[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.
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