[Congressional Record Volume 155, Number 191 (Wednesday, December 16, 2009)]
[Senate]
[Pages S13321-S13322]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. CANTWELL (for herself, Mr. McCain, and Mr. Feingold):
  S. 2886. A bill to prohibit certain affiliations (between commercial 
banking and investment banking companies), and for other purposes; to 
the Committee on Banking, Housing, and Urban Affairs.
  Mr. McCAIN. Mr. President, I am pleased to be joining my friend and 
colleague from Washington, Senator Cantwell, to introduce the Banking 
Integrity Act of 2009. My reasons for joining this effort are simple--I 
want to ensure that we never stick the American taxpayer with another 
$700 billion tab to bail out the financial industry. If big Wall Street 
institutions want to take part in risky transactions--fine. But we 
should not allow them to do so with federally insured deposits.
  Paul Volcker, a top economist in the Obama administration and former 
Federal Reserve Chairman, wants the nation's banks to be prohibited 
from owning and trading risky securities, the very practice that got 
the biggest ones into deep trouble in 2008. The administration is 
saying no, it will not separate commercial banking from investment 
operations. Mr. Volcker argues that regulation by itself will not work. 
Sooner or later, the giants, in pursuit of profits, will get into 
trouble. The administration should accept this and shield commercial 
banking from Wall Street's wild ways. ``The banks are there to serve 
the public,'' Mr. Volcker said, ``and that is what they should 
concentrate on. These other activities create conflicts of interest. 
They create risks, and if you try to control the risks with 
supervision, that just creates friction and difficulties'' and 
ultimately fails.
  The bill we are introducing today precludes any member bank of the 
Federal Reserve System from being affiliated with any entity or 
organization that is engaged principally in the issue, flotation, 
underwriting, public sale or distribution of stocks, bonds, debentures 
or other securities. Essentially, commercial banks may no longer 
intermingle their business activities with investment banks. It is that 
simple.
  Since the repeal of the Glass Steagall Act in 1999, this country has 
seen a new culture emerge in the financial industry: one of dangerous 
greed and excessive risk-taking. Commercial banks traditionally used 
people's deposits for the constructive purpose of main street loans. 
They did not engage in high risk ventures. Investment banks, however, 
managed rich people's money--those who can afford to take bigger risks 
in order to get a bigger return, and who bore their own losses. When 
these two worlds collided, the investment bank culture prevailed, 
cutting off the credit lifeblood of main street firms, demanding 
greater returns that were achievable only through high leverage and 
huge risk taking, and leaving taxpayers with the fallout.
  When the glass wall dividing banks and securities firms was 
shattered, common sense and caution went out the door. The new mantra 
of ``bigger is better'' took over--and the path forward focused on 
short-term gains rather than long-term planning. Banks became 
overleveraged in their haste to keep up in the race. The more they 
lent, the more they made. Aggressive mortgages were underwritten for 
unqualified individuals who became homeowners saddled with loans they 
couldn't afford. Banks turned right around and bought portfolios of 
these shaky loans.

  Sub-prime loans made up only five percent of all mortgage lending in 
1998, but by the time the financial crisis peaked in late 2008, they 
were approaching 30 percent. Since January 2008, we have seen 159 state 
and national banks fail. In my home State of Arizona, five banks have 
shut their doors, leaving small businesses scrambling to find credit 
from other banks that may have already been overleveraged.
  Banks sold sub-prime mortgages to their affiliates and other 
securities firms for securitization, while other financial institutions 
made risky bets on these and other assets for which they had no 
financial interest. As the market grew bigger, its foundation became 
shakier. It was like a house of cards waiting to fall, and fall it did.

[[Page S13322]]

  In October 2008, the financial system was on the brink of collapse 
when Congress was forced to risk $700 billion of taxpayer dollars to 
bail out the industry. These financial institutions had become ``too 
big to fail.'' In fact, the special inspector general of the Troubled 
Asset Relief Program, TARP, testified before Congress earlier this year 
that ``total potential Federal Government support could reach $23.7 
trillion'' to stabilize and support the financial system. Ironically, 
some of these ``too big to fail'' institutions have now become even 
bigger. An editorial from yesterday's New York Times stated:

       The truth is that the taxpayers are still very much on the 
     hook for a banking system that is shaping up to be much 
     riskier than the one that led to disaster.
       Big bank profits, for instance, still come mostly courtesy 
     of taxpayers. Their trading earnings are financed by more 
     than a trillion dollars' worth of cheap loans from the 
     Federal Reserve, for which some of their most noxious assets 
     are collateral. They benefit from immense federal loan 
     guarantees, but they are not lending much. Lending to 
     business, notably, is very tight.
       What profits the banks make come mostly from trading. Many 
     big banks are happy to depend on the lifeline from the Fed 
     and hang onto their toxic assets hoping for a rebound in 
     prices. And the whole system has grown more concentrated. 
     Bank of America was considered too big to fail before the 
     meltdown. Since then, it has acquired Merrill Lynch. Wells 
     Fargo took over Wachovia. JPMorgan Chase gobbled up Bear 
     Stearns.
       If the goal is to reduce the number of huge banks that 
     taxpayers must rescue at any cost, the nation is moving in 
     the wrong direction. The growth of the biggest banks ensures 
     that the next bailout will have to be even bigger. These 
     banks will be more likely to take on excessive risk because 
     they have the implicit assurance of rescue.

  Excess was a common theme for banks/financial institutions in the 
mid-2000s--excessive risk, excessive bonuses. Times were good at 
Merrill Lynch in 2006 when the firm's risky mortgage business was 
booming. The firm made record earnings of $7.5 billion that year and 
paid out bonuses of $5 billion to $6 billion. Fast forward to late 2008 
when Merrill's gambling left it in deep financial despair with losses 
exceeding $27 billion. Yet we witnessed the firm pay out another $3.6 
billion in bonuses just before it was acquired by Bank of America.
  Merrill Lynch wasn't alone in excess and greed. Citigroup posted a 
net loss of nearly $28 billion in 2008, yet paid out $5.3 billion in 
bonuses. Although Goldman Sachs earned only $2.3 billion, it paid out 
$4.8 billion in bonuses. Morgan Stanley earned $1.7 billion, and paid 
out nearly $4.5 billion in bonuses. JPMorgan Chase earned $5.6 billion 
and paid $8.7 billion in bonuses. If a company doesn't make money, how 
can it pay these bonuses? In this case, each of these firms was a 
recipient of billions in taxpayer-funded TARP money.
  The Federal Government has set a dangerous precedent here. We sent 
the wrong message to the financial industry: you engage in bad, risky 
business practices, and when you get into trouble, the government will 
be there to save your hide. Many would call it a moral hazard. I call 
it a taxpayer-funded subsidy for risky behavior.
  The consolidation of the banking world was also riddled with 
conflicts of interest, despite the purported firewalls that were put 
into place. If an investment bank had underwritten shares for a company 
that was now in financial trouble, the investment bank's commercial arm 
would feel pressure to lend the company money, despite the lack of 
merits to do so. The Banking Integrity Act of 2009 would eliminate some 
of these conflicts.
  Today, it is time to put a stop to the taxpayer-financed excesses of 
Wall Street. No single financial institution should be so big that its 
failure would bring ruin to our economy and destroy millions of 
American jobs. This country would be better served if we limit the 
activities of these financial institutions. Banks should accept 
consumer deposits and invest conservatively, while investment banks 
engage in underwriting and sales of securities.
  I urge my colleagues to support this bill.
                                 ______