[Congressional Record Volume 156, Number 52 (Wednesday, April 14, 2010)]
[Senate]
[Pages S2262-S2265]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
ENDING TOO BIG TO FAIL
Mr. KAUFMAN. Mr. President, I have come to the floor several times
now to discuss the problem of too big to fail, which I believe is the
most critical issue to be addressed in any financial reform bill.
Financial institutions that are too big to fail are so large, so
complex, and so interconnected that they cannot be allowed to fail nor
follow the normal corporate bankruptcy process because of the dire
threat that would pose to the entire financial system.
The largest six bank holding companies--Bank of America, JPMorgan
Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley--are
certainly too big to fail. The term may also cover a larger set of
institutions.
After all, last year's most vaunted stress tests of the largest bank
holding companies covered 19 institutions, and even that exercise did
not include many other systemically significant nonbank financial
institutions, including Fannie Mae and Freddie Mac, insurance
companies, derivatives clearinghouses, and hedge funds.
While many in government and industry want to eliminate the term
``too big to fail,'' the fact is these too-big-to-fail financial
institutions are bigger, more powerful, and more interconnected now
than ever before.
Only 15 years ago, the six largest U.S. banks had assets equal to 17
percent of overall gross domestic product. The six largest U.S. banks
now have total assets estimated in excess of 63 percent of gross
domestic product. That goes from 17 percent of GDP just 15 years ago to
63 percent of GDP now.
While some still argue there are benefits to having very large
financial conglomerates--and I am sure there are--virtually everyone
agrees the problem of too big to fail needs to be address. The
disagreement is how this be done.
I was interested to hear Senator McConnell on the Senate floor
yesterday say we must never use taxpayer money again to bail out too-
big-to-fail institutions. But no one wants to do that. No one is
thinking about that. No one is planning to do that.
The question is, What is the solution to prevent these institutions
from failing in the first place? The other party has put forward no
solution, and doing nothing is by far the worst solution of all.
The minority leader came to the floor today and said the bill before
the Senate is good for Wall Street and bad for Main Street. That is
simply an astounding statement to make. Main Street wants Congress to
act. Main Street wants Congress to ensure that Wall Street never
engages in reckless behavior again. Yet what does the minority leader
offer?
Despite the experience of Lehman Brothers, the minority leader
apparently believes we should do nothing and simply stand back in the
future and let these megabanks fail when they take risks that go wrong.
The minority leader said yesterday:
The way to solve this problem is to let the people who made
the mistakes pay for them. We won't solve this problem until
the biggest banks are allowed to fail.
Astounding. His answer is, the resolution of too-big-to-fail banks
needs to be dealt with through the bankruptcy process. In my view, that
approach is dangerous and irresponsible.
If we do nothing and wait for another crisis, future Presidents--
whether Republican or Democratic--will face the same choices as
President Bush: Whether to let spiraling, interconnected, too-big-to-
fail institutions, such as AIG, Citigroup, and others, collapse in a
contagion, sending the economy into a depression or step in ahead of
bankruptcy and save them with taxpayer money.
If that happens, the choice of allowing bankruptcy will mean
tremendous economic pain on Main Street America. So some Congress in
the future will similarly be faced with another TARP-like decision,
which in the fall of 2008 many in both parties believed they had no
choice but to support, including the minority leader.
Relying on bankruptcy law is not the answer. The approach by many
conservatives and those on the other side of the aisle is to simply let
them fail and let U.S. bankruptcy law--where shareholders get wiped out
and creditors take a haircut--reimpose the discipline in the financial
system that was lacking in the runup to the crisis.
For example, Peter Wallison and David Skeel have argued in the Wall
Street Journal:
The real choice before the Senate is between the FDIC and
the bankruptcy courts. It should be no contest, because
bankruptcy courts do have the experience and expertise to
handle a large-scale financial failure. This was demonstrated
most recently by the Lehman Brothers bankruptcy.
If bankruptcy was a cure in Lehman Brothers, it was one that almost
killed the patient. When former Treasury Secretary Hank Paulson decided
to let Lehman Brothers go into bankruptcy, our global credit markets
froze and creditors and counterparties panicked and headed for the
hills. Instead of imposing market discipline, it only prompted more
bailouts and almost brought down the entire financial system. It
ultimately took 18 months to close out the case on Lehman Brothers, an
eternity for financial institutions that mark to market and fund their
balance sheets on an interday basis.
Bankruptcy is an even more unattractive option when one considers
that Lehman was an investment bank, while today's megabanks operate
under the bank holding company umbrella. It is virtually impossible to
have an integrated resolution of a large and complex bank holding
company. The bank subsidiary would go into FDIC resolution, the
insurance affiliates would go into State liquidation procedures, the
securities affiliate would go into chapter 7, while other affiliates
and overall holding companies would go into chapter 11.
A plan this unwieldy is no plan at all. In fact, the only way to
truly eliminate the problem with too-big-to-fail banks is for Congress
to act. It is true that I believe we should go further than the current
bill. I would break these big banks apart, thus limiting their size and
leverage. Given the consequences of failing to do enough to prevent
another financial crisis, the safest thing to do today is for Congress
to put an end to too big to fail. If you believe these megabanks are
too big, if you reject the choice of bankruptcy that will lead to a
recession or depression, then breaking them up is the logical answer.
That is the only way that greatly diminishes the future probability of
another financial disaster. The Great Depression of the 1930s must be
avoided at all cost.
[[Page S2263]]
Two years ago, permitting Lehman Brothers to enter bankruptcy brought
about the Great Recession, the most painful economic downturn this
country has seen since the Great Depression. If we were to let other
institutions fall into bankruptcy, adopting the minority leader's
approach, the horrors our economy would have faced would make the
realities of the past 2 years pale in comparison.
I certainly don't want to rely on bankruptcy to break the boom-bust-
bailout cycle. I believe Congress should break the cycle today. We
should not follow an abdication of regulatory responsibility with an
abdication of democratic government. As representatives of the people
most hurt by the financial crisis, Congress should act decisively to
ensure that we benefit again from decades of financial stability, not
do nothing, which most assuredly would leave us to live on the
precipice of financial disaster, as the minority leader would have us
do.
We need a full and straightforward debate in the Senate about what
Congress must do. In my view, the mere existence of too-big-to-fail
institutions perpetuates a long cycle of boom, bust, bailout. Instead
of hopelessly trying to impose order and discipline in a chaotic
crisis, we need to clearly, decisively, and preemptively deal with the
problem of too big to fail now.
As Senator Levin pointed out this week, when he kicked off the
Permanent Subcommittee's hearings on its investigation of the financial
crisis, there are many eerie parallels between this crisis and the one
in the late 1920s and early 1930s. In both cases, bankers were derelict
in their duties, while drawn to disruptive and excessive speculation,
fueled in part by their compensation arrangements. Does that sound
familiar? Bankers were derelict in their duties, while drawn to
disruptive and excessive speculation, fueled in part by their
compensation arrangements.
In the 1930s, in response to these problems, we built an enduring
regulatory framework that put our entire financial system on stable
footing for decades. We simply cannot afford another financial
meltdown. The choice is clear. But it is also clear that the worst
thing we can do is to take the dangerous risk of doing nothing. To me,
the choice that is best for the American people is clear.
I yield the floor.
The PRESIDING OFFICER. The Senator from Virginia is recognized.
Mr. WARNER. Mr. President, I also rise to discuss financial reform
and, to be blunt, to try to set the record straight about some
misleading statements that have been made on this floor about both the
process and the substance of the bill that the Banking Committee
reported out recently.
Under Chairman Dodd's leadership and working with ranking minority
member Senator Shelby, I have worked hard, since coming to the Senate,
to understand the root causes of the crisis we are only now beginning
to emerge from economically but to recognize that we have to have a
robust solution in place to make sure we are never again confronted
with the type of crisis and the lack of preparation this Nation faced
back in the fall of 2008.
I also come to this body, as you know, as someone who spent an awful
lot of time around the capital markets. Quite candidly, I will put my
free market, procapitalist credentials up against anybody's in this
body. But I come to the floor as well as someone who has tried to
recognize that the financial crisis--perhaps more than any other issue
we have addressed--doesn't have a Democratic or a Republican root of
origin, nor does it have a partisan solution set. We have to recognize
that, perhaps on this piece of legislation more than ever, we have to
have a bipartisan basis to establish a long-term financial framework
for the next hundred years.
I am very proud of the fact that we have worked so far in a
bipartisan way. I have particularly appreciated, over the last year,
the partnership I have built with Senator Corker of Tennessee, where we
both recognize that while we both have backgrounds in business and both
have experience and exposure to the capital markets, there is a great
deal of complexity in trying to rewrite the financial rules in the
sense that it will be not only for this country but because the rest of
the world will follow what America does, for the whole world. So it
will require a great deal of humility and a recognition that we have
more to learn.
Because of that, Senator Corker and I, starting early in 2009, began
holding a series of seminars, in fact, where we brought in established
financial leaders and invited members of both parties to come and learn
with us as we tried to put in place rules and regulations governing the
financial system. While I have been disappointed, particularly by the
Republican leader's comments yesterday, I am not naive. I still believe
there is a path to a bipartisan bill. What we need to do is to simply
lower the rhetoric and do what is needed for the American people.
Let's put in place a robust set of rules and a robust regime of
reform that will ensure that never again will the American taxpayer
have to bail out firms that are too big to fail. While there were
differences that we had on how we approached health care reform, this
is one area where--whether it is a liberal blogger group or a tea party
convention--there is a unanimity of opinion that never again should the
taxpayers be put at risk because of the financial interconnectedness of
large firms.
Soon, the Senate will consider the bill Chairman Dodd has put
together. While there are bits and pieces that different folks will
disagree with, this is a strong bill that vastly improves regulation
and the structure of our financial markets. Let me repeat that Senator
Dodd has put together a strong bill. One part of the bill Senator
Corker and I have been particularly engaged in deals with systemic risk
in ending the notion of too big to fail. That was the subject yesterday
of some wildly inaccurate statements on this floor, which I am here to
address.
I have to admit I am deeply invested in this section, and that
investment comes in no small part because of the months of work Senator
Corker and I put into this area. Let me acknowledge at the front end
that there are parts of this section that both Senator Corker and I
will want to change and amend. Those changes and amendments we would
probably reach agreement on in perhaps 5 or 10 minutes, but the basic
structure we set up is one I believe will lead to meaningful financial
reform.
Now, let's go to what we are talking about. We recognized at the
outset that never again could we allow the financial system and the
interconnectedness of this financial system to come to the brink of
crisis and, in effect, the regulatory system and the legal system have
no recourse and rules on how we deal with an impending crisis.
One of the things we recognized at the outset was that in the past
there was very little collaboration and coordination between different
regulators. You might have a Prudential supervisor who is looking at
the depository institution and having one view of an institution; and
you might have the regulator looking at the bank holding structure and
having another view. Because these complex institutions may also have
security aspects, the SEC is over here. But there was no coordinated
place where this collaborative view, beyond the stovepipes and beyond
the silos, could all come together and recognize that while the
institution's single actions in a single sector might not pose a
systemic risk, that in toto these risks, when aggregated together, put
our financial system in jeopardy.
So what do we propose? Along with Senator Corker and experts from the
industry, we propose creating a Systemic Risk Council that would, in
effect, be the early warning system for our overall financial system to
spot these large, systematically important institutions and, in effect,
put some speed bumps in their path.
I may not even agree with some of the Members of my own side of the
aisle that we ought to go out proactively and break up these
institutions just because they are too large. Size, in and of itself,
was not the problem. It was the interconnectedness of their activities
and the fact that if you started to pull on the string of some of these
activities, the effect that had basically collapsed the whole house of
cards. It was not size alone, it was interconnectedness and recognizing
how to spot that interconnectedness at the front end, and putting some
speed bumps on these systemically large institutions that is important.
[[Page S2264]]
One of the things we found was that oftentimes the regulators did not
have current, real-time data on the extent of these transactions and
this interconnectedness. So a part of the bill that has received very
little attention is the creation of the Office of Financial Research,
which will aggregate, on a daily basis, all the status of transactions
of all these institutions and allow us to have at least the
transparency at the regulator level to know what is going on and allow
the regulators never again to say: Well, the last piece of data we had
was the last quarterly report. This information will flow up to the
Systemic Risk Council, and the Systemic Risk Council will then be able
to put in place what I call speed bumps on these systematically large
institutions.
Increase capital. One of the questions that comes back time and again
from financial experts, we need to increase the capital reserve levels
of many of these large institutions. We have to look at their liquidity
ability. In many cases the institutions that failed during the crisis
were not insolvent but there was a rush because of fear in the system
and the liquidity crisis this caused, so how do we be sure we use
liquidity in a better way?
Leverage, traditional additional financial institutions--I look at
our neighbors in Canada, about a 20-to-1 leverage ratio. We saw on some
of the off-balance sheet operations not 10- or 20-to-1 traditional
ratios, but 50- or 100-to-1 leverage ratios.
We put in place as well something that has been advocated by folks at
New York Fed--it originally comes out of the University of Chicago--a
whole new set of financial structure in these large institutions that
will convert to equity in the precursor, before a crisis takes place.
In effect, shareholders will be diluted by this contingent capital
requirement, putting again more pressure on management not to make
undue risks.
We believe these speed bumps, while they may not prevent any future
crisis, will be huge impediments to these large systemically risky
institutions taking undue risks and outrageous actions.
We have also put a new requirement in place, one that again has not
gotten a lot of review. We will literally require the management of
these large institutions to put in place their own funeral plans, their
own plans on how they will unwind their institutions through an orderly
bankruptcy process.
I believe there were large systemically important institutions in the
fall of 2008 that in effect came to the regulators and in effect said
we are so big and interconnected that we do not know how to unwind
ourselves.
Never again should we allow that to happen. We allow the regulators
to work, and in effect bless the funeral plans these systemically large
institutions will put in place.
We think we have put in place these appropriate barriers that will
restrict some of the unduly risky activities from these large
institutions, but you cannot predict and cannot foresee every crisis.
So what we need to do is set a framework on how we would address the
crisis if these speed bumps and this early warning system does not
fully function. I do not, actually, candidly, completely agree with my
colleague from Delaware. I do believe we need a strong, robust
bankruptcy process that gives predictability to investors so they know
what will happen through the normal dissolution of a firm that has made
mistakes in the marketplace. We need to ensure that bankruptcy becomes
the normal default process. Again, as I mentioned, having these large
firms write their own funeral plans, write their own bankruptcy plans
that have to be approved by the regulators, will give us guidance on
that path.
But we also have to realize when there may be a management team that
does not see the handwriting on the wall or when a firm is, even with
all of these checks, falling into the potential of its failure causing
systemic risk, we still have to have the ability to act.
Let me state very clearly, the resolution process that was put in the
Dodd bill, no rational management team would ever elect to choose
because resolution will not lead to conservatorship, resolution will
lead to receivership and extermination of the firm. The firm's common
share equity will be wiped out, the firm's management will be wiped
out--resolution will never be chosen as a preferred route. Bankruptcy
will be the preferred route.
Even in that case, we still put additional protections in place so
that no future administration, having seen the blowback from the public
on using resolution in 2008--I cannot imagine any future administration
actually wanting to use this mechanism, but to ensure, again--Senator
Corker and I spent a great deal of time on this--that we have, again,
protections so resolution is not misused, we put very strict criteria
in before it can be implemented. We require three keys, in effect, to
be turned simultaneously--in effect the nuclear option analogy of
different keys being turned before this tool could be used.
We require the Chair of the Federal Reserve, the FDIC, and the
Treasury Secretary in consultation with the President to all agree that
we have to act, to move a firm into resolution rather than going
through bankruptcy.
But that, again, is not all. Senator Corker, I think rightfully,
pointed out that we need, in case there were an overly aggressive
administration, a judicial check as well. So we put an additional
judicial check in place before resolution could be implemented--
resolution only as the last resort, only as a path that makes sure that
the parts of this systemically important firm can be transferred to
some other existing entity, not preserved. The firm will be wiped out,
but the functions that are important do not bring down the overall
financial system.
One of the most curious comments of the Republican leader yesterday
was the critique that, if you invoke resolution, the question becomes
where is the money going to come from and who is going to pay for it?
What I found very curious in the Republican leader's comments yesterday
was that we--and this was by no means set in stone--put in place a $50
billion fund that would be prefunded by the industry; not the $150
billion that was in the House bill that could rightfully create moral
hazard, but in effect a dollar amount up front. It could go down lower.
That would basically keep the lights on at these institutions until the
FDIC could go out and, in effect, borrow against the unencumbered
assets of this firm to get the real dollars in place to keep the
resolution process going in an appropriately functioning way.
Is $50 billion the right number? It may not be. Reasonable people can
disagree; $25 billion might be the right number. There might be other
paths. Senator Corker and I worked on the notion of a trust that could
be created. But what I find curious is no one in the financial sector
that we have spoken to thinks this dollar amount is a bailout. No one
in the financial sector has said this will be an adequate amount of
capital to resolve a whole crisis. The funding to resolve the whole
crisis will come from the ability we give the FDIC to borrow against
the unencumbered assets.
If there is a better way to get there, we are all for it. At least I
can say for my side, I am willing to look at any other option. But what
I find curious is, I believe if we had not put up this industry
prefunded amount, in effect a bridge until we can actually get the FDIC
process in place, we would hear criticisms, at least from some, saying
not putting up any industry prefunding would allow taxpayer exposure.
One of the things we want to make sure is that taxpayers, again, are
never, ever exposed to the kind of risk that took place in 2008.
I would also add that whatever these prefunds, trust instruments, or
even the funding that would come from borrowing against the
unencumbered assets, we need to buy a little time so it is not done in
a haphazard way so any of these funds will be ultimately recouped after
the crisis from the industry based on those institutions that
benefited, those institutions that also were part of the causation.
Again, let me stress all of these funds, whatever will be repaid--and
again whatever funds that are invested in these institutions in the
interim will not go in, as what happened in 2008, as common equity as
an effort to, in effect, prop up the systemically important firms. But
it will go in as, in effect, top in the creditor process, debtor-in-
possession financing.
[[Page S2265]]
Did we get this perfect? No, perhaps not. There are ways, again, that
we can improve. But the framework we put in place, the almost uniform
response we have received, has been we have taken a gigantic step
toward ending too big to fail in a rational, thoughtful approach.
I see my colleague, the Senator from Tennessee, has arrived on the
floor. I again compliment him for his work, for the fact both of us
said at the outset for neither of us was this religion. We just need to
get it right. If we have to ruffle a few feathers on both sides of the
aisle so that never again are the American taxpayers put in the
position they were in 2008, then so be it.
I appreciate the good work of the Senator from Tennessee on this
effort. I appreciate our working together on the preference toward
bankruptcy, on the recognition that we have to have that judicial
check, that we cannot go out and grab firms willy-nilly that are not
depository, that are systemically important. I think we have taken
giant steps forward.
I ask my colleagues from both sides of the aisle to lower the
rhetoric a bit, to recognize this can and still should be a place where
this Senate can work in a bipartisan fashion to put in place a set of
rules so we can, with the appropriate speed bumps in our financial
system for those firms that are systemically important--that we do put
in financial rules of the road for the 21st century, that we do allow
America to continue to be the financial capital of the world and the
innovation in financial products capital of the world. I think we can
still get there.
I look forward to work not only with my friend from Tennessee but
colleagues from both sides of the aisle to get it right.
I yield the floor.
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