[Congressional Record Volume 156, Number 34 (Wednesday, March 10, 2010)]
[Senate]
[Pages S1362-S1363]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. MERKLEY (for himself, Mr. Levin, Mr. Kaufman, Mr. Brown of 
        Ohio, and Mrs. Shaheen):
  S. 3098. A bill to prohibit proprietary trading and certain 
relationships with hedge funds and private equity funds, to address 
conflicts of interest with respect to certain securitizations, and for 
other purposes; to the Committee on Banking, Housing, and Urban 
Affairs.
  Mr. LEVIN. Mr. President, I would like to relay a story that says a 
great deal about how the worst financial crisis since the Great 
Depression came to be.
  In 2006, a bond trader at Lehman Brothers struck up a conversation 
with one of the firm's college interns. When the trader asked this 
intern, who had not yet begun his senior year, what he was doing on his 
winter vacation, the young man replied that he would be trading 
derivatives for Lehman. That was a surprise, but the shock came when 
the intern said the firm had given him $150 million of its own money 
for this college student to bet on risky derivatives.
  Now, one college junior and his $150 million trading account did not 
bring the entire financial system close to collapse. But it is just 
this brand of recklessness that led to the need for multibillion-dollar 
bailouts and to the worst recession in decades, one that has left 
millions of Americans without a job.
  The losses that Lehman and other large financial firms racked up, 
trading on their own account and not on the behalf of investors, helped 
build the bonfire that nearly engulfed our entire financial system.
  That is why I have joined Senators Merkley, Kaufman, Sherrod Brown, 
and Shaheen to introduce the Protect our Recovery Through Oversight of 
Proprietary Trading Act, or PROP Trading Act. With this legislation, we 
attempt to rein in some of the reckless practices that led to economic 
catastrophe, the proprietary trading and hedge-fund operations that 
lost billions of dollars, caused the collapse of some of our biggest 
financial institutions, and pushed other major financial firms to the 
brink of collapse.
  This legislation would accomplish several important goals to ensure 
that the abuses of recent years don't lead to another crisis. It would 
ban taxpayer insured banks, and their affiliates and subsidiaries, from 
engaging in proprietary trading that is, trading on their own behalf 
and not that of their customers. It would ban taxpayer insured banks 
from investing in or sponsoring hedge funds or private equity funds. 
Nonbank institutions that are critically important to the systemic 
health of the financial system, i.e., those that have been deemed ``too 
big to fail,'' would be subject to new capital requirements and limits 
on their ability to trade on their own behalf or invest in hedge funds 
or private equity funds. Federal regulators would set those 
requirements and limits. And our legislation would prohibit 
underwriters of asset-backed securities from engaging in transactions 
that create a conflict of interest with respect to the securities they 
package and sell.
  The reaction of Wall Street has been swift. Proprietary trading, they 
tell us, was not a large factor in creating the financial crisis. And 
restrictions on proprietary trading would have no effect in preventing 
the next crisis.
  On both points, they are wrong. Here is why.

[[Page S1363]]

  While Wall Street claims that proprietary trading was a tiny part of 
its operations before the crisis, their financial reports during the 
boom years tell a different story. Firms such as Goldman Sachs and 
Lehman Brothers earned as much as half their revenue on proprietary 
trades when markets were booming. Bank of America reported in a 2008 
regulatory filing that losses in ``large proprietary trading and 
investment positions'' had ``a direct and large negative impact on our 
earnings.'' JP Morgan Chase warned in its 10K filing for 2008 that it 
held large ``positions in securities in markets that lack pricing 
transparency or liquidity,'' presumably proprietary positions. 
Likewise, Goldman Sachs told regulators that the collapse of 
proprietary asset values ``have had a direct and large negative 
impact'' on its earnings.
  What these firms are saying in the dry, lawyerly language of SEC 
filings is that they had been betting big, and losing big, and those 
failed bets had done them serious harm.
  How much harm? By August of 2008, according to one estimate, the 
nation's largest financial firms had suffered $230 billion in losses 
from proprietary trading. Only a Wall Street trader could dismiss such 
losses as immaterial; in fact, that total is about one-third the size 
of the Wall Street rescue package we were forced to approve. Nearly 
every major financial institution suffered major losses in proprietary 
trades. Lehman Brothers, whose bankruptcy was a major contributor to 
the financial crisis, in 2006 derived more than half its revenue from 
proprietary trades. By 2007, its proprietary holdings totaled $313 
billion. But the firm lost $32 billion on such trades in 2007 and 2008, 
nearly double the value of the firm's common equity. Bear Stearns 
collapsed and was bought by JP Morgan Chase with federal aid in large 
part because of the collapse of its hedge funds. Morgan Stanley, JP 
Morgan Chase, Merrill Lynch, Goldman Sachs, each suffered major losses 
as a result of the risky bets they placed on securities that plummeted 
in value.
  There also is a need to prevent financial institutions that create 
asset-backed securities from engaging in transactions connected to 
those securities that present a conflict of interest. As has been 
widely reported, some institutions at the height of the boom in asset-
backed securities were creating these securities, selling them to 
investors, and then placing bets that their product would fail. Phil 
Angelides, the chairman of the Financial Crisis Inquiry Commission, has 
likened this practice to selling customers a car with faulty brakes, 
and then buying life insurance on the driver. It is an abusive 
practice, it should stop, and our legislation would stop it.
  It would be irresponsible of us to allow such risk and abuse to 
remain present in our financial system, lying dormant until the day we 
are once again on the brink of financial catastrophe, and once again 
the need to rescue financial firms who refuse to prudently manage their 
risks. This legislation is urgently important, and I urge my colleagues 
to carefully consider the consequences of failing to act.
                                 ______