[Congressional Record Volume 156, Number 58 (Thursday, April 22, 2010)]
[Senate]
[Pages S2574-S2580]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
FINANCIAL REGULATORY REFORM
Mr. SESSIONS. Madam President, we are talking about financial reform.
There is a lot of attention and a lot of the Members of the Senate are
trying to keep up with it and trying to make sure we create a reform
package that effectively deals with corporations that have so
mismanaged their business that they need to be dissolved or broken up
or liquidated, as is normally the case when a company in America cannot
pay its bills.
This happens every day for smaller companies. It becomes a bit more
complicated, sometimes a great deal more complicated, when the
corporations get bigger and bigger and bigger. The way our corporations
are normally dissolved, if they are financially insolvent and cannot
operate, has always been bankruptcy court.
There are bankruptcy judges all over America. It is a Federal court
system. Bankruptcy is referred to in the U.S. Constitution. It has
worked very well. I guess what I am concerned about is, some of the
provisions that are in the proposed legislation that is floating about
would alter that traditional idea in ways that may be unwise.
Senator Leahy, the chairman of the Judiciary Committee, I am the
ranking Republican on that committee, and I have talked about this a
little bit. It is getting to a point where we need to figure out what
is happening here. The matter is highlighted by a letter from the
Judicial Conference of the United States--Mr. James Duff, the Presiding
Secretary, of the Judicial Conference of the United States. Chairman
Leahy asked them their opinions on some of the proposals for
dissolution of companies, the orderly liquidation of companies.
The Judicial Conference responded in a letter that was received by
Senator Leahy, and I do believe it raises important questions. I truly
do. I am a person who spent a lot of time practicing law, both as U.S.
attorney and in private practice in Federal court, and have some
appreciation for how bankruptcy courts operate. I would say, we ought
to pay attention to what the Judicial Conference says to us. It is a
kind of correspondence they take seriously. They do not lightly send
off letters to the Senate. This was in response to a question. So this
is what Mr. Duff replies on behalf of the Judicial Conference, in reply
to Senator Leahy:
As you noted, Title II would create an ``Orderly
Liquidation Authority Panel'' within the Bankruptcy Court for
the District of Delaware for the limited purpose of ruling on
petitions from the Secretary of the Treasury for
authorization to appoint the Federal Deposit Insurance
Corporation (FDIC) as the receiver for a failed financial
firm.
Then it goes on to say:
This is a substantial change to the bankruptcy law because
it would create a new structure within the bankruptcy courts
and remove a class of cases from the jurisdiction of the
Bankruptcy Code. The legislation, by assigning to the FDIC
the responsibility for resolving the affairs of an insolvent
firm, appears to provide a substitute for a bankruptcy
proceeding.
You see, when people loan money to a corporation, people buy stock in
a
[[Page S2575]]
corporation, they buy bonds of a corporation or otherwise loan them
money, they have an expectation that if that company fails to prosper
and pay what they owe, that company at least will be hauled into
bankruptcy court and they will have an opportunity to present their
claims and to receive whatever fair proportion of the money that is
still left in the company as their payment.
It may be 10 cents on a dollar, it may be 90 cents on a dollar or
whatever you get. They understand that bankruptcy judges have the
authority to try to allow the company to continue to operate, to stay
or stop people from filing lawsuits against the company and collecting
debts, to allow the company a while to see if they cannot pay off more
debtors by continuing to operate than shutting them down.
But if they see the company is so badly in financial crisis that it
is going to collapse anyway, they come in and shut it down before they
can rip off more people. So that is what bankruptcy courts do every
day. So this letter indicates that by assigning the FDIC responsibility
for resolving these affairs, it provides a substitute for bankruptcy,
which is denying the lawful expectations of people who loan money to or
bought stock in these corporations.
They go on to say:
We note, however, that the legislation will result in the
transition of at least some bankruptcy cases to FDIC
receivership in situations where a firm is already in
bankruptcy, either voluntarily or involuntarily.
In other words, it appears that legislation would allow a case to be
taken out of bankruptcy that was already in the bankruptcy court.
It goes on to say:
The legislation does not envision objection, participation,
or input from the bankruptcy creditors (whose rights will be
affected) in the course of appointing the FDIC as receiver.
Indeed, the legislation deals in a sealed manner; [secret
manner, apparently] only the Secretary and the affected
financial firm would be noticed and given the opportunity of
a hearing.
That will have major impacts on a stockholder or bondholder or a
creditor of a corporation. The FDIC is going to meet with this big
company, this big bank, and work out a deal and not even tell the
people who loaned the corporation money in good faith and have certain
legal rights, at least they always had previously. These rights,
somehow, will be extinguished or cut off.
It goes on to say:
The financial position of affected creditors may have been
changed within the context of the firm's bankruptcy case in
such a way that the creditors' rights might have changed
dramatically. Any resulting due process challenges would
impose significant burdens on the courts to resolve novel
issues for which the bill provides no guidance.
They go on to say:
In addition, we note that petitions under this title
involving financial firms would be filed in a single judicial
district. The Judicial Conference favors distribution of
cases to ensure that court facilities are readily accessible
to litigants and other participants in the judicial process.
Under the current proposal all of these cases are going to be tried
in Delaware. I do not know if we have enough judges in Delaware.
They go on to say this:
With respect to the limited review [that means appellate]
to be conducted by the panel created in section 202, [of the
proposed legislation] we note that the authority may exceed
what is constitutionally permitted to a non-Article III
entity.
What does that mean? That means some of these powers are judicial
powers given only to Federal district courts presided over by
senatorially confirmed, presidentially-appointed, lifetime Federal
judges. We can't just give them off to somebody else to decide. It is
just not constitutional. We don't have the powers in the Congress, or
the President doesn't have the powers to take over judicial roles.
They continue:
A previous statute was held unconstitutional because it
conferred on the bankruptcy courts the authority to decide
matters reserved for Article III courts.
It goes on to talk about that.
Let me tell my colleagues what CEOs don't like. Do we want to be
tough on CEOs? I will give some suggestions.
If they can't run their companies and they can't pay their
bondholders, can't pay their debtors, their stock has become worthless.
People invested in their companies believing they were legitimate,
believing the representations of their financial condition, and it
turned out to be false. They do not want to be in a court where they
raise their hands and have to give testimony under oath. They don't
want to be in that position.
The way the law has been thought of and is worked out to handle these
cases is to have a Federal bankruptcy judge preside over this process.
There are bankruptcy rules about what the judge can and cannot do. Each
entity that has an interest in the matter can have lawyers. The
stockholders can have lawyers. The bondholders can have lawyers. The
creditors can have lawyers. The workers can have lawyers. The employees
can have lawyers. The guys have to come in under oath. They have to
bring their financial statements. If they lie, they go to jail for
perjury. This is a powerful thing. A lot of these big wheels don't want
to subject themselves to it. I would say, if we want to be tough on
these companies, don't create some FDIC buddy group that has been
supervising them and sees their role as trying to work with them. Have
a real judge.
We can create a system where we select experienced judges, create
some special procedures for larger bankruptcy cases. We should consider
that.
My one comment before I wrap up is, we should listen to the Judicial
Conference and recognize there is a danger to the rule of law to
legitimate expectations of creditors and stockholders by this new
change, this unexpected change in the law. We should allow classical
procedures to work. If we need to improve them and make some special
provisions for dissolution of corporations to help bankruptcy judges do
the job better, I would certainly favor that. That would allow us to
function in a lawful way, a principled way, and not allow people to
meet in private and secret, as we have seen happened recently, and
dissolve their cases in a matter that is not open and free to the
entire public, as would happen in bankruptcy court.
I ask unanimous consent to have printed in the Record the letter from
the Judicial Conference.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Judicial Conference
of the United States,
Washington, DC, April 12, 2010.
Hon. Patrick J. Leahy,
Chairman, Committee on the Judiciary, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: I am writing in response to your letter
of March 25, 2010, seeking the views of the Judiciary with
regard to provisions relating to bankruptcy that are
contained in the financial regulation bill recently approved
by the Senate Committee on Banking, Housing, and Urban
Affairs. We appreciate your soliciting the views of the
courts on this matter. You identified several of the issues
that are of concern to the courts, and I will address each of
those.
As you noted, Title II would create an ``Orderly
Liquidation Authority Panel'' within the Bankruptcy Court for
the District of Delaware for the limited purpose of ruling on
petitions from the Secretary of the Treasury for
authorization to appoint the Federal Deposit Insurance
Corporation (FDIC) as the receiver for a failing financial
firm. This is a substantial change to bankruptcy law because
it would create a new structure within the bankruptcy courts
and remove a class of cases from the jurisdiction of the
Bankruptcy Code. The legislation, by assigning to the FDIC
the responsibility for resolving the affairs of an insolvent
firm, appears to provide a substitute for a bankruptcy
proceeding. The Judicial Conference has not adopted a
position with regard to the removal from bankruptcy court
jurisdiction of the class of financial firms identified in
this legislation.
We note, however, that the legislation will result in the
transition of at least some bankruptcy cases to FDIC
receivership in situations where a firm is already in
bankruptcy, either voluntarily or involuntarily. Section
203(c)(4)(A) provides that a pending bankruptcy case would be
evidence of a firm's financial status for purposes of
triggering the Treasury Secretary's authority to seek to
appoint the FDIC as receiver. The bill does not specify how
the transition from a bankruptcy proceeding to an
administrative proceeding would be effected. Further, the
bill does not specify the effect of the transfer on prior
rulings of the court. For example, would any stays or other
rulings continue in effect or be dissolved upon the transfer
to the FDIC? This could be especially problematic if
creditors have changed position based upon rulings in
the course of the bankruptcy proceeding. The legislation
does not envision objection, participation, or input from
the bankruptcy creditors (whose rights will be affected)
in the course of appointing the FDIC as receiver. Indeed,
the legislation proposes to deal with this petition in a
sealed manner; only the Secretary
[[Page S2576]]
and the affected financial firm would be noticed and given
the opportunity of a hearing. The financial position of
affected creditors may have been changed within the
context of the firm's bankruptcy case in such a way that
the creditors' rights might have changed dramatically. Any
resulting due process challenges would impose a
significant burden on the courts to resolve novel issues,
for which the bill provides no guidance.
In addition, we note that petitions under this title
involving financial firms would be filed in a single judicial
district. The Judicial Conference favors distribution of
cases to ensure that court facilities are reasonably
accessible to litigants and other participants in the
judicial process. Although we are aware that a large number
of companies are incorporated in Delaware, it is not clear
that Delaware would necessarily be a convenient location for
many of the affected companies, nor indeed the proper venue
for that petition, absent changes to title 28, United States
Code.
We also note that the legislation requires the designation
of more bankruptcy judges for the panel than are permanently
authorized for Delaware under existing law. The District of
Delaware is authorized one permanent bankruptcy judge and
five temporary judgeships. If Congress were to choose not to
extend these judgeships or convert them to permanent status,
it would be impossible to implement section 202's requirement
to appoint three judges to the Orderly Liquidation Authority
Panel from the District of Delaware.
With respect to the limited review to be conducted by the
panel created in section 202, we note that the authority may
exceed what is constitutionally permitted to a non-Article
III entity. A previous statute was held unconstitutional
because it conferred on the bankruptcy courts the authority
to decide matters that are reserved for Article III courts.
Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458
U.S. 50 (1982). The review of the Secretary's decision in
this instance appears to resemble more closely appeals of
agency decisions under the Administrative Procedure Act than
a bankruptcy petition and, therefore, appears more
appropriate for an Article III court. Moreover, the
affirmation of the Secretary's petition to designate the
Federal Deposit Insurance Corporation as a receiver
effectively removes a case from the application of bankruptcy
law. Accordingly, it seems anomalous to subject this petition
to review by a bankruptcy court.
Your letter particularly questioned whether the time limit
of 24 hours for a decision by the panel would be sufficient
or realistic. The Judicial Conference has consistently
opposed the imposition of time limits for judicial decisions
beyond those already set forth in the Speedy Trial Act or
section 1657 of title 28. We appreciate that a matter
affecting the operation of the national economy warrants a
prompt resolution. We note that the courts, recognizing this
concern, have already demonstrated an ability to move swiftly
in resolving bankruptcy petitions involving large
corporations with broad impact on the national economy. In
each of these instances, the initial determinations were
made by a single judge. The resulting appeals in some
cases were also adjudicated on an expedited basis without
a statutory requirement to do so.
Requiring a panel of three judges to assemble, conduct a
hearing, and craft a written opinion within 24 hours presents
practical difficulties that may be insurmountable. Although
Sec. 202(b)(1)(A)(iii) could be read to limit the court's
review to the question of whether the covered financial
company is in default or danger of default, the Secretary is
required to submit to the panel ``all relevant findings and
the recommendation made pursuant to section 203(a),'' which
specifies consideration of multiple factors (repeated in
subsection (b) of that section as the basis for the
Secretary's petition). Even with the full cooperation of the
financial firm affected by the proceeding, which is not a
predicate for the consideration of a petition, it would
appear difficult to hear and consider the evidence and
prepare a well-reasoned opinion addressing each reason
supporting the decision of the panel within 24 hours. Even
assuming that factors other than the solvency of the firm
would be excluded from this special panel's review, it may
well be that the subject financial firm or one of its
creditors would seek judicial review of one of the prior
administrative evaluations of the statutory factors, either
in the course of the hearing conducted by the Orderly
Liquidation Authority Panel or in another court. Such
challenges would also make it difficult to meet the proposed
timeline. It is possible that the facts of a particular case
may be so clear that a decision could be rendered within 24
hours, but the statutory requirement of such speed seems
inconsistent with the thoughtful deliberation that would be
appropriate for a decision of such great significance.
Although it is to be hoped that only a small number of
large financial firms would ever become subject to this
legislation, each of the petitions would involve large
volumes of evidence regarding complex financial arrangements.
Thus, the legislation could result in a large proportion of
the judicial resources of a single bankruptcy court being
devoted exclusively to review of the Secretary's petitions.
Further, the bill provides that the Secretary may re-file a
petition to correct deficiencies in response to an initial
decision, thus extending the time in which the court's
resources would be diverted from other judicial business. The
District of Delaware is one of the busiest bankruptcy courts
in the nation; to draw the court's limited judicial resources
away from the fair and timely adjudication of those
bankruptcy cases to process petitions under this bill would
be inequitable and unjust to the debtors and creditors in
those pending cases. If, as seems possible given recent
economic developments, the failure of one firm weakens other
firms in the financial services sector, the demand could
exceed the court's resources. This consideration alone
counsels against the assignment of all such cases to a single
court.
Finally, we note that both the Administrative Office of the
United States Courts (AO) and the Government Accountability
Office (GAO) are directed to conduct studies which will
evaluate: (i) the effectiveness of Chapter 7 or Chapter 11 of
the Bankruptcy Code in facilitating the orderly liquidation
or reorganization of financial companies; (ii) ways to
maximize the efficiency and effectiveness of the Panel; and
(iii) ways to make the orderly liquidation process under the
Bankruptcy Code for financial companies more effective.
With respect to those firms that are to be treated under
Chapters 7 and 11 of the Bankruptcy Code, the vagueness of,
and/or lack of criteria for determining ``effectiveness''
will hamper the ability of the AO and GAO to produce
meaningful reports. Some would regard rapid payment of even
small portions of claims as an effective resolution, while
others would prefer a delayed payment of a greater share of a
claim. There would also be significant disagreements between
creditors holding different types of secured or unsecured
claims as to the most effective resolution of an insolvent
firm. Some would argue that effectiveness should be measured
by the impact of the resolution on the larger economy,
regardless of the impact on the creditors of the particular
firm. Without clearer guidance for the studies, both agencies
will be required repeatedly to expend resources on the
development of reports that may not provide the information
Congress is seeking.
Thank you for seeking the views of the Judiciary regarding
this legislation and for your consideration of them. If we
may be of assistance to you in this or any other matter,
please do not hesitate to contact our Office of Legislative
Affairs at (202) 502-1700.
Sincerely,
James C. Duff,
Secretary.
Mr. SESSIONS. I yield the floor.
The PRESIDING OFFICER. The Senator from Washington.
Mrs. MURRAY. As we prepare to consider legislation that includes some
of the strongest reforms of Wall Street ever, it is important that we
not lose sight of exactly what is on the line for the American people;
that we will not allow complicated financial products and terminology
to distract from the fact that this is a debate about fairness, about
family finances, and protecting against another economic collapse; that
we remember for Wall Street lobbyists, this may be complex, but for the
American people it is pretty simple. For them this is a debate about
whether they can walk into a bank and sign up for a mortgage or apply
for a credit card or start a retirement plan.
Are the rules on their side when they do that, or are they with the
big banks on Wall Street? For far too long, the financial rules of the
road have favored big banks and credit card companies and Wall Street.
For far too long they have abused those rules. Whether it was gambling
with the money in our pension funds or making bets they could not cover
or peddling mortgages to people they knew could never pay, Wall Street
made expensive choices that came at the expense of working families.
Wall Street used its ``anything goes'' rules to create a situation
where everybody else paid, and Wall Street created a system that put
their own short-term profits before the long-term interests of this
country.
The simple truth is, it is time to end this system that puts Wall
Street before Main Street. It is time to put families back in control
of their own finances. It is time to focus on making sure the rules
protect those sitting around the dinner table, not those sitting around
the board room table. To do that, we have to pass strong Wall Street
reform that cannot be ignored. Those reforms, I believe, have to
include three core principles: a strong, independent consumer
protection agency; an end to taxpayer bailouts; and tools to ensure
that Americans have the financial know-how that empowers them to make
smart choices about their own finances and helps them avoid making the
same poor decisions that helped create this crisis.
First and foremost, Wall Street needs a watchdog. Right now what we
have is a patchwork of Federal agencies, none of which are tasked with
focusing solely on consumer protection. What we
[[Page S2577]]
have is confusion and duplication and an abdication of responsibility.
What we have, quite simply, is not working. What we need is a single,
strong, independent agency, a cop on the beat whose sole function is to
protect consumers, a cop on the street who will expose big bank ripoffs
and end unfair fees and curb out-of-control credit card and mortgage
rates. We need a cop on the street that ensures when one makes
important financial decisions, the terms are clear. The risks are laid
out on the table, and the banks and other financial companies offering
them are being upfront. What we need is one agency with one mission
looking out for one group of people, and that is American families.
Secondly, Wall Street reform must spell an end to the taxpayer-
financed bailout. There is nothing that makes me or my constituents in
Washington State angrier than the fact that Wall Street ran up this
huge bill, and we had to pick up the tab. Wall Street reform has to end
that once and for all. It has to be a death sentence for banks that
engage in reckless practices, and it must make them pay for their
funeral arrangements, if they do.
Third, reform has to address the fact that Wall Street is not alone
in deserving blame for this crisis. Therefore, it must not be the only
target of reform. We cannot ignore the fact that millions of Americans
walked into sometimes predatory home loan agencies all across the
country, unprepared to make big, important financial decisions. We have
to acknowledge that too many Americans put too little thought into
signing on the dotted line. Those bad decisions had a huge impact. That
is why I have been working so hard to pass a bill I introduced called
the Financial and Economic Literacy Improvement Act.
That legislation would change the way we approach educating Americans
about managing their own finances and making good decisions about
housing and employment and retirement. We add a fourth R to the basics
of reading and writing and arithmetic. That is resource management. It
gives Americans, young and old, the basic financial skills to heed
warnings in the fine print they are signing and avoid mounting debt. I
believe if we are going to avoid many of the mistakes that led to this
crisis, we need a similar component in the bill we work on next week.
We all know the old adage that sunlight is the best disinfectant.
With all of the reforms I have been talking about today, we have the
potential to bring a whole lot of sunlight to Wall Street. But as we
have seen in the lead up to this crisis and with Wall Street's response
now to our reform effort so far, they don't like to do their work in
the sunlight. They like to do it in back rooms. I have heard they have
had some company recently in those back rooms. I have heard that over
the last several days, some of our colleagues on the other side have
been huddling with Wall Street lobbyists to figure out how they can
kill this bill that is coming to us. They want to figure out how they
can preserve the status quo and what they have today. They want to talk
their way out of change. They have been calling out to special
interests in Washington and bankers back on Wall Street and big money
donors. In fact, just about everyone has been invited to those meetings
except, of course, the American people. That is because the vast
majority of Americans, including the hard-working families in my State
who were hurt by this crisis through no fault of their own, want to see
the strong Wall Street reforms I have talked about today passed. They
want to hold Wall Street accountable for years of irresponsibility and
taxpayer-funded bailouts. And more than anything, they want to make
sure we never go through this again.
There is still a widely held view on Wall Street--and with too many
still in DC--that the voices of the people can somehow be drowned out
with big money and even bigger fabrications. Wall Street still thinks
they can get away with highway robbery because, for all too long, they
have. They think they can get away with telling the American people
that more regulation is bad, when the absence of regulation is largely
what got us into this mess.
They think people will be satisfied with watered-down rules that Wall
Street can then simply step aside or go around or ignore. They think
they can pull a fast one on Main Street. They are flatout wrong. I know
that because I grew up literally on Main Street in Bothell, WA, working
for my dad's 5-and-10-cent store with my six brothers and sisters.
I know they are wrong because Main Street is where I got my values,
values such as the product of your work is what you can actually show
in the till at the end of the day; that if that money was short, you
dealt with the consequences. If it was more than you expected, you knew
that more difficult days could lie ahead; values like a good
transaction was one that was good for your business and for your
customer; that personal responsibility meant owning up to your mistakes
and making them right; that one business relied on all the others on
the same street; and, importantly, that our customers were not prey and
businesses were not predators, and an honest business was a successful
one.
Those are the values I learned on Main Street growing up. Believe me,
those same values are still strong for our country today. They exist in
small towns such as the one in which I grew up and in big cities in
every one of our States.
Next week, when we bring a strong Wall Street reform bill to the
floor, everyone in the Senate is going to hear from people who still
hold values like that very dear. I am sure they will tell us in no
uncertain terms: It is time to end Wall Street's excesses. It is time
to bring some sanity back into the system, to protect our consumers, to
end bailouts and back-room deals, to restore personal responsibility
and bring back accountability.
I am hopeful we will all listen because there certainly is a lot on
the line for the American people. They deserve all of our support.
I yield the floor.
The PRESIDING OFFICER (Mr. Burris). The Senator from North Dakota is
recognized.
Mr. DORGAN. Mr. President, I ask unanimous consent to speak in
morning business for 20 minutes.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. DORGAN. Mr. President, my colleague from the State of Washington
just talked about Wall Street reform. It is such an important subject.
It is the case that all of us who have lived through these last several
years will understand when the history books record these years that we
have lived and existed and struggled through a period that is the
deepest recession since the Great Depression.
Mr. President, 15 million to 17 million people wake in the morning,
now as I speak, jobless, get dressed, and go out to look for a job.
Most do not find it. It has been a tough time. Yet those who read the
newspaper and understand the difficulty of those who are losing homes,
losing jobs, losing hope, also read the business pages and see that one
of the heads of the largest investment banks last year was paid $25
million in salary. One of the folks who was one of the largest income
earners in this country earned $3 billion running a hedge fund. That is
$3 billion, by the way. That is almost $10 million a day.
So they see record profits from the biggest financial interests in
this country--many of whom pursued policies that steered us right into
the ditch. They wonder what is the deal here. The people at the top,
the ones who caused most of the problem--the ones many of which would
have gone broke had the Federal Government not come in with some
funding to try to provide some stability--they are now at record
profits, paying record bonuses. The folks at the bottom are out
struggling to find a job because they have been laid off.
So it always comes back to something I have described often and it
seems to never change and it is even more aggressive now. Bob Wills and
His Texas Playboys, in the 1930s, had a verse in one of their songs:
``The little bee sucks the blossom, but the big bee gets the honey.''
The little guy picks the cotton, but the big guy gets the money.
So it is and so has it always been but even more aggressive now. The
same newspaper talks about the trouble given the workers of this
country and the families of this country by the big financial
institutions having steered this country into the deepest recession
since the Great Depression; even as in
[[Page S2578]]
the same newspaper they read about the largess, the record profits and
record bonuses.
So the question is, What do we do about that? We are going to bring a
financial reform bill, a Wall Street reform bill, to the floor of the
Senate. I wish to talk a bit about that and say we need to review, just
for a moment, the unbelievable cesspool of greed that existed--not
everywhere but in some places--and at levels that steered this country
into very dangerous territory.
Yes, new things, new instruments we had never heard of before: credit
default swaps, naked credit default swaps. Some might say: What is a
credit default swap? And, for God's sake, what is a naked credit
default swap? How do you get a credit default swap naked? Well, let me
take you not just to default swaps, let me take you back about a year
and a half ago to a time when the futures market in oil was like a
Roman candle and went up to $147 a barrel--$147 for a barrel of oil in
day trading--just like a Roman candle and then went back down.
That market was broken. A bunch of speculators--they did not want to
buy any oil. They have never hauled around a can or a case or a barrel
of oil. They just wanted to speculate on the futures market. So they
broke that market, ran it way up. Well, that is one symptom of
financial systems that are broken and do not work.
Credit default swaps. We have been hearing recently about the SEC
decision to file a criminal complaint against a large investment bank,
Goldman Sachs. What we have discovered with the interworkings of this
scheme that was created is, I think, based on my knowledge of it, that
the development of--excuse me, it was a civil case by the SEC, not a
criminal case, and that is an important distinction, but, nonetheless,
it is a civil complaint against Goldman Sachs. My understanding is,
there was created some billions of dollars of naked credit default
swaps that had no insurable interest in anything of value. These were
people who were betting on what might happen to the price of bonds.
Bonds selected by a person whom I have spoken about on the floor of
the Senate previously over the last couple years, a man named John
Paulson, who, in 2007, was the highest income earner on Wall Street--he
earned $3.6 billion. That is $300 million a month or $10 million a day.
How would you like to come home and your spouse says: How are you
doing? How are we doing? And he says: Well, we are doing pretty good,
$10 million every day.
So my understanding of the SEC complaint is they set up a system
where Mr. Paulson could short what I believe were naked credit default
swaps and others took the long position and you had rating agencies
rating these things apparently with high ratings, until they discovered
what they truly were and then the ratings collapsed. Mr. Paulson made a
bunch of money and everybody else got duped out of their money.
Well, that is a short description and probably not even a very good
description, but it is close enough to understand what has been going
on in this country: betting--not investing--betting on credit default
swaps, naked swaps that have no insurable interest in anything, no
value on either side. You just put together a contract and say: I am
going to bet you this issue happens, this stock goes up, this bond goes
down. Let's have a wager. Well, you do not have to own anything. Let's
just have a bet.
That is not an investment; that is a flatout wager. We have places
where you should do that. If you want to do that, you can go to Las
Vegas, and they say what goes on there stays there. Who knows. You can
go to Atlantic City. We have places where you can do that. But those
places are not places where you do activities that are equivalent to
what we now see having been done in the middle of some of the
investment banks and financial institutions in this country.
I have spoken many times on the floor about this, and I am going to
repeat some things I have said just because, as I talk about what needs
to be done in a couple cases on this reform bill, we need to understand
what happened and how unbelievably ignorant it was.
The subprime loan scandal--everybody was involved in that. When I say
``everybody,'' I am talking about all the biggest financial
institutions because they were securitizing mortgages and selling them
upstream to hedge funds, investment banks, and you name it--all making
huge bonus profits, all kinds of fees, and starting with the broker who
could place big mortgages for people who could not afford it; and right
on up the line, they were all making big money.
So here is an advertisement we all listened to in the last decade
during this unbelievable carnival of greed. This was the biggest
mortgage company in our country, the biggest mortgage bank in America--
now bankrupt, of course, now gone--although the head of this company
left with a couple hundred million dollars, I am told. So he got out
pretty well-heeled, now under investigation. But here was their ad on
television and radio.
It says: Do you have less than perfect credit? Do you have late
mortgage payments? Have you been denied by other lenders? Call us. We
want to lend you money. Unbelievable. The biggest mortgage bank in the
country says: Are you a bad credit risk? Hey, call us. We have money
for you.
Zoom Credit, another mortgage company. Here is their advertisement:
Credit approval is just seconds away. Get on the fast track. With the
speed of light, Zoom Credit will preapprove you for a car loan, a home
loan, a credit card. Even if your credit is in the tank, Zoom Credit is
like money in the bank. Zoom Credit specializes in credit repair and
debt consolidation too. Bankruptcy, slow credit, no credit--who cares?
Come to us. We want to give you a loan.
Ignorant? Sounds like it to me. Greedy? It appears to me it is.
Millennia Mortgage: 12 months with no mortgage payment. That is
right. We will give you the money to make your first 12 payments if you
call in the next 7 days. We pay it for you. Our loan program may reduce
your current monthly payment by 50 percent, allow you no payments for
the first 12 months. Let us give you a loan. You do not have to make
any payments for a year.
Sound strange? It does to me. How about the mortgages that say: Do
you know what, you don't want to pay any principle? No problem. You
don't want to pay any interest? No problem. You pay nothing--no
interest, no principle. And, by the way, if you don't want us to check
on your income--that is called a no-documentation loan--we will give
you a no-doc loan with no interest payments and no principle payments.
We will put it all on the back side. Do you know what you should do? Go
ahead and do that because you can flip that house. If you can't make
the payments a couple years later, when we are going to reset your
interest rate at 12 percent--or whatever ridiculous amount they were
going to do--you can sell that house and make the money because the
price of that house is always going to go up.
So it went all across this country, right at the bottom, with teaser
rates. The result was, a whole lot of folks were talked into mortgages
they could not afford. The loan folks, the brokers, who were putting
out these mortgages, were making a lot of money. They were securitizing
them, selling them up. There were fees being paid to everyone, and
everybody was making a lot of money--very fat and happy.
By the way, it has not changed. If you go to the Internet, you can
find on the Internet, today, EasyLoanForYou: Get the loan you seek.
Fast. Hassle-free. Our lenders will preapprove your loan regardless of
your credit score or history.
Go to the Internet. See if it has stopped.
Here is an Internet solicitation: Bad Credit Personal Loans. How
about that? Is that unbelievable? I wonder what college they teach this
in. You start a company called Bad Credit Personal Loans. It says:
Previous bankruptcy? No credit? Previous bad credit? Recent job loss?
Recent divorce? Need a larger loan amount? Well, click here now. For
gosh sake, take advantage of what we are offering. If you are a bad
person, we want to give you money.
Speedy Bad Credit Loans--same thing. Bad credit? No problem. No
credit? No problem. Bankruptcy? No problem. Come to us.
Well, is it a surprise that a lot of greedy people and a lot of the
biggest
[[Page S2579]]
institutions in this country whose names you recognize instantly loaded
up on this nonsense? They loaded up--loaded to the gills. Why? Because
they were all making massive amounts of money by buying and selling and
trading these securities. Yes, not just the securities, not just
securitization of loans but credit default swaps and CDOs and you name
it. It was a carnival and a field day.
So that has all happened in the last 10 years--and even much worse.
But let me end it there to say, we are now talking about: What do we do
about all this? This kind of behavior steered the country right into
the ditch. We lost $15 trillion when the economy hit rock bottom.
Something like $12 trillion has been lent, spent or pledged by the
Federal Government to prop up private companies--many of them that were
doing exactly as I have just described. This has been a very difficult
time. So the question now is, What do we do about this? Do we just
decide, do you know what, it is OK? We are not going to do anything
about this?
I just mentioned naked credit default swaps. I do not know the number
in this country, but in England they estimate, of their credit default
swaps, 80 percent of them are so-called naked; that is, they have no
insurable interest on any side of the transaction. It is simply making
a wager. When you have banks that make wagers just as if they are using
a roulette wheel or a blackjack table or a craps table, they just as
well ought to put that in the lobby, except my feeling is, it is
fundamentally antithetical to everything we know about sound,
thoughtful finance in this country to have allowed this to have
happened--we did allow it--and now to continue to allow it to happen.
So I wish to take you back 11 years to the floor of the Senate
because I have been through this before in something called financial
modernization. It was 11 years ago now, actually: financial
modernization. This is not the first time we have had substantial
legislation on the floor of the Senate to address the issue of finances
and the financial system. We had something called financial
modernization on the floor of the Senate, and it was the piece of
legislation--big piece of legislation--that pooled everything together.
It said you can create one, big, huge holding company and bring
everything in together--the investment banks, the commercial banks,
FDIC-insured banks, the securities trading--bring them all together as
one, big, happy family, one big pyramid. It will be just fine because
it will make us more competitive with the European financial
institutions, and it is going to be great. I said I think that is nuts.
What are we doing?
I have some quotes from 1999 of things I said on the floor of this
Senate. On November 4, I said:
Fusing together the idea of banking, which requires not
just safety and soundness to be successful but the perception
of safety and soundness, with other inherently risky
speculative activity is, in my judgment, unwise.
I said:
We will, in 10 years time, look back and say: We should not
have done that--repeal Glass-Steagall--because we forgot the
lessons of the past.
I said during debate in 1999:
This bill will in my judgment raise the likelihood of
future massive taxpayer bailouts. It will fuel the
consolidation and mergers in the banking and financial
services industry at the expense of customers, farm
businesses, and others.
I said:
We have another doctrine at the Federal Reserve Board. It
is called too big to fail. Remember that term, too big to
fail. They cannot be allowed to fail because the consequence
on the economy is catastrophic and therefore these banks are
too big to fail. That is no-fault capitalism; too big to
fail. Does anybody care about that? Does the Fed, the Federal
Reserve Board? Apparently not.
That is what I said 11 years ago on the floor of the Senate.
I said:
I say to the people who own banks, if you want to gamble,
go to Las Vegas. If you want to trade in derivatives, God
bless you. Do it with your own money. Do not do it through
the deposits that are guaranteed by the American people with
deposit insurance.
I said during that debate:
I will bet one day somebody is going to look back and they
are going to say: How on Earth could we have thought it made
sense to allow the banking industry to concentrate, through
merger and acquisition, to become bigger and bigger and
bigger; far more firms in the category of too big to fail?
How did we think that was going to help our country?
Those are quotes I made 11 years ago on the floor of this Senate. I
didn't know then that within a decade, within 10 years, we would see
huge taxpayer bailouts, but I thought this was fundamentally unsound
public policy. I was one of only eight Senators to vote no. The whole
town stampeded. In fact, as the Presiding Officer knows, this Financial
Modernization Act was Gramm-Leach-Bliley, three Republicans, but this
was firmly embraced by the Clinton administration and by the then-
Secretary of the Treasury and others. It was bipartisan: We have to do
this, have to compete with the rest of the world, and it was, Katey,
bar the door. We are going to allow these big companies to get bigger,
and it is going to be just great for the country.
It wasn't so great for the country. What I wish to show is what
happened as a result of that piece of legislation. This graph shows
from 1999 forward the growth of total assets in the largest financial
institutions. Look at this graph: Bigger and bigger. Not just a bit
bigger; way, way, way up, the growth in assets of those six largest
financial institutions.
This chart shows the four banks, total deposits in trillions of
dollars, and we see what has happened there: liabilities in the six
largest institutions, deposits in the four largest banking
institutions.
This chart shows the aggregate assets of the top six commercial and
investment banks and what has happened in 10 years.
It doesn't take a genius and it doesn't take somebody with higher
mathematics or having taken an advanced course in statistics to
understand what this picture shows. We have seen a dramatic amount of
concentration--some of it, by the way, aided and abetted by the Federal
Government because as we ran into this problem, this very deep
recession--the deepest since the Great Depression--our government
arranged the marriages of some of the biggest companies, and so the big
became much bigger.
I have said all of that simply to say: That is where we have been,
and now the question is, Where are we going? What kind of legislation
are we going to take up on the floor of the Senate? Already there has
been a big dust-up. The minority leader came to the floor of the Senate
and said what was done in the Banking Committee will be a big bailout
of the banks. Of course, that isn't the case at all. This is a fact-
free zone with respect at least to some debates. I don't think there is
anybody in this Chamber who believes we don't have a responsibility now
to address these issues, and address them in the right way.
Let me be quick to say a couple of things. No. 1, there are some
awfully good financial institutions in this country run by some good
people who have done a good job, and we need them. You can't have
production without the ability to finance production. We need
commercial banks. We need all of the other financial industries and
institutions, but we need to make sure the excesses and the greed and
the unbelievable things that were done by some in the last decade
cannot be repeated, cannot happen again.
The piece of legislation that is going to come to the floor of the
Senate from the Senate Banking Committee is a good piece of
legislation. I commend Senator Dodd. I think he has done an excellent
job. By the way, those who have said in the Senate that somehow this is
just partisan, they didn't reach out to others; that is not the case,
and everybody knows it.
Chris Dodd reached out to Republicans week after week and month after
month to try to get some cooperation. Finally, they just walked away
and they said: We are all going to vote no, no matter what. So it is
not the case that this was designed to be some sort of partisan bill. I
still hope there will be Republicans and Democrats who together
understand what needs to be done to fix the problems that exist in our
financial services industry.
In addition to Senator Dodd bringing a bill from the Banking
Committee, let me say Senator Blanche Lincoln, under her leadership in
the Agriculture Committee, has brought a piece of legislation to the
Senate floor on derivatives that I think is a good piece of legislation
that needs to be a part of the banking reform bill.
[[Page S2580]]
What I wish to talk about ever so briefly is two other things. There
are a number of people who have bills that I am going to be supportive
of that I think have great merit that are necessary. I think they are
necessary to fix the real problems that exist. The issue of repairing
what was done to Glass-Steagall, Senator Cantwell, Senator McCain have
a bill on that. There are others who have a bill on proprietary
trading, and there are others as well. But I wish to talk about two
things very briefly.
No. 1, I am preparing an amendment that deals with what are called
naked credit default swaps. I don't think that is investing. That is
simply betting. If there is no insurable interest on either side of
credit default swaps, that is not investing. I think there ought to be
a requirement that there be an insurable interest on at least one side
in order for it to be a legitimate function because it seems to me if
we don't ban naked credit default swaps, we will have missed the
opportunity to do something that is necessary to fix part of what
happened in the last decade, No. 1.
No. 2 is the issue of too big to fail. It has not been described, it
seems to me, by either the Banking Committee or by amendments that have
been suggested--it has not been described that we should take seriously
too big to fail by deciding if you are too big to fail, you are too
big. This country has, on occasion--when we have a systemic risk that
is unacceptable, when we have a moral imperative to do something about
something such as this, this country has decided we will break Standard
Oil into 23 parts; we will break up AT&T--and, by the way, the 23 parts
turned out to be much more valuable in their sum than the value of the
whole.
But having said all that, I believe there needs to be an amendment--
and I am preparing an amendment--that deals with the issue of too big
to fail. Very simply it says if the Financial Stability Oversight
Council develops an approach that says, all right, this is an
institution that is just too big to fail and the moral hazard for our
country and the systemic risk for our country is too great and
therefore we judge it too big to fail, I believe what ought to happen
over a period of time--perhaps 5 years--is a symptomatic divestiture
sufficient so that the institution remains an institution that is not
then too big to fail. I believe that ought to be something that we
consider as we develop our approach to these financial reform measures.
I don't think big is always bad, and I don't think small is always
beautiful. I want us to be big enough to compete. I want us to have the
resources to be able to make big investments in big projects. I
understand all of that, and I can point to some terrific financial
companies in this country run by first-rate executives.
So understand what I am talking about are the abuses and the
unbelievable cesspool of greed we have seen in a decade from some
institutions that were big enough and strong enough to run this country
into very serious trouble. That is why I think we have a responsibility
at this point to address all of those issues that are in front of us as
we deal with banking reform.
I know this is going to be a long and a difficult task, but one of my
hopes would be that Republicans and Democrats can all agree on one
thing: What we have experienced in the last decade cannot be allowed to
continue. It cannot be allowed to continue. No one, I believe, would
want our financial institutions to continue to bet rather than invest,
to continue to invest in naked credit default swaps where there is no
insurable interest. Nobody, I would hope, would believe that represents
the kind of productive financing that we need to produce in this
country again. I want the financing to be available from good, strong
financial institutions to good, strong companies that need to expand to
produce American goods that say ``Made in America'' again.
That is what I want for our country. That kind of economic health can
only come if you have a strong system of financial institutions that
are engaged in the things that originally made this a great country,
not trading naked credit default swaps but making good investments in
the productive sector of this country.
I believe we can do that again, and I believe we will. I don't
approach this banking reform debate with trepidation. I think
ultimately cooler heads will prevail and all of us will understand the
need, and when we meet that need, this country will be much better off.
Mr. President, I yield the floor.
The PRESIDING OFFICER. The Senator from Pennsylvania.
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