[Congressional Record Volume 155, Number 113 (Friday, July 24, 2009)]
[Extensions of Remarks]
[Pages E1965-E1967]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 INTRODUCTION OF THE CONSUMER PROTECTION AND REGULATORY ENHANCEMENT ACT

                                 ______
                                 

                          HON. SPENCER BACHUS

                               of alabama

                    in the house of representatives

                        Thursday, July 23, 2009

  Mr. BACHUS. Madam Speaker, today the Republican leadership of the 
House and the Financial Services Committee joined me in introducing 
H.R. 3310, the Consumer Protection and Regulatory Enhancement Act, to 
comprehensively modernize and streamline the regulatory structure of 
the financial services industry.
  The legislation will ensure that (1) the government stops rewarding 
failure and picking winners and losers; (2) taxpayers are never again 
asked to pick up the tab for bad bets on Wall Street while some 
creditors and counterparties of failed firms are made whole; and (3) 
market discipline is restored so that financial firms will no longer 
expect the government to rescue them from the consequences of imprudent 
business decisions. The Republican plan seeks to return our regulatory 
system to one in which government policies do not promote moral hazard, 
and insolvent financial firms do not become wards of the state.
  The Obama administration and many Democrats in Congress have insisted 
that the financial crisis was caused by a lack of regulation and a 
failed free market philosophy, requiring government intervention on the 
scale of the New Deal to ``re-regulate'' finance. H.R. 3310 is premised 
upon a belief that it was misguided government policies to allocate 
credit and government intervention to prop up failed financial 
institutions that helped precipitate, and later exacerbate, the crisis, 
which suggests that what is needed is smarter--not more--regulation. 
The bill fundamentally rejects the command-and-control approach that 
has characterized the Obama administration's and congressional 
Democrats' stewardship of the economy.
  The Administration's regulatory reform proposals would empower the 
Federal Reserve as a new ``systemic risk super-regulator.'' Rather than 
massively expanding the Federal Reserve's mission and further 
enshrining a failed government policy of rescuing ``too big to fail'' 
institutions, H.R. 3310 scales back the Fed's authorities so that it 
can focus on conducting monetary policy and unwinding the trillions of 
dollars in obligations it has amassed during the financial crisis. When 
combined with the administration's reckless ``borrow-and-spend'' fiscal 
policy, the vast expansion of the Fed's balance sheet in recent months 
arguably represents a far more significant source of ``systemic risk'' 
to our nation's economy than the failure of any specific financial 
institution.
  The guiding principle of H.R. 3310 can be summed up in one sentence: 
no more bailouts. By putting an end to ad hoc, improvised and 
unprincipled bailouts designed to spare big Wall Street firms and their 
creditors from the consequences of their mistakes, our legislation 
offers a clear alternative to the limitless and unconstrained ``bailout 
authority'' that Democrats want to confer upon those very regulators 
that failed to anticipate the current crisis that almost wrecked our 
financial system. The Democrats want to hide the consequences of 
regulatory and private sector mistakes by giving regulators the 
authority to bail out large financial institutions, their creditors, 
and their counterparties, without any accountability whatsoever. Even 
worse, the Democrats have not yet figured out who is going to pay for 
this limitless bailout authority, administered by bureaucrats for the 
benefit of a handful of large financial institutions.
  Our legislation also rejects the call for a government-run economy 
that depends upon the omniscience and omnipotence of government 
regulators who have shown themselves unable to anticipate crises, let 
alone do anything to prevent them. Republicans believe that the 
financial system works best when individual participants are free to 
keep the gains yielded by their efforts, but are forced to bear the 
costs of their failure. By adhering to the principle that no firm is 
``too big to fail,'' Republicans will ensure that responsibility for 
monitoring the stability of the financial system is placed exactly 
where it needs to be: with the individual market participants who have 
the self-interest and the expertise to monitor their exposure to the 
financial system, and who are in the best position to take the 
necessary action to protect themselves, their investors, and their 
creditors from the risks that are endemic to the financial system.
  Rather than asking government to spare participants from the 
consequences of their mistakes by imposing those costs on others, our 
legislation calls for the resolution of insolvent non-bank 
institutions--no matter how large or systemically important--through 
the bankruptcy system.
  The key to making bankruptcy work as an alternative is to make 
credible and clear the government's commitment to restructuring, re-
organizing, or liquidating troubled financial institutions at the 
expense of their creditors and counterparties. This commitment requires 
a firm rejection of the current status quo, in which the decision 
whether to rescue a specific firm and insulate its creditors and 
counterparties from losses is left to the discretion of regulators 
accountable to no one but themselves. This commitment also requires the 
rejection of the possibility of any bailout, no matter how that bailout 
is described. Without this firm commitment to ending bailouts, too-big-
to-fail financial institutions and those who do business with them have 
every incentive to pursue short term gains, knowing that the costs will 
ultimately be borne by others if things go wrong. By making credible 
the government's policy that losses will be borne by those responsible, 
the government makes the financial system stronger by encouraging 
creditors to be more vigilant in assessing the creditworthiness and 
business practices of the parties to whom they are extending credit. 
And

[[Page E1966]]

by making clear that the government will not step in to bail out a 
failing institution or its creditors, the government can remove the 
uncertainty and confusion that roiled the markets last September when 
market participants could not anticipate the government's actions.
  The relatively smooth bankruptcies of Drexel Burnham Lambert, Enron, 
and WorldCom demonstrate that the bankruptcy system is more than 
capable of resolving and liquidating large, complex institutions. The 
failure of Lehman Brothers last September is often cited by proponents 
of a new systemic risk resolution authority as an example of why 
bankruptcy ``won't work.'' In truth, the shock to the markets from 
Lehman's collapse was the result of dashed expectations of market 
participants that the government would ride to Lehman's rescue just as 
it had in the earlier Bear Stearns and GSE episodes, not of any 
inadequacies in the bankruptcy process. Nevertheless, Republicans 
believe that bankruptcy can be made more efficient and better tailored 
to resolving large non-bank financial institutions. The legislation, 
therefore, proposes a new chapter to the Bankruptcy Code to deal with 
the unique characteristics of financial institutions that will make 
``orderly failure'' a practical solution for resolving troubled firms. 
Among other things, this new chapter will provide for better 
coordination between the regulators of these institutions and the 
bankruptcy system, so that regulators can provide technical assistance 
and specialized expertise about financial institutions. In addition, 
this new chapter will give bankruptcy judges the power to stay claims 
by creditors and counterparties to prevent runs on troubled 
institutions, thereby helping to alleviate the panic that could strike 
the financial system if a large institution finds itself facing 
difficulties.

  Rather than establishing the Federal Reserve as the ``systemic risk 
regulator,'' and identifying in advance those firms that are 
systemically significant (i.e., ``too big to fail''), the legislation 
creates a Market Stability and Capital Adequacy Board, chaired by the 
Secretary of the Treasury and comprised of outside experts as well as 
representatives from the financial regulatory agencies responsible for 
supervising large, complex firms. This panel would be charged with 
monitoring the interactions of various sectors of the financial system, 
and identifying risks that could endanger the stability and soundness 
of the system. The panel's mandate would include reviewing financial 
industry data collected from the appropriate functional regulators; 
monitoring government policies and initiatives; reviewing risk 
management practices within financial regulatory agencies; reviewing 
capital standards set by the appropriate functional regulators and 
making recommendations to ensure capital and leverage ratios match 
risks regulated entities are taking on; reviewing transparency and 
regulatory understanding of risk exposures in the over-the-counter 
derivatives markets and making recommendations regarding the 
appropriate clearing of trades in those markets through central 
counterparties; and making recommendations regarding any government or 
industry policies and practices that are exacerbating systemic risk. In 
order to address current regulatory gaps, each functional regulator 
would be required to assess the effects of their regulated entities' 
activities on macroeconomic stability and review how entities under 
their regulatory purview interact with entities outside their purview. 
This panel would not have independent enforcement or supervisory 
authority over individual firms, but would instead meet on at least a 
quarterly basis and periodically report its findings to Congress and 
the relevant functional regulators (the cops on the beat) so that 
policymakers and regulators could act upon them to contain risks posed 
by specific firms, industry practices, activities and interactions of 
entities under different regulatory regimes, or government policies.
  To modernize the financial regulatory structure, the legislation 
streamlines the current framework of overlapping and redundant Federal 
financial regulatory agencies by centralizing supervision of deposit-
taking entities in one agency while preserving charter choice (e.g., 
credit unions and State charters) as well as the dual banking system 
(the regulator would have two divisions--one would oversee federally 
chartered banks and thrifts, and one would serve as the primary federal 
regulator of state-chartered, state-supervised banks). The legislation 
immediately combines the OCC and OTS into one agency and shift the 
supervisory functions of the Federal Reserve and FDIC to that agency, 
including responsibility for overseeing bank and financial holding 
companies. It establishes an Office of Consumer Protection within the 
new agency to streamline in one place responsibility for rule 
promulgating and enforcing the Federal consumer protection laws 
applicable to depository institutions, eliminating the confusion 
created by the existence of five different Federal regulatory agencies 
which currently share consumer protection responsibilities. Consumer 
protection rules will be reviewed and updated regularly with rule 
promulgation consisting of extensive consumer testing. In addition, 
Republicans will provide the Office of Consumer Protection with the 
authority to redesign and improve consumer disclosures so that they are 
transparent to all interested parties and written in plain language to 
enhance understanding by all consumers and investors.
  The legislation simplifies and streamlines the complaint process for 
consumers and investors who believe they have been wronged by abusive 
industry practices, by establishing a single, toll-free number and Web 
site--to be administered by the Office of Consumer Protection--to field 
consumer inquiries and direct them to the appropriate regulatory or 
enforcement agency.
  The legislation ensures that institutions engaged in similar 
activities and serving similar functions will be regulated similarly, 
limiting the potential for competitive distortions and a ``race to the 
bottom'' among firms seeking the most lenient regulatory treatment. It 
promotes simplicity and consistent enforcement. It guarantees 
accountability and transparency. And it enables the Federal Reserve and 
the FDIC to concentrate on their most important responsibilities: 
formulating monetary policy and protecting the deposit insurance fund, 
respectively.
  The extraordinary market interventions conducted by the Federal 
Reserve since the onset of the financial crisis have added trillions of 
dollars to the government's balance sheet and taken it far afield from 
its core mission of conducting the nation's monetary policy. The 
Republican legislation re-focuses the Fed on its monetary policy 
mandate by relieving it of current regulatory and supervisory 
responsibilities, reassigning them to other agencies. Reallocating 
these duties will eliminate the Fed's current incentive to prop up the 
economy through an accommodative monetary policy to prevent firms under 
its regulatory purview from failing. The legislation makes the Federal 
Reserve more transparent and accountable to taxpayers by enabling the 
Government Accountability Office to conduct more extensive audits of 
the central bank. In addition, to send clear signals to markets, the 
legislation requires the Fed to have an explicit inflation target, and 
would narrow the Fed's authority under section 13(3) of the Federal 
Reserve Act, which currently provides the Fed with nearly unlimited 
powers during periods the Board of Governors deems ``unusual and 
exigent,'' as follows: (1) require the Secretary of the Treasury to 
officially sign off on all actions taken by the Federal Reserve 
pursuant to section 13(3); (2) allow Congress to block any Federal 
Reserve action undertaken pursuant to its section 13(3) authority 
within 90 days of such action by passing a congressional resolution of 
disapproval, in which case the Fed would have 90 additional days to 
unwind the relevant facility; (3) place all expenditures to date 
pursuant to section 13(3), and those taken in the future, on Treasury's 
balance sheet; and (4) eliminate the Federal Reserve's ability to use 
its 13(3) authority to intervene on behalf of a specific institution, 
allowing the powers to only be used to create liquidity facilities that 
would be broadly available to a market sector.
  H.R. 3310 also brings needed reform to the GSEs. Fannie Mae and 
Freddie Mac's government-subsidized model has cost taxpayers tens of 
billions of dollars. The legislation phases out taxpayer subsidies of 
Fannie Mae and Freddie Mac over a number of years and ends the current 
model of privatized profits and socialized losses. It sunsets the 
current GSE conservatorship by a date certain, placing Fannie and 
Freddie in receivership if they are not financially viable at that 
time. If they are viable, once the housing market has stabilized, the 
plan would initiate the process of cutting their ties to the government 
by winding down the federal subsidies granted through their charters 
and transitioning Fannie and Freddie into non-government backed 
entities that compete on a level playing field with other private 
firms. The legislation addresses the need to reduce Fannie and 
Freddie's portfolios, re-focus Fannie and Freddie on promoting housing 
affordability, and require SEC registration and the payment of taxes.
  To restore market discipline and promote greater investor due 
diligence, H.R. 3310 discourages blind reliance on ratings supplied by 
the major credit rating agencies that has had such disastrous 
consequences for investors and the economy as a whole. For too long, 
the government has adopted policies that bestowed a ``Good 
Housekeeping'' seal of approval on the rating agencies and their 
products, which perpetuated a rating agency duopoly that contributed 
significantly to a mispricing of risk and a subsequent collapse in 
market confidence. Designating certain agencies as Nationally 
Recognized Statistical Rating Organizations (NRSROs) and hard-wiring 
references to their ratings into numerous Federal statutes and 
regulations are the two most egregious examples of this implied 
government blessing. The legislation addresses these market distortions 
by changing the NRSRO designation to ``nationally registered

[[Page E1967]]

statistical rating organizations'' and removing all references to 
ratings throughout Federal law and regulation. These changes will 
promote greater competition among rating agencies and less reliance on 
their ratings among investors. To further mitigate over-reliance on 
third-party credit analysis, functional regulators will be required to 
more thoroughly examine governance, risk management and enterprise 
management policies and procedures.
  To restore investor and consumer confidence and better protect 
financial markets, H.R. 3310 enhances the ability of the financial 
regulatory agencies to enforce Federal consumer protection and 
securities laws. Regulators need more tools in their arsenal to proceed 
administratively and judicially against alleged violators. The 
legislation increases civil money penalties in government enforcement 
actions; maximizes restitution to victims of fraud; improves 
surveillance of bad actors who exploit gaps in the current regulatory 
regime to continue preying upon innocent consumers; and reauthorizes 
the Financial Crimes Enforcement Network (FinCEN), authorizing an 
additional $15 million to combat financial fraud.
  Madam Speaker, H.R. 3310 will bring smarter, not more, regulation of 
our financial services industry, and I urge my colleagues to join me as 
a cosponsor of this legislation.

                          ____________________