[Congressional Record Volume 156, Number 61 (Wednesday, April 28, 2010)]
[House]
[Pages H2997-H3003]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                     THE NEED FOR FINANCIAL REFORM

  The SPEAKER pro tempore (Mr. Garamendi). Under the Speaker's 
announced policy of January 6, 2009, the gentlewoman from California 
(Ms. Speier) is recognized for 60 minutes as the designee of the 
majority leader.
  Ms. SPEIER. Mr. Speaker, I am joined this evening by a number of 
colleagues who are going to give us, I think, the reasons why financial 
reform is a must in this country. And the biggest poster child for why 
we have to do financial reform really is in Goldman Sachs.
  So we thought we would start our discussion tonight by looking at the 
principles that Goldman Sachs has promoted on its Web site. There are 
14 principles that Goldman Sachs has promoted on its Web site. The very 
first, and one I would like to start out with, is ``Our clients' 
interests always come first.'' Well, let's talk about their clients' 
interests coming first.
  Let's speak precisely about one deal, the deal called Abacus. And in 
Abacus their clients were many people. They had a client named John 
Paulson, the biggest hedge fund individual in this country. He wanted 
Goldman to sell mortgage-backed securities that were bad. They were 
subprime. And he precisely wanted them to sell them to many of their 
clients, and he was going to short them, meaning he was going to bet 
against them.

                              {time}  1715

  But it just doesn't end there. He specifically designed the package. 
He handpicked the mortgages that were going to be in the package. And 
then Goldman sold them to unsuspecting buyers. And lo and behold, what 
happened? What happened was Mr. Paulson made a billion dollars, and the 
other clients of Goldman Sachs lost a billion dollars, and Goldman 
Sachs walked away with $50 million of fees that were paid to Goldman 
Sachs by Mr. Paulson. Now, that is the basis of the SEC complaint filed 
against Goldman Sachs for civil fraud.
  So what is civil fraud, you might ask? Civil fraud is, It shall be 
unlawful for any person in the offer or sale of any securities to 
obtain money or property by means of any untrue statements of a 
material fact or any omission to state a material fact necessary.
  So the question is, was it a material fact that Abacus was made up of 
these mortgage-backed securities, 90 percent of which were what are 
considered no doc mortgages? That means there was no documentation that 
the people that got those mortgages could pay for them. There was no 
documentation of income, no documentation of debt. Those were no doc 
loans. And there was a history of no doc loans going back. So it was 
fixed from the very beginning.
  They were arranged by John Paulson, a material fact that was not 
disclosed to the other buyers, and it was not disclosed to the other 
buyers that John Paulson created this because he wanted to short them, 
because he wanted to bet against them. So if there ever was a case of 
fraud, I would argue that that was a case of fraud. Yet Goldman Sachs 
says, ``Our very first priority is that our clients come first.''
  Let's move over here to No. 14: ``Integrity and honesty are at the 
heart of our business. We expect our people to maintain high ethical 
standards in everything they do, both in their work for the firm and in 
their personal lives.''
  Well, there is one gentleman who has worked for Goldman Sachs that 
they referred to as the Fabulous Fab. He's a gentleman by the name of 
Fabrice Tourre out of their office in London. Well, I wouldn't suggest 
to you that Mr. Tourre is fabulous. I would suggest to you that he is 
fraudulent.
  In some of the e-mails that the Senate Committee on Investigations 
was able to collect, this is what Mr. Tourre was saying. Now, Mr. 
Tourre is the individual who was selling these synthetic collateralized 
debt obligations. He was the one that was doing the work on behalf of 
Mr. Paulson. So what did he say? He said, ``The whole building is about 
to collapse anytime now.'' Those were Mr. Tourre's words. He described 
himself in an e-mail as the only potential survivor, the Fabulous Fab, 
standing in the middle of all these complex, highly leveraged, exotic 
trades he created without necessarily understanding all the 
implications of these monstrosities. He then went on to say in an e-
mail in 2007, he described the mortgage business as ``totally dead and 
the poor little subprime borrowers would not last too long.'' Yet 2 
months later, he was boasting that he continued to dump some of the 
worthless mortgage securities on, and I quote, ``widows and orphans 
that I run into at the airport.''
  This is a man of integrity and honesty. I would suggest that is not 
the case.
  And, finally, in an e-mail to his girlfriend, he called his 
Frankenstein creation, these synthetic CDOs, a product of pure 
intellectual masturbation, the type of thing which you invent telling 
yourself, well, what if we created a thing which has no purpose, which 
is absolutely conceptual and highly theoretical and which nobody knows 
how to price? That's Mr. Tourre, who yesterday when he testified said, 
and I quote, ``I firmly believe that my conduct was correct.'' That is 
Mr. Tourre. That is Goldman Sachs.
  I would like to now ask my good friend, John Yarmuth from Kentucky, 
to join me in this colloquy.
  Mr. YARMUTH. I thank the gentlewoman for yielding.
  It's a great pleasure to be here today to discuss with the American 
people the fundamentals of the problem that we're trying to deal with 
with the Wall Street reform legislation now working its way through 
Congress.
  I had the privilege in the last Congress to be a member of the 
Oversight and Government Reform Committee when all of this was 
unfolding, in the fall of 2008 when for the first time people were 
getting a sense that Wall Street was essentially operating like an 
unregulated casino. It was essentially the Wild West of finance. And my 
economics training, as skimpy as it may have been, taught me that the 
financial system in our capitalist form of government, in our free 
market, is supposed to help with the allocation of capital in its most 
productive way so that capital finds its most productive uses. And what 
we found looking at these incidents as they unfolded back in 2008 and 
as we have seen even up until the last couple of weeks is that the 
giants of the financial system in this country, Goldman Sachs, the 
other major Wall Street financial institutions, weren't guiding capital 
to its most productive use.
  They were guiding capital, hoarding capital, accumulating enormous 
sums

[[Page H2998]]

of capital, in some cases essentially creating capital out of the 
ether, and deploying it for their own very greedy use. And I know that 
when we have had arguments both inside of Congress and out over the 
last few years, we say, well, why would government allow these 
institutions to get so big that they can wield this kind of power? And 
the answer we always got from the Goldman Sachses of the world and from 
others was, well, we need to be that big so we can compete in the 
global economy.
  The question they have never answered to my satisfaction and I don't 
think to the congresswoman's satisfaction and certainly I don't think 
to the American people's satisfaction is competing for whom? For what? 
To what purpose? Because if we allow, as a society, companies to get 
that big where they can threaten to bring down the entire economy and 
they don't produce any good for society at large, then why do we care 
if they can compete?
  Whom are they competing for? Are they competing just for their 
stockholders? In the case of Goldman, are they competing just for their 
partners who take home $13 billion, $15 billion worth of bonuses each 
year? That's the question I think that is at the core of this debate 
and has to be as we move forward trying to decide exactly what policies 
we should adopt.
  In Goldman's case, as I mentioned, I think in 2009, the total bonuses 
they have allocated for their partners, their principals, and their 
employees is something like $13 billion. Do you know how much their 
Federal tax rate was? It was .9 percent, .9 percent.
  Now, virtually every American pays a higher tax rate than that. 
Goldman Sachs paid less than 1 percent of its net income in taxes, 
while its principals and its employees, its top earners, Mr. Blankfein 
and others, were making millions upon millions.
  So we have to say, does society benefit from having Goldman Sachs 
here? No. I think we can make a pretty strong case that over the last 
couple of years, this country has suffered enormous damage, and not 
just in New York but throughout the country, throughout Main Street, 
with defaults, mortgage, collapse of banks, all sorts of things. The 
enormous problems with AIG and its cost to the taxpayers when we had to 
bail them out, largely attributable to the type of activity that 
Goldman and others were involved in.

  So as we look through Goldman's business principles, and I think you 
have done an excellent job of pointing out some of the ironies, to use 
a gentle term, some of the ironies involved in those principles, we 
have to ask ourselves, what are Goldman's principles for being part of 
the American economy? Where do we show anywhere in there that they want 
to help our economy prosper? No. This is for their shareholders, their 
principals, and their clients who are among the wealthiest individuals 
in the world.
  So while we worry about what Goldman has done, and I think most of 
us, most Americans, are outraged at, if for nothing else, the ethical 
shortcomings of the techniques that they have been using, we have to 
ask ourselves as well what good does Goldman Sachs, what good does Bear 
Stearns, may it rest in peace, and Lehman Brothers, what good do they 
do for the American economy? Because I think the evidence is pretty 
strong that, in fact, they have been extremely detrimental to the 
American economy and to the average American in their activities over 
the last few years.
  Ms. SPEIER. Reclaiming my time, you mentioned that they paid a tax 
rate of less than 1 percent. The average American pays a tax rate of 
what?
  Mr. YARMUTH. Well, actually, as we heard just a few weeks ago, about 
47 percent of the lowest income earners in America pay almost no income 
tax. They do pay a significant employment tax, Social Security and 
Medicare. In fact, every American working pays 7.5 percent combined 
Social Security and employment tax. Income tax will vary. I think the 
average Federal income tax, people making $40,000 to $50,000 a year, 
was in the 3 or 4 percent range, which is still three or four times 
what Goldman Sachs was paying. And, of course, once you get to higher 
levels, the Federal income tax is somewhere--I think the average 
American making more than $250,000 a year pays an average of 23 
percent. So that's just somebody making $250,000, $300,000 a year, not 
the billions and billions of dollars that Goldman Sachs has made. They 
pay 23 percent on average more than Goldman Sachs paid.
  Ms. SPEIER. Thank you.
  I now yield to my good friend from the State of Oregon, Peter 
DeFazio.
  Mr. DeFAZIO. Thank you for yielding.
  I think the American people are a bit confused as to what is really 
going on here. And, you know, it's a lot like the Humphrey Bogart 
movie: What's going on here is gambling, plain and simple.
  It would be one thing if these so-called investment banks like 
Goldman Sachs were lending into the productive sector of the U.S. 
economy, if they were lending to people who had good ideas to produce 
products and goods, employ Americans and help us compete in the world 
economy. But they are not doing that. In this case, they weren't even 
helping to package and move mortgages off of people's portfolios and 
someplace else. They were merely mimicking with what are called 
synthetic collateralized debt obligations, packages of bad or 
potentially bad mortgages to bet on, for this one hedge fund to bet 
against and make a billion dollars.
  But then, of course, unfortunately, other parts of Goldman Sachs, 
apparently unbeknownst to them, I mean, in totally good faith, went to 
clients of Goldman Sachs and said, Hey, we've got a good product here 
we'd like to sell you. Unfortunately, other parts of Goldman Sachs had 
assembled this product with the intention that it would fail, and these 
other people were not informed of that fact and purchasing them, 
although Goldman would say they didn't have an obligation to tell 
people that they had designed it to fail, working with someone who was 
betting it to fail, and that Goldman itself was betting on it to fail.
  But the bottom line of all is it's a huge amount of churning on 
things that don't help the economy, help the American people, help us 
compete in the world.

                              {time}  1730

  Goldman has gone to the point in 2007, their gambling income--excuse 
me--their financial services, investment, self-proprietary, et cetera 
stuff, whatever you want to call it, was actually five times larger 
than their investment banking activities. So 20 cents of every dollar 
at Goldman was going into productive investment. The other 80 cents was 
going into gambling on imaginary products. It's a lot like fantasy 
football. A lot of Americans can understand that. Imagine if they took 
out and created synthetic products that related to fantasy football. 
Maybe some Americans can understand that.
  Recently, one firm actually proposed, a Cantor Fitzgerald subsidiary, 
proposed to do futures on movies. In L.A. they would produce a movie 
and then the people on Wall Street would bet on what the opening 
weekend was going to return, and they would bet on how much money it 
might make. This became of such concern to producers in L.A. because 
they thought, My God, if they start out shorting us right away, that's 
going to depress our investment potential for the movie, et cetera, et 
cetera. So in the Senate bill they're actually banning this sort of 
derivative.
  So they have banned two kinds of derivatives. One has been 
historically banned for some reason lost in the mist of time. Onions, 
you can't do them on onions. And the second would be movies from 
Hollywood. Otherwise, you can bet on anything. You can bet on the 
weather tomorrow as a derivative product. You can market it on Wall 
Street, et cetera, et cetera.
  This is not a productive activity. I would suggest a simple way to 
deal with it. One thing that's good is the Senate has actually, for 
once, proposed something useful, which is to say that if Goldman wants 
to have a proprietary trading section and trade in these gambling 
products, that they couldn't be insured by the FDIC or draw money 
through special windows at the Treasury. We should not subsidize their 
addiction to gambling. The taxpayers should not subsidize it. That 
would be a good step.
  But the other thing we could do would be to put a very modest tax on 
this gambling and to say, Look, for legitimate hedgers, airlines who 
want to

[[Page H2999]]

hedge against fuel price increases, farmers who are worried about 
failure of the corn crop, those people. We already distinguish between 
hedgers and speculators over at the Commodity Futures Trading 
Commission.
  Let's just say hedgers would be exempt from the tax. But speculators, 
those who have no skin in the game, aren't producers, or even worse, 
are not even actually involved in any way as a counterparty but just 
merely creating synthetic things to bet for or against, they would pay 
a very modest tax. If the tax was approximately two-tenths of 1 
percent--that's .0002--on each of these, we could raise somewhere 
between $30 billion to $50 billion a year to help pay for some of the 
damage they have caused to our economy.
  It might not raise that much because it might rein in some of this 
speculative activity, which I think would be a desirable impact; but I 
would suggest that would be one way to deal with this very, very 
reckless activity.
  I congratulate the gentlelady for having this hour to highlight these 
concerns and the contradictions that we see in the business principles 
versus what we all saw going on.
  With that, I'd yield back.
  Ms. SPEIER. I thank the gentleman for his great commentary. I now 
would like to recognize from the State of Maryland (Mr. Cummings).
  Mr. CUMMINGS. I want to thank the gentlelady for holding this hour. 
And I want to thank her for yielding and I want to thank all my 
colleagues for being here tonight. As I listen to my colleagues this 
evening, I could not help but think that the American people have lost 
in at least two ways. One, they have lost with regard to money that 
they could have been making on the market. Two, they have lost because 
the so-called swaps that were purchased, these insurance--what we could 
call insurance, for those people who may be listening, Mr. Speaker--
some of that money, particularly the ones that we're dealing with right 
now, were bought from AIG. When these bonds went down, AIG ended up 
paying.
  Folks may be asking the question, What does that have to do with me? 
Well, the fact is that when those bonds were paid off, those are the 
kinds of--because they were paid off from AIG, just like an insurance 
policy would pay--a lot of American money had to go into AIG to keep it 
propped up--to the tune of $180 billion, with a B.
  I cannot help but think about yesterday as I listened to Fabulous 
Fab--
  Ms. SPEIER. Fraudulent Fab.
  Mr. CUMMINGS. Fraudulent Fab. As he talked, I heard no remorse. I 
heard folks basically saying, This is the way we do it, this is how we 
do it, and almost implying that it was none of our business, none of 
the business of the Senate or the House. The sad part about it, as I 
sat there, I really wanted to almost come through the television screen 
because I thought about all of the people who have lost so much, have 
lost so much over the last few years. The people who have lost their 
homes, lost their savings, lost their jobs, lost opportunities. 
Children cannot go to school. They can't get loans. Yet, still folks 
sitting there from Goldman almost acting as if, You know what, don't 
even bother asking us about what we do. It's our business.
  Well, it's not just their business because it affects almost every 
single American, the types of things they do. That's why 60 Members of 
this Congress wrote to the SEC--and I'm very glad to see Mary Schapiro 
taking over the SEC and doing what needs to be done--and said to them, 
Look, we're glad that you're bringing the civil action, but we also 
want you to look at other deals similar to this one because we want to 
get to the bottom of this. And we also said that if any money was paid 
from AIG to Goldman and Paulsen and it was ill-gotten, we want our 
money back. But we said another thing. We said that if there appeared 
to be criminal activity, we wanted it referred to the Justice 
Department so that they could take appropriate action.
  Now let me be clear: I live in Baltimore. There are people in my 
neighborhood in the inner city of Baltimore that if they stole a $300 
bike, they're going to jail, period. A $300 bike. And the reason why 
it's so important to me that we look at all these other transactions 
and try to figure out if there was criminal activity is because I want 
the folks on Wall Street to be treated like the folks on Madison Avenue 
in Baltimore. And so I think what we are doing here is so important. I 
think that we are at the tip of an iceberg, but we have got to chisel 
down.
  The gentlelady, when she first started our discussion, she said 
reform is so important that we've got to deal with reform now. I think 
when you look at what has happened in this deal as it has been so 
wonderfully and accurately described by my colleagues, we understand 
why it is so important that we have transparency. We have got to have 
it.
  Ms. SPEIER. Will the gentleman yield?
  Mr. CUMMINGS. Yes, I yield to the gentlelady.
  Ms. SPEIER. When you speak to the term ``transparency,'' do you think 
that Goldman would have sold a dollar's worth of those synthetic 
collateralized debt obligations if people knew that their other client 
was shorting them and that 90 percent of them were no-doc loans that 
were destined to fail?

  Mr. CUMMINGS. No, I really don't. Goldman, they said our slogan is: 
Our customers always come first.
  Ms. SPEIER. Very first principle. Our clients' interests always come 
first.
  Mr. CUMMINGS. Our clients' interests always come first. If that were 
truly their goal, they would have put out that information. They seem 
to be saying, Well, you know, maybe it may be a little teeny bit 
unethical, but we did not have a duty. When you have a slogan like our 
clients' interests always come first, it seems to me that you would 
operate on the highest level of integrity, transparency, clarity, and 
accountability, end of case.
  But that's not what happened here. And so you're absolutely right. We 
have got to make sure that we shine some light on this system, that we 
have the kind of reform that we are trying to get through here. And I 
know that there are people who are saying, Well, maybe too much is 
being done. I just want to take one more minute to talk about that.
  It seems to me that if you want people to invest in something, you 
want them to understand and believe that it's not rigged before they 
get there. I don't know how many people--and that's basically what 
you're talking about--How many people are going to go into a card game 
believing it's rigged before they get there. They're just not going to 
do them, that the odds are against them big time. They're not going to 
do it.
  This shining of the light, this transparency, would be good for the 
market, for Wall Street. Americans would feel comfortable and others 
would feel comfortable in investing in Wall Street. And therefore, in 
the end, in the end, we have a solid, strong Wall Street that people 
feel comfortable about investing their hard-earned money.
  Again, I want to thank the gentlelady. I yield to the gentlelady.
  Ms. SPEIER. I thank the gentleman from Maryland, who's been 
passionate about trying to get to the bottom of AIG. I think it's 
important to point out--and this may curl the hair on top of your head, 
my dear friend--but on top of everything else, Goldman Sachs' 
directors, the CEO, Mr. Blankfein, all have insurance for any omissions 
or conduct that they may become the subject of any inquiry for. If they 
commit any civil fraud or criminal fraud, they have insurance for that. 
You won't be surprised probably to know who their insurance is with.
  Mr. CUMMINGS. Please don't tell me.
  Ms. SPEIER. None other than AIG. And who owns AIG today but the 
American people.
  Mr. CUMMINGS. The American people.
  Ms. SPEIER. The U.S. taxpayers.
  Mr. CUMMINGS. To the tune of $180 billion.
  Ms. SPEIER. Correct. What is even more disconcerting, and we will 
find that out in the upcoming weeks, just like the synthetic CDO known 
as Abacus, it appears that Mr. Blankfein and Goldman Sachs also sold to 
AIG more of the CDOs that were rigged.
  Mr. CUMMINGS. Again, you make the case for why we have to have 
reform. We have to have reform and act with the urgency of now, because 
every moment that goes by, I'm afraid

[[Page H3000]]

there's going to be another Goldman Sachs deal. By the way, others are 
watching all of this in the market. And there may be others doing the 
same things.
  Ms. SPEIER. Clearly.
  Mr. CUMMINGS. So the urgency is now. We've got to act on this now. 
I'm hoping that that will happen. We have done our part. Then we've got 
to wait for our brothers and sisters on the other side to do theirs. 
Again, we just cannot continue to wait.
  Ms. SPEIER. I thank the gentleman.
  Mr. CUMMINGS. I want to thank the gentlelady for yielding.
  Ms. SPEIER. I now would like to invite my good friend from the State 
of New York, Congressman Hinchey, to engage.

                              {time}  1745

  Mr. HINCHEY. Well, thank you very much. I want to express to you my 
appreciation for you engaging and initiating this discussion here. It's 
something that's very important; it's something that needs attention, 
and it certainly needs relief. As I think we all know, we are facing--
involved in one of the most serious economic crises in the history of 
this country. We haven't had an economic downturn as serious as this 
one since the Great Depression, which happened in 1929 and ran through 
the thirties.
  One of the most interesting things about the way in which this 
economic recession has come about and continues is the failure, in 
fact, in many ways, the refusal of responsible people to understand 
what happened back in the 1930s and the relationship between what's 
happening now, the kinds of circumstances that caused that Great 
Depression similar to the circumstances that are causing this deep 
recession that we are experiencing now. And it's only a recession 
because we have Social Security now, which went into place after the 
Depression in the 1930s as a means to sort of fight against that 
Depression, and a number of other things which were engaged in to try 
to deal with it effectively.
  There are a lot of people who are trying to eliminate some of those 
effective things. In fact, we had a President recently come in and say 
that we should privatize Social Security. I think we could imagine what 
might have happened if we had privatized Social Security and how much 
worse this economic recession would be today if the Social Security 
system had been privatized, and it then certainly would have been lost.
  So this is a serious issue, and it's an issue that needs financial 
regulatory reform; and that need for financial regulatory reform has 
never been more evident for us in the context of our lives and 
especially our experience here in this Congress. We are still feeling 
the effects of that meltdown, which began in 2007 and then hit hard in 
2008 on Wall Street. And now, 2 years after that 2008 meltdown, we 
still have record unemployment with roughly 15 million Americans 
currently out of work. Obviously, much needs to be done to deal with 
this and correct it.
  Wall Street recovered rather quickly, interestingly enough, while the 
jobs and housing market remain on life support. It seems that Wall 
Street was able to recover quickly because it knew the housing bubble 
was on the verge of bursting and hedged their bets appropriately. And 
they knew that the housing bubble was on the verge of bursting because 
of the subprime mortgages that they manipulated into the context of 
investing operations. They knew what they had done, and they knew what 
was happening as a result of what they had done.
  As we all know, the Securities and Exchange Commission recently made 
claims that Goldman purposefully created an investment, a 
collateralized debt obligation called ABACUS 2007-AC1, that was 
designed to fail. The SEC suspects that a Goldman Sachs employee--and 
probably not just one--Goldman Sachs employees purposefully misled 
clients into buying investments that were not only worthless but were 
almost guaranteed to have a devastating effect on the great economy.
  I have signed my name onto two letters that are aimed at expanding 
the investigation of Goldman Sachs. One of those letters is to the 
Securities and Exchange Commission Chair Mary Schapiro and the other to 
Attorney General Eric Holder. Goldman Sachs deserves to be thoroughly 
investigated for this suspicious activity, but we need to keep in mind 
that they are not solely to blame.
  It's not just Goldman Sachs that was responsible for this problem. 
Throughout the 1990s, there was unprecedented deregulation of the 
banking sector, which set the stage for Wall Street to run amok. 
Safeguards put in place in the 1930s to deal with that Great Depression 
were thrown out, and that is just fascinating how intentionally that 
was done. Safeguards put in place in the 1930s, thrown out and 
unraveled by both Congress and the Federal Reserve. As they let this 
happen, some of us tried to stop the deregulation, but we were in the 
minority. We should not delay in getting commonsense reforms passed 
that will increase consumer protections, regulate hedge funds and the 
derivatives market. And let us not forget to include a stronger Volcker 
Rule.
  The Volcker Rule, interestingly enough, puts an end to an investment 
bank's ability to conduct proprietary trading with their bank deposits. 
This proposal also prevents bank holding companies from housing hedge 
funds or private equity branches. The overarching goal is very similar 
to what I tried to achieve when I submitted a Glass-Steagall amendment 
to the House financial regulatory reform bill.
  Restoring the Glass-Steagall Act--which of course was passed back in 
the context of the Great Depression--would put back in place the clean 
division between commercial and investment banking that was first 
established in that Banking Act back in 1933. The original bill was put 
in place as a response to the Great Depression and resulted in decades 
of economic stability and prosperity. Throughout the 1990s, the banking 
lobby worked hard to undermine the Glass-Steagall Act, and it was 
ultimately overturned in 1999.
  Ms. SPEIER. Will the gentleman yield?
  Mr. HINCHEY. Yes.
  Ms. SPEIER. You make the case for this great poster that shows the 
cracks in Wall Street. And back in 1996, the Federal Reserve 
reinterpreted the Glass-Steagall Act several times at the behest of 
Wall Street, eventually allowing bank holding companies to earn up to 
25 percent of their revenues in investment banking.
  But you know what? That wasn't enough for them. They then came back 
in 1999 and repealed the Glass-Steagall Act that worked for over 60 
years in this country, brought about, as you pointed out, because of 
the Great Depression that created those firewalls between investment 
banking, commercial banks, and insurance companies.
  And then in 2000, what was the next thing that happened? The next 
thing that happened in 2000 when Brooksley Born, who was then the 
Commodity Futures Trading Commission Chairman, said, We should regulate 
derivatives, and our friends in the White House and around basically 
said, Oh, no. We can't. We passed a law that basically prevented 
Congress from regulating derivatives. Those derivatives are the things 
we're talking about today, these credit default swaps that brought AIG 
down; these collateralized debt obligations, synthetic or otherwise, 
that brought the entire financial services industry down.
  And as you can see, the other cracks, the regulation that was created 
in 2004 that took away the leverage cap of 12 to 1, and as a result, 
where were they leveraged at but at 30 to 1, the Lehman Brothers, the 
Goldman Sachs of the world.
  And then again in 2005, a very interesting rule that basically 
exempted stockbrokers from the Investment Advisers Act. Do you know 
why? Because they didn't want to have a fiduciary duty to their 
clients. They only wanted to have a duty to themselves.
  Mr. HINCHEY. That is exactly right, and I very much appreciate you 
putting that form up there, Cracks in Wall Street. It's a very 
interesting presentation and a very accurate presentation of the set of 
circumstances that were put into play over that period of time 
beginning in 1996 with this Congress here trying to manipulate the 
situation.

  I remember how many of us fought against those things. We fought 
against them. We voted against them. And, of course, we voted against 
that elimination of that Glass-Steagall Act because we understood very 
clearly

[[Page H3001]]

that the elimination of investments, by allowing investment banks to 
work closely together with commercial banks and take issues like 
mortgages and manipulate the mortgages into subprime mortgages, and 
sell mortgages to people who were not able to afford them, and to 
continue to manipulate that mortgage system and to include that 
mortgage system into large investment packages, and those large 
investment packages which were weak and really didn't deserve nearly 
the kind of attention or the funding that they received were successful 
based upon--largely based upon, at least, the fact that they had 
mortgages within them. And people had the idea that, Well, mortgages 
are secure. Anyone who has a mortgage is going to pay that mortgage 
off. Hardly anybody misses their mortgage payment.
  And it was the intentional manipulation of the mortgages in those 
investments which led to, to a great extent, the collapse of this 
economy and the collapse that we're experiencing now and all of the 
difficult circumstances we have to deal with.
  Now, a lot of these things need to be addressed. Some of them have 
been addressed in the context of legislation that we have passed. The 
Senate is now struggling with that legislation, trying to pass 
something similar to it so that we could agree on something that is 
going to begin to modify this dire situation that we're dealing with. 
But the fact of the matter is there is more that we're going to have to 
do, not just the situations that are pending right at this moment. Even 
though they are critically important and they need to be dealt with and 
completed, there is more that needs to be done. And what needs to be 
done, including other things, is the prevention in the future of the 
manipulation of mortgages and the other kind of investment manipulation 
that took place in the context of this molding together of commercial 
and investment banking.
  We need honest banking in this country. We have had it for most of 
the time, and most of the bankers in this country are honest and strong 
and safe and secure and working in the best interests of the people in 
their community. But there are exceptions to that, and those exceptions 
can be deep and dire, and we've seen the results of it in the context 
of this economic situation that we are dealing with now. It needs to be 
corrected, and I deeply appreciate you for bringing this subject up in 
this way and for bringing attention to the issues that you have 
presented in the context there next to you.
  So thank you very much. It's a great pleasure to be with you in this 
context, and I sure hope that the opponents of this bill in the Senate 
are going to get the kind of pressure that they need from sensible 
places and sensible people, conscientious people, to make sure that 
they stop blocking it. We need to get these things passed.
  Ms. SPEIER. I thank the gentleman from New York for his well-placed 
comments and his recommendations to our colleagues in the other House.
  I now have the great pleasure of joining in colloquy with my good 
friend from the State of Ohio, the great and passionate Marcy Kaptur.
  Ms. KAPTUR. I thank you very much, Congresswoman Jackie Speier, for 
spearheading this effort this evening and for the incredible work that 
you do for this House and for our country and for your superior 
knowledge of the financial markets and the banking industry. America 
really needs you now more than ever, and I thank your constituents for 
electing you here. You are the right person at the right time and the 
right place, that's for sure.
  Ms. SPEIER. I thank the gentlelady.
  Ms. KAPTUR. It's a pleasure to join you tonight to place information 
on the Record related to Goldman's behavior as well as other 
institutions that have caused our country so much harm. And as others 
have mentioned, on April 16, the Securities and Exchange Commission 
announced that it was filing a civil lawsuit at long last against the 
big speculator Goldman Sachs, accusing it of committing fraud, but it 
was a civil filing.
  We know that what happened on Wall Street in the financial markets, 
the commodities markets, and in the housing markets led to enormous 
financial turmoil in our country and, ultimately, this great economic 
crisis that we are facing. And the American people want answers. They 
want to know who did what, and they ultimately want justice.
  A few days after that filing, over five dozen of our colleagues 
signed on to a bipartisan letter sent to the Attorney General on April 
23, and our letter called upon the Attorney General to begin a criminal 
investigation and prosecution.
  One of our concerns continues to be that if, in fact, a civil case is 
filed by the SEC, could it be possible down the road that some of that 
evidence could be inadmissible in the event there is a criminal 
proceeding. So we urged Attorney General Holder to proceed quickly, and 
today we delivered--in addition to that letter--signatures from over 
140,000 Americans who have been signing up on an e-petition to the 
Attorney General urging the same.
  We thank the organizations Progressive Change Campaign Committee and 
MoveOn.org for alerting citizens across this country that they don't 
have to be neutral in this fight. They can let their views be known to 
the Attorney General of our country about the importance of criminal 
proceedings.
  What makes that so important is the fact that the Attorney General's 
office in the Department of Justice has been understaffed throughout 
the last 10 years, unable to do the type of financial crimes 
investigations that are necessary. Back in the savings and loan crisis 
at the end of the 1990s and early 2000s--or I should say at the end of 
1989 up until the early 1990s--we had over 1,000 investigators in 
financial fraud at this Department of Justice. After 9/11, that was 
reduced to about 75; and, therefore, we were totally unequipped at the 
Justice Department to deal with a lot of the wrongdoing that was 
proceeding through those years and those decades.

                              {time}  1800

  I have a bill, H.R. 3995, to close that gap and increase the number 
of investigators. Quite frankly, I have a deep concern about some of 
the self-serving individuals that may have been representing private 
interests rather than the public interest as they were conducting their 
business through Goldman Sachs and other firms.
  I would like to place on the record, for example, the following: 
Joshua Bolten, who was President Bush's chief of staff in the White 
House at the time that the markets melted down, had actually been the 
person who ran Goldman Sachs' London office, and yet then he came to be 
President Bush's chief budget officer and then went to be chief of 
staff at the White House at the key moment when decisions had to be 
made about how to handle the financial markets
  In the current administration, it is no secret that the chief of 
staff to the current Secretary of the Treasury, Mark Patterson, had 
come directly from Goldman Sachs as its top lobbyist. In addition, Neel 
Kashkari from Goldman Sachs had gone to handle the TARP. I think this 
goes far beyond party, this has to do with America and standing up as 
patriots for this country and asking the question: Isn't that too much 
insider dealing? How do you know that they are really representing 
their client's interest or the public interest when they are personally 
involved both on the private side and then on the public side like a 
very fast revolving door?
  I will also place on the Record tonight the fact that since the 
crisis started the six institutions in addition to Goldman Sachs, that 
includes Citibank and Wells Fargo, HSBC, Morgan Stanley, all these big 
banks now control two-thirds of the deposits and GDP of this country. 
Six institutions. They are raiding equity out of our local communities. 
They are just simply too powerful and they are too irresponsible. They 
are not doing loan workouts in places I come from. I thank the 
gentlelady for calling into question their business principles as you 
so ably put on the floor here as to who their interests really are.
  That is my bottom line question: Who do these people represent? They 
seem to be getting bonuses at extraordinary levels, in the millions of 
dollars. When people in my district have fallen off unemployment 
benefits, these companies like JPMorgan Chase do not return phone calls 
to do loan workouts. Wells Fargo, they are totally irresponsible. They 
have too much power and

[[Page H3002]]

they are thumbing their nose at the American people at a time when our 
people are just hanging on.
  I want to thank the gentlelady for holding this Special Order this 
evening and for giving us a chance to place on the Record the letter 
that we sent to the attorney general asking for criminal proceedings, 
and also the names of the Members of Congress who have signed on this 
letter. I urge other colleagues who wish to join us to please give us a 
call. I thank you for allowing me to place this information into the 
Record.


                                Congress of the United States,

                                   Washington, DC, April 23, 2010.
     Hon. Eric Holder
     U.S. Attorney General, U.S. Department of Justice, 
         Washington, DC.
       Dear Attorney General Holder: The U.S. Securities and 
     Exchange Commission (SEC) announced on Friday, April 16, 
     2010, that it had filed a securities fraud action against the 
     Wall Street company Goldman Sachs & Co (GS& Co.) and one of 
     its employees for making materially misleading statements and 
     omissions in connection with a synthetic collateralized debt 
     obligation (``CDO'') that GS & Co. structured and marketed to 
     investors. The SEC alleges that:
       1. This synthetic CDO, ABACUS 2007-AC1, was tied to the 
     performance of sub-prime residential mortgage-backed 
     securities (``RMBS'') and was structured and marketed by GS & 
     Co. in early 2007 when the United States housing market and 
     related securities were beginning to show signs of distress. 
     Synthetic CDOs like ABACUS 2007-AC1 contributed to the recent 
     financial crisis by magnifying losses associated with the 
     downturn in the United States housing market.
       2. GS & Co. marketing materials for ABACUS 2007-AC1--
     including the term sheet, flip book and offering memorandum 
     for the CDO--all represented that the reference portfolio of 
     RMBS underlying the CDO was selected by ACA Management with 
     experience analyzing credit risk in RMBS. Undisclosed in the 
     marketing materials and unbeknownst to investors, a large 
     hedge fund, Paulson & Co. Inc. (``Paulson''), with economic 
     interests directly adverse to investors in the ABACUS 2007-
     AC1 CDO, played a significant role in the portfolio selection 
     process. After participating in the selection of the 
     reference portfolio, Paulson effectively shorted the RMBS 
     portfolio it helped select by entering into credit default 
     swaps (``CDS'') with GS & Co. to buy protection on specific 
     layers of the ABACUS 2007-AC1 capital structure.
       3. In sum, GS & Co. arranged a transaction at Paulson's 
     request in which Paulson heavily influenced the selection of 
     the portfolio to suit its economic interests, but failed to 
     disclose to investors, as part of the description of the 
     portfolio selection process contained in the marketing 
     materials used to promote the transaction, Paulson's role in 
     the portfolio selection process or its adverse economic 
     interests.
       As the SEC notes, financial manipulations such as this 
     contributed to the near collapse of the U.S. financial system 
     and cost American taxpayers hundreds of billions of dollars. 
     On the face of the SEC filing, criminal fraud on a historic 
     scale seems to have occurred in this instance. As an ever 
     growing mountain of evidence reveals, this case is neither 
     unique nor isolated.
       If both global and domestic confidence in the integrity of 
     the U.S. financial system is to be regained, there must be 
     confidence that criminal acts will be vigorously pursued and 
     perpetrators punished.
       While the SEC lacks the authority to act beyond civil 
     actions, the U.S. Department of Justice (DOJ) has the power 
     to file criminal actions against those who commit financial 
     fraud. We ask assurance from you that the U.S. Department of 
     Justice is closely looking at this case and similar cases to 
     further investigate and prosecute the criminals involved in 
     this, and other financially fraudulent acts. Furthermore, if 
     the DOJ is not currently looking into this particular case, 
     we respectfully ask you to ensure that the U.S. Department of 
     Justice immediately open a case on this matter and 
     investigate it with the full authority and power that your 
     agency holds. The American people both demand and deserve 
     justice in the matter of Wall Street banks whom the American 
     taxpayers bailed out, only to see unemployment and housing 
     foreclosures rise.
       This matter is of deep importance to us. As you may know, 
     H.R. 3995, the Financial Crisis of 2008 Criminal 
     Investigation and Prosecution Act, has been introduced, which 
     authorizes you to hire more prosecutors, Director Mueller of 
     the Federal Bureau of Investigation to hire 1,000 more agent 
     as well as additional forensic experts, and Chair Mary 
     Schapiro of the U.S. Securities and Exchange Commission to 
     hire more investigators to continue to pursue justice and 
     route out the criminals in our financial system. Part of 
     financial regulatory reform should include removing the 
     criminals and crafting a system that supports those who 
     follow the law.
       We in Congress stand ready to support you in protecting the 
     American taxpayers from financial crimes such as the fraud 
     that the U.S. Securities and Exchange Commission has charged 
     Goldman Sachs with committing. We ask that you take up this 
     case, and others, to pursue justice for the American people, 
     to put criminals in jail, and seek to restore the integrity 
     of our nation's financial system.
           Sincerely,
         Marcy Kaptur, John Conyers, Michael Burgess, Jim 
           McDermott, Diane E. Watson, Christopher P. Carney, Raul 
           Grijalva, Keith Ellison, Charlie Melancon, Tom 
           Perriello, Betty Sutton, Jay Inslee, Pete Stark, 
           Michael Honda, John T. Salazar, Niki Tsongas, Alan 
           Grayson, David Loebsack, Bob Filner, Betsy Markey, John 
           Barrow, Jesse Jackson Jr., Eleanor Holmes Norton, Grace 
           F. Napolitano, Maurice Hinchey, Peter Welch, Marcia L. 
           Fudge, Rush Holt, Peter DeFazio, Michael E. Capuano, 
           Bill Pascrell, Jr., Michael H. Michaud, Steve Cohen, 
           Bruce L. Braley, Bart Stupak, Mark Schauer, Chellie 
           Pingree, Martin Heinrich, Jackie Speier, Janice D. 
           Schakowsky, Sheila Jackson Lee, Tammy Baldwin, Barbara 
           Lee, Mike Doyle, Gene Taylor, Wm. Lacy Clay, Jr., James 
           Moran, Danny K. Davis, Ben Chandler, Dennis Kucinich, 
           Carol Shea-Porter, Bennie G. Thompson, Laura 
           Richardson, Loretta Sanchez, Dale Kildee, Leonard L. 
           Boswell, Donna F. Edwards, Frank Pallone, Jr., Ann 
           Kirkpatrick, Carolyn C. Kilpatrick, Mazie K. Hirono, 
           James P. McGovern.

  Ms. SPEIER. I thank the gentlelady from Ohio. You referenced the 
number of people in the Department of Justice that are tasked with 
doing the investigations. It was very interesting this week when we had 
the hearing on Lehman Brothers and Mary Schapiro spoke to their ability 
to do their job when they only had 24 staff members in that specific 
division to do investigations of all of the Wall Street firms.
  If you ill-equip your very agencies to do the job, they won't be able 
to do the job. Between 2003 and 2007 under the Bush administration with 
Christopher Cox as the head of the SEC, you will not be surprised to 
know that there was an 80 percent reduction in enforcement actions at 
the SEC and 60 percent reduction in disgorgement actions at the SEC.
  So no surprise that we had an SEC that was ill-equipped, and also a 
different perspective. It was not there to protect the American people 
but to allow business to flourish. And the business that flourished was 
much like what Goldman Sachs was doing where they actually put AIG in 
some of these synthetic collateralized debt obligations that they knew 
were going to fail.
  Lehman Brothers, Goldman Sachs shorted Lehman Brothers and helped 
make sure it did come down. It was reportedly in many of the e-mails at 
Goldman Sachs by employees when they were communicating with some of 
their clients that they said that they were no longer going to support 
or back up Bear Stearns, and then all of a sudden Bear Stearns went 
down.
  We now have China suing Goldman Sachs over bad derivative deals. We 
have Germany, France, and the U.K.; and God knows, what did they do 
with Greece? Much like Enron, Goldman Sachs went to Greece and created 
a way by which they could take some of their debts off their balance 
sheet so they could get support from the EU, and in the course of doing 
so, hid much of the debt. And now we all know what has happened to 
Greece. We all know what has happened to the stock market just 
yesterday as a result of the rating agencies taking the steps they did.
  This company has no shame. This company is willing to do any deal as 
long as it makes them money.
  Ms. KAPTUR. Do you happen to know what the bonuses were for Goldman 
Sachs? I know they totaled into the billions.
  Mr. DeFAZIO. Last year it was rather modest for Mr. Blankfein, he 
only got a $9 million bonus which was considerably less than previous, 
but that does figure out to $1,000 an hour, 24 hours a day, 7 days a 
week, 365 days a year. Most Americans would be happy to have that 
salary for a fraction of a week.
  Ms. KAPTUR. I think he thought it was too little, didn't he?
  Mr. DeFAZIO. Well, compared to the enormous wealth that he created by 
shorting and manipulating and synthesizing. You know, the one thing I 
would reflect on, I was a little puzzled yesterday when I kept hearing 
him say, We are the market makers. We are the market makers.
  After awhile I started thinking about book makers, market makers, is 
there a difference. What is the difference when they are not dealing in 
reality or productive investment, they are dealing in manipulated 
investments, products that are designed to fail. I mean,

[[Page H3003]]

we have too-big-to-fail institutions that create products that are 
designed to fail, and they profit immensely by doing that. What's that 
about market making?
  Ms. SPEIER. The hardest thing to try to explain to the American 
people is what is a synthetic CDO and liken it to what goes on in our 
lives. So I have been scratching my head trying to think of what it 
would be like. This may not be a good analogy, but I offer it up. It 
would be like a doctor going in and doing open heart surgery knowing 
that his patient was very close to death anyway, and then taking out a 
life insurance policy on that patient because he was clearly going to 
win each way.
  Ms. KAPTUR. Excellent analogy. They created rules by which only they 
could win, and that doesn't seem to me to be the spirit of free 
enterprise. They created so much collateral damage it brought down the 
economy of the whole country. They keep using the argument if we didn't 
have the TARP, then things would have really gone wrong. I thought, How 
could it be worse? How could it be worse than this? Is what they did 
with the TARP just bailing themselves out, because they certainly have 
not done anything for the American people. They have thrown all of the 
bills of all of their mistakes on Fannie Mae, Freddie Mac, FHA, all of 
the instrumentalities of the United States for decades to come. They 
didn't take any losses on those themselves. They were enriched by the 
taxpayers of the United States who lifted them right up. And they are 
not dealing with the damage across this country where foreclosures 
continue to go up.
  I place on the Record the names of the six companies that now hold 
two-thirds of the wealth of this Nation, and they are Goldman Sachs, 
Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells 
Fargo. They have enriched themselves handsomely. They doubled their 
importance since the beginning of this crisis while quashing community 
banks across this country, seeing forced mergers as institutions like 
PNC bought up National Citibank in Ohio, as local community banks that 
didn't do anything wrong and were not permitted to do this kind of 
wild-eyed business deal, found themselves having to pay huge FDIC fees. 
And the net yield of all of this is the big ones got bigger and the 
American people are continuing to be kicked out of their homes and 
these institutions won't return phone calls and they have hold of the 
auction process and their investment intermediaries are holding the 
equity and the ownership in these properties. How is that good for this 
country?

  Ms. SPEIER. I thank the gentlelady from Ohio. It is very important to 
make the point that Goldman Sachs has never loaned a dime, has never 
offered a loan to an American trying to buy a house. They have never 
been a commercial bank as we know them, and yet they have the luxury of 
being at the discount window getting the money cheap even though they 
have not been a commercial bank as we know a commercial bank to be. All 
they have done is bet on how to rig these various mortgage-backed 
securities and make a truckload of money off them.
  Ms. KAPTUR. What amazed me is when all of the house of cards started 
to fall, sometimes in my part of the country you see chipmunks tearing 
across the concrete, and they go so fast. The minute they got in 
trouble, what did they do, they came under the umbrella of the Bank 
Holding Company Act so they could not be a speculator any more, now 
they are a legitimate bank; right? Even though they were trafficking in 
all of those securities, they were just like those little chipmunks. 
They hid themselves right under the Bank Holding Company Act. I don't 
agree with what was done, but they took good care of themselves.
  Ms. SPEIER. I now yield time to my good friend, the gentleman from 
Rhode Island (Mr. Langevin).
  Mr. LANGEVIN. I thank the gentlelady for yielding, and I want to echo 
the concerns and the words of my colleagues who have spoken on this 
issue of financial reform and the outrageous financial business 
practices that have been taking place on Wall Street.
  I am angry, as you are, and I certainly want to take the opportunity 
to express my strong support for the work being done to crack down on 
Wall Street and enact reform to prevent another near-economic collapse 
from endangering our financial system and American families.
  I was certainly proud to vote for the Wall Street Reform and Consumer 
Protection Act this past December, and I look forward to voting for its 
final passage into law this year.
  In my home State of Rhode Island, we are still feeling the 
repercussions of the Great Recession. With an unemployment rate of 12.6 
percent, we are tied for the third highest unemployment rate in the 
Nation. And I'm angry that while Wall Street banks were propped up with 
taxpayer funds last year, our small businesses on Main Street are 
struggling to keep their doors open. American families are struggling 
to keep their homes, and they are still asking where is their 
assistance because it hasn't been enough.
  Over the past few years, I, like many Rhode Islanders, have been 
angered by the greed exhibited by Wall Street and other companies that 
took advantage of their investors, preyed on our constituents, and 
rewarded executives with outrageous pay packages. This week, we heard 
Goldman Sachs executives testify before the Senate that they are not to 
blame for the bad investment deals that were based on the mortgage 
market and added to its collapse.
  This testimony is a slap in the face to hardworking Americans, small 
business owners and everyone else who played by the rules only to find 
themselves devastated by the economic downturn. And it should convince 
every Member of this body to prioritize legislation that puts consumers 
first and demands accountability of our regulators and financial 
institutions.
  Sadly, Wall Street has been fighting such reform tooth and nail when 
in fact they should be embracing our efforts to ensure that the rules 
are clear, the system is transparent and the playing field is even. 
Once again, I urge the financial sector to join us instead of fighting 
us--if your practices are legitimate, you should have, nothing to fear 
from this legislation.
  The reckless actions of Goldman Sachs and other financial 
institutions provide a clear illustration of why we need to place a 
greater importance on good corporate governance. We must create an 
environment in which businesses take care of--and are held accountable 
to--their shareholders, employees and customers. Companies should be 
encouraged to have sustainable environmental policies and practices, 
solid workplace relations and produce safe products.
  That is why I plan to reintroduce the Federal Employees Responsible 
Investment Act, which would add a socially responsible investment 
option to the Thrift Savings Plan. Making an investment in companies 
that are committed to corporate responsibility will have a positive 
impact on our financial system, as well as empower individuals to 
reward companies that share their values.
  We must do everything in our power to move our economy forward, and I 
urge all my colleagues, especially those in the Senate, to support 
legislation that ends Wall Street's gambling with our hard-earned 
dollars. I agree with President Obama when he said last week, ``this 
issue is too important and the cost of inaction is too great.'' My 
constituents in Rhode Island couldn't agree more.
  Ms. SPEIER. I thank the gentleman and recognize we could have spoken 
for 2 hours this evening, and we will continue this.

                          ____________________