[Congressional Record Volume 156, Number 57 (Wednesday, April 21, 2010)]
[Senate]
[Pages S2495-S2497]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]



                      Financial Regulatory Reform

  Mr. LeMIEUX. Madam President, I come to the floor of the Senate today 
to talk about the issue of financial regulatory reform, an issue that 
is consuming the good efforts and time of many of our colleagues in the 
Senate. It is an issue that is very important to the future economic 
health and viability of this country.
  As we go about our lives, even in this difficult economy, I think it 
is easy to forget how bad things were just a couple of years ago, how 
bad things were in the fall of 2008. It is important for us to remember 
the situation that we were put in, where our stock market fell 
precipitously, where our financial institutions were on the verge of 
collapse, where the Congress was forced to step in to give billions of 
dollars of taxpayer money to save the financial institutions, to avoid 
what was perceived at the time to be a situation as dire as that which 
happened in the late 1920s when the Great Depression started.
  It is important for us to remember that terrible, challenging time as 
we evaluate what we should do now to prevent that time from happening 
again. We should be looking back to the causes of that crisis in order 
to figure out the solutions we should impose today.
  There has been good work done among Members of both sides of the 
aisle. Senators Dodd, Shelby, Corker, and others on the Banking and 
Finance Committee have been working overtime to come forward with a 
piece of legislation that will help put us in a situation where we will 
no longer have companies too big to fail which could have us going back 
to the American taxpayer to bail out Wall Street to save our financial 
institutions. We should never be put in that position again, so I 
commend the work that is being done. I am hopeful we will have a 
bipartisan product.
  There are pieces of this legislation as it is currently constructed 
which give me concern; that they would cause a bailout to again be a 
situation that the Congress has to address gives me great concern. 
There is particular legislation as part of this package which would set 
up a fund of $50 billion with certain companies designated as too big 
to fail. I think that is a wrong strategy. I think, therefore, we are 
guaranteeing future bailouts. We are saying to these companies: You are 
too big to fail. The Federal Government is giving you its stamp of 
approval. We will come in and rescue you with taxpayer dollars--or 
shareholder dollars, for that case.
  I think that creates the wrong incentive. I think it promotes risky 
behavior

[[Page S2496]]

and at the same time creates an unfair playing field for those 
institutions which have played by the rules, which have had sound 
financial management. We should not forget in this debate and 
discussion that the way business is supposed to work in this country is 
you put together a venture to sell a product or a service. If you 
succeed, you have a profit. If you fail, you go out of business. The 
failures of the American economic system are in many ways just as 
important as the successes.
  Where would we be if technologies that proved to be failures were 
subsidized and preventing better technologies from coming forward? That 
doesn't make any sense for consumers. It doesn't make any sense for the 
American way of life. We need to make sure businesses can fail if they 
do not succeed.
  We have a system of bankruptcy in this country that is admired around 
the world that, in an orderly way, takes companies into its procedures 
and either reorganizes them or liquidates them. That should be the way 
the process works. We do not want to continue to support bad businesses 
with bad practices and bad ideas. We want the good businesses to 
succeed, and we certainly do not want to create a playing field where 
the businesses that run the right way are at a disadvantage. So I have 
problems with that portion of the bill.
  There are other portions of the bill with which I have trouble. 
Certainly, we should not be in a situation of more taxpayer bailouts or 
even shareholder bailouts.
  I wish to talk today about the causes of the prior crisis and what 
this bill needs to do to make sure that crisis does not happen again. 
If we go back to 2007-2008, we can see in hindsight what led to this 
financial meltdown. In a State such as mine, Florida, we have been 
particularly impacted by the meltdown that occurred because the basis 
of this meltdown was residential property and the mortgages that went 
along with that property.
  In a State such as mine, in Florida, we have been very fortunate over 
the past 30 years or so because as we have had slowdowns in our real 
estate economy--which is a main driver of the economy in Florida, 
construction of real estate--other parts of the market have been able 
to step in and succeed when real estate construction fell back. Never 
before, until this most recent crisis, was the financial market wedded 
with the real estate market.
  Let's look back at the circumstances that occurred. Sometime during 
the early 2000s, a process started whereby banks and lending 
institutions would give mortgages to people who did not have the 
ability, in all honesty, to afford the home they were purchasing. There 
was a type of loan in Florida, and I am sure in other parts of the 
country, called the Ninja loan--no income, no job. Why would any 
lending institution give you a loan if you were not creditworthy in 
order to obtain that loan.
  I had the opportunity to purchase my first home back in 1995. When I 
did, I could only put down 15 percent. My bank required me to get 
mortgage insurance in order to make it to the 20 percent deposit 
requirement. That was the way it was in this country. There was a time 
when you tried to obtain a mortgage where the bank was very vested in 
you being able to pay because they were holding the note.
  Sometime in the early 2000s, the process started whereby mortgage 
brokers and banks could sell off your mortgage into the marketplace 
because we started to securitize mortgages, make mortgages trading 
instruments. When that happened and when now the mortgage broker or the 
bank that generates a fee from the writing of the mortgage of itself 
can take that mortgage and send it off, sell it off to somebody else, 
we created a bad incentive.
  The bad incentive was, I don't care about the creditworthiness of the 
person to whom I am loaning the money because I no longer have to hold 
the mortgage. So the creation of these instruments, these securitized 
instruments to trade mortgages created that bad incentive, and all of a 
sudden mortgages were being written to people who otherwise did not 
have the credit and didn't have the likelihood of repaying them.
  What did that do? Easier money meant prices became inflated. Most 
folks in Florida and all around this country did not look at the price 
of the home they were purchasing, they looked at their monthly payment. 
Interest rates were extremely low, money was easy to get, a downpayment 
was no longer a requirement. This helped the building business, the 
home construction business to take off--more homes, more mortgages.
  The financial markets on Wall Street found that putting together 
these mortgage-backed securities, these large trading instruments with 
thousands, tens of thousands of mortgages, was very profitable for 
them. They could trade these back and forth and they, too, could 
receive a commission on the sale of these products. That made them 
money. Guess what. They were not responsible if they went under either.
  In order for all of this to work, someone had to vouch for the 
worthiness of these large mortgage-backed securities, these trading 
instruments of mortgages. Wall Street looked, as it always has looked, 
to these rating agencies such as S&P, Moody's, Fitch--and guess what. 
They came along and allegedly looked at these products and stamped them 
as being AAA, the highest level of creditworthiness, very unlikely to 
have any problems with them where the person who purchased some kind of 
instrument on them would not get paid let alone lose their investment.
  The challenge was that the rating agencies did not understand the 
mortgages that were in these products. They didn't do the due 
diligence, and we protect them by Federal law from any recourse. They 
didn't have any skin in the game either.

  So now we have the borrower with no skin in the game because they 
didn't have to put anything down on their house--they are basically 
renting. We have the bank and mortgage broker with no skin in the game 
because they don't have to hold the mortgage on their books. We have 
the financial firms with no skin in the game because they are just 
trading these large securitized instruments, and worse still they 
create what they call synthetic agreements where you do not have to 
hold any of these mortgages yourself. You are just creating sort of a 
shadow trading instrument that trades off of the same underlying 
mortgage when, in fact, it doesn't hold them. It is like me betting 
that your house will burn down without me having an interest in your 
house.
  We created this long chain of people in the marketplace, from the 
borrower to the mortgage broker bank to the financial institution to 
the rating agency, who had no skin in the game on these transactions. 
The sale of these market-backed securities, and later the credit 
default swaps which was the insurance policies against them, created 
huge fees for the financial firms.
  We did, for the first time in this history, something we had never 
done before. We put the prime asset of most Americans--their home--in 
play on Wall Street. Year after year the demand for these mortgages 
drove the excess. More and more, poorer and poorer mortgages went to 
feed the beast on Wall Street. At the end of the day, the housing 
market couldn't sustain itself, and when the mortgages started to fail, 
when people started to not be able to make their payments, when the 
increase in property prices could not increase any more because gravity 
affects everything after a while, the whole system in 2007 and then 
2008 began to fall apart, and we found out that companies such as AIG 
were all entangled in buying and selling insurance products on these 
products; that they had huge exposures, that Wall Street banks had $5, 
$10, $15 billion or more in exposure and some of the biggest 
institutions that we know from Wall Street failed--at first bought up 
by other companies and then ultimately bailed out by you, the taxpayer. 
I go through this history and explain it in the best way I know how. It 
is a very complicated topic, because what we do in this reform bill has 
to address the skin-in-the-game problem. So to my friends, Senator 
Dodd, Senator Shelby, Senator Corker, Senator Warner, and others, who 
are in the midst of negotiating the bill that will come to this floor, 
I have made three suggestions as to what we need to do to make sure we 
do not replicate this problem again.

[[Page S2497]]

  First, these rating agencies, which are captive to the investment 
banks whose products they rate, can no longer be held harmless to not 
do the due diligence required and stamp AAA on products they do not 
investigate and do not understand. But for these rating agencies, this 
crisis probably would not have happened. But for them, but for the 
imprimatur of their AAA stamp, people would not have slept well at 
night buying a product they did not understand. It is like Consumer 
Reports. Consumer Reports says, this is a great car. It is safe. You as 
a consumer do not understand the modern workings of a car with all of 
its computer technology, but you buy Consumer Reports, and you read it. 
It tells you this is the safest car in America, so you feel safe 
putting your wife and your kids in that car.
  But you did not know under this circumstance that the very rating 
agencies that were rating these products, one, were not doing any due 
diligence, and, two, were being paid by the investment banks whose 
products they were rating. That has got to change.
  Suggestion No. 2. In terms of residential mortgage underwriting, if a 
broker or bank is going to write some exotic-type mortgage where there 
is little to nothing down, then they should be required to maintain a 
portion of those mortgages on their books. Let them bear the risk. Do 
not let the bank shift it off so it can become securitized in the 
marketplace, entangle all of our financial institutions, and put us, 
the taxpayer, at risk. If we make those banks hold some of these 
nontraditional mortgages, I guarantee you they will do a better job of 
making sure the people they are lending money to are good creditworthy 
investments for them.
  The third suggestion is this: The issuers of securitization, 
including these synthetic--which basically means manufactured, not 
real--collateralized debt obligations also should be required to retain 
a substantial stake of the instruments they market. They have to have 
skin in the game as well, so that if these instruments fail, they are 
going to lose money.
  We have got to understand, not only in this discussion but throughout 
the problems we address, the incentives we are creating. We cannot have 
a financial market system whereby there is no exposure to me in any 
part of the equation, because that is going to encourage bad behavior. 
It is the same reason why we got it wrong on health care reform. 
Because as long as we have third-party payers, Medicare and Medicaid 
insurance companies, we, the consumers, have little interest in the 
cost we are paying. Therefore, costs do not go down.
  It is the same brewing problem we are going to have when a recent 
statistic says that 47 percent of Americans do not pay taxes. If 47 
percent of Americans do not pay taxes, do they actually care if the 
U.S. Government does a good job of spending money effectively and 
efficiently? The incentive is for them not to care, because it is not 
their money.
  We have got to address this issue today in the financial markets, and 
tomorrow in all of the legislation we pass.
  Americans, banks, consumers, in all forms, whether we are buying 
health care services or financial products, whether we are buying a 
home or trading on Wall Street, we have to have skin in the game, or we 
create bad incentives that harm our country.
  With that, I conclude my remarks and suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The bill clerk proceeded to call the roll.
  Mr. BROWN of Ohio. I ask unanimous consent that the order for the 
quorum call be rescinded.
  The ACTING PRESIDENT pro tempore. Without objection, it is so 
ordered.
  Mr. BROWN of Ohio. Mr. President, I ask unanimous consent to speak 
for up to 5 minutes.
  The ACTING PRESIDENT pro tempore. Without objection, it is so 
ordered.