulators have sufficient authority, the bill would use the 
same comprehensive definition of swap agreement that is used in current 
law to prohibit swaps regulation.
  These measures would give regulators immediate authority to acquire 
swap-related data. That would allow them to evaluate swap risks at 
specific companies as well as across the financial system. Regulators 
could then use this data to look into what additional safeguards are 
needed and what abuses need to be stopped.
  One thing the bill would not do is require federal financial 
regulators to regulate swaps or tell them how to regulate swaps if they 
decide to do so. That is left for the larger regulatory reform bill 
coming later this year. The only instruction provided in this bill is 
that, if any regulator decides to act, it must consult, work, and 
cooperate with all of the other federal financial regulators to ensure 
swaps are treated in a consistent way.
  I see this bill as a necessary first step to eliminate harmful 
statutory barriers that tie regulators' hands, impede oversight of the 
multi-trillion-dollar swaps markets, and create systemic risk. The bill 
does not take the needed second step of laying out ways to regulate 
swaps. It does not, for example, specify swaps recordkeeping, 
disclosure requirements, clearing requirements, capital or liquidity 
safeguards, or other measures. Senator Collins has another bill that, 
in part, addresses credit default swaps clearinghouses; I have a 
separate bill that specifies safeguards in the area of commodity swaps. 
Other colleagues have introduced bills that address a variety of swaps 
issues. The legislation we are introducing today does not contradict or 
preclude any of those other approaches it is an interim measure that 
would clear the way for more specific swaps requirements in subsequent 
reform legislation.
  The Levin-Collins bill offers a limited, commonsense way to restore 
immediate federal authority over a high-risk, high-dollar financial 
sector that has operated for too long in the shadows, and whose failure 
has cost us hundreds of billions of dollars so far. Due to the 
trillions of dollars and financial risk involved, I urge the Senate to 
act on this bill as soon as possible.
  I would also like to take a moment to extend my thanks and 
appreciation to the SEC, CFTC, and Treasury officials who took the time 
to provide technical assistance in drafting this legislation. I hope 
those agencies, and the Obama Administration as a whole, will announce 
their support for the bill and work for its enactment.
  Mr. President, I ask unanimous consent that a summary of the bill be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

    Summary of Levin-Collins Authorizing the Regulation of Swaps Act

       The Authorizing the Regulation of Swaps Act, introduced by 
     Senator Carl Levin, D-Mich., and cosponsored by Senator Susan 
     Collins, R-Maine, is intended to give federal financial 
     regulators immediate authority over swap agreements in light 
     of the fact that trillions of dollars in swap transactions 
     continue to be marketed, traded, and implemented in the 
     United States without adequate federal oversight or 
     regulatory authority. Hundreds of billions of taxpayer 
     dollars have already been expended to overcome the failures 
     of firms that engaged in unregulated swaps. The bill contains 
     the following provisions.
       Repeal Existing Prohibitions on Regulating Swaps. The bill 
     would repeal over a dozen provisions in existing law, 
     including in the Commodity Futures Modernization Act of 2000, 
     which prohibit federal financial regulators from regulating 
     swap agreements.
       Authorize the Regulation of Swaps. The bill would give 
     authority to federal financial

[[Page S5069]]

     regulators, including bank, securities and commodities 
     regulators, to oversee and regulate all types of swap 
     agreements, including credit default, commodity, equity, 
     interest rate, and foreign currency swaps. The bill uses the 
     same definition of swap agreement that is used in current law 
     to prohibit swaps regulation, and would authorize federal 
     oversight and regulation of all exchange-traded and over-the-
     counter swaps.
       Require Consistent Treatment of Swaps. The bill does not 
     require federal regulators to regulate swap agreements--it 
     merely authorizes such regulation and removes barriers that 
     have prevented this regulation since 2000. Nor does the bill 
     provide any direction to federal financial regulators on how 
     to regulate swaps other than to require them to consult, 
     work, and cooperate with each other to promote consistency in 
     the treatment of swap agreements.
       Establish Interim Authority. By removing existing statutory 
     prohibitions and providing federal financial regulators with 
     authority to oversee and regulate swaps, the bill would 
     eliminate harmful statutory barriers, give regulators 
     immediate interim authority over multi-trillion-dollar swaps 
     markets, and clear the way for more specific swaps 
     requirements in subsequent comprehensive financial reform 
     legislation later this year.
                                 ______