[Congressional Record Volume 156, Number 61 (Wednesday, April 28, 2010)]
[House]
[Pages H3003-H3006]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
ECONOMIC CRISIS IN AMERICA
The SPEAKER pro tempore (Mr. Boccieri). Under the Speaker's announced
policy of January 6, 2009, the gentleman from Iowa (Mr. King) is
recognized for 60 minutes.
Mr. KING of Iowa. Mr. Speaker, I listened with interest to the
presentations made here in the previous hour, and there were a couple
of visuals that I want to look at and commit some of that to memory.
I heard from Ms. Kaptur that this is not a partisan issue, it is an
economic issue and an American issue, and I agree. I have been troubled
for some time not just the influence that comes out of Goldman Sachs,
but the influence that comes out of Wall Street. Here is my concern and
here how it was internalized.
I lived much of my life watching from a distance what was going on on
Wall Street, and I believed that as those investors and those bankers
sat down there and began to trade on the
[[Page H3004]]
streets of Wall Street and began to build the edifices that exist there
today so very close to Ground Zero, that they were keepers of the free
enterprise flame in America.
{time} 1815
I had great trust that they were the ones that understood from the
top down, from the multiple billions of dollars in investments down,
how to hold together free enterprise, how to plan for the long term,
how to put provisions in place so that each generation could have that
opportunity to do free enterprise capitalism and free market
capitalism.
I got my first wide open eyes when I first went to Wall Street when I
was elected to Congress; it would be fairly early in 2003 for me. It's
a long story, but the short version of it was after I went around Wall
Street and met with a lot of the CEOs and the players that were there,
on the way back I turned to my wife and I said, Marilyn, they don't
have a vision for the long term. They don't have a plan in place to
protect our investments and see to it that this doesn't collapse.
They're looking at the short term. They're looking at taking their
margins out and they're looking at their quarterly reports, but they're
not looking at where we are in 10 years or a generation or 50 years or
100. That was well before we saw anything except a dot-com bubble that
was, at the time, being filled by an unnatural housing market that was
partially fueled by unnaturally low interest rates. But that was my
vision then.
As I watch this unfold, I reflect upon an individual we brought in as
an expert, and since I'm going to quote him on the floor, I don't want
to attribute it to the name, but it's 30 years in investment banking.
This was in the beginning of the subprime mortgage crisis as the
dialogue was beginning in the country before we actually saw this
starting to tail off. He explained it this way: when you're in this
investment banking business, what you do is--and these would be the
experts--what you do is pretty much what everybody does. That way if
they're making money, you're making money, and if things fall apart and
they get bailed out, you'll be bailed out with them.
That was more than 3 years ago. That's another incident that was
branded into my memory because it was a seminal moment in my
understanding that the economy that most of us deal with as
individuals, balancing our checkbook, paying our credit card bills,
looking at the income that comes in weekly or monthly and budgeting our
expenses and knowing that there are checks and balances in everything
that we do, if we fail to make our house payment, somebody comes and
sells our house. If we fail to make our car payment, somebody
repossesses our car. They don't come along and say, oh, sorry, you
didn't buy a nice enough car, we're going to tax somebody and fund
that. We have to be responsible for our finances.
If we start a business, we have to guarantee those payments. We have
to get a line of credit at the bank so we can make our monthly bills
and we can meet the payroll and the utilities and all of the things
that come along with the free enterprise side of this.
I looked at Wall Street and I found out that they had a different set
of rules, a different way of looking at this, that their checks and
balances were not built in so that there was an assurance that--the
built-in component that is a check and balance that would require that
the people who would make the over-investments and take the excessive
risks would pay the price for that.
So as we get to this point now where we have seen the downward spiral
in our economy, this ``Great Recession'' as some will call it and the
massive government bailouts that we have had and the tremendous burden
on the taxpayers, born and unborn, that we will have this obligation to
try to service the interest and the principal on this debt, still the
guarantee is there, more than implicit, it's now nearly explicit with
this legislation. And we may or may not agree on how we go forward, but
I think we can agree that the things that we've done in the past
haven't had enough checks and balances internally.
As I listened to this dialogue--I didn't come to the floor to speak
about this subject, but I wanted to express this right in the aftermath
of this previous Special Order, Mr. Speaker, to let you know and
everyone know that we do have a common cause to put responsibility and
government responsibility in the market system. I just watched the
gentlelady pay attention here. I would yield to whatever remarks she
might choose to make.
Ms. KAPTUR. I want to thank Congressman King very much for coming to
the floor because we share a concern that goes beyond party. This is so
serious for our country, it's serious for our generation, it's serious
for the next generation.
If we look at the abuses of the financial system over the last 30
years, let's say, every time something bad happened, the government
bailed them out. And then the next crisis was worse than the one before
it. I came here during the 1980s. I saw what happened, and I saw a huge
debt put on the American people, $140 billion at that point. And rather
than strengthening the laws to prevent moral hazard, we loosen them.
And then we got a worse crisis.
If you look back to Enron, if you look back to everything that
happened during the 1990s, rather than repairing it, what we did was we
gave them more latitude--it's inexplicable what occurred--and the moral
hazard got greater. And now with this, this is so much larger than the
last two crises, and it's a real question as to whether the so-called
``reform'' coming out of the Congress will actually work.
I would like to place in the Record an interview with Professor
William Black, an attorney who was recently on television, that I think
is very, very probing about the enormous potential here for financial
fraud, control fraud, the lack of investigators inside the FBI, and as
Congresswoman Speier mentioned, inside of the SEC. And then also an
interview with Dr. Simon Johnson of MIT and Mr. James Kwak about what
is actually happening in this crisis and how we are not addressing it
fully in the reform bills proceeding through this Congress.
So I just appreciate you giving me the opportunity to say that and to
say we are in common cause here. I appreciate your comments very much.
I am very worried about where we're headed as a country. I see
community banks being destroyed in my region. I see these big money
center institutions that have been prone to moral hazard having greater
and greater authority in our country. And the amount of money they give
to political campaigns, and with the recent decision by the Supreme
Court to allow endless funding by any group in our political campaigns.
Any one of them could wipe us out.
That's not what this country was set up for. We were set up for
opportunity. We were set up for the individual to matter, for our
communities to matter, for the equity that our people, when they create
it in their homes, that they just don't lose it because these people
think of some scheme to raid them. And yet that's what we're facing
now.
So we have an enormous obligation to educate the American people and
learn from them and hear their best advice on how we can dig ourselves
out of this hole.
I thank you for allowing me a few moments of your time.
Interview: Excerpts From Bill Moyers Journal, April 23, 2010, Guest:
Bill Black
Bill Moyers: Bill Black is with me now. One of the
country's leading experts on crimes in high places he teaches
economics and law at the University of Missouri-Kansas City,
and wrote this book, ``The Best Way To Rob a Bank Is To Own
One.''
Welcome back to the Journal.
William K. Black: Thank you.
Bill Moyers: What did you think of the President's speech
late this week?
William K. Black: It's a good speech. He's a very good
spokesman for his causes. I don't think substantively the
measures are going to prevent a future crisis. And I was
disappointed that he wasn't willing to be blunt. He used a
number of euphemisms, but he was unwilling to use the F word.
Bill Moyers: The F word?
William K. Black: The F word's fraud in this. And it's the
word that explains why we have these recurrent, intensifying
crisis.
Bill Moyers: How is that? What do you mean when you say
fraud is at the center of it?
William K. Black: Well, first, when you deregulate or never
regulate, mortgage bankers were never regulated, you
effectively have decriminalized that industry, because only
the regulators can serve as the sherpas, that the FBI and the
prosecutors need to be able to understand and prosecute these
kind of complex frauds. They can do one or two or maybe three
on their own, but when an entire industry is beset by wide
scale fraud,
[[Page H3005]]
you have to have the regulators. And the regulators were the
problem. They became a self-fulfilling prophecy of failure,
because they, President Bush appointed people who hated
regulation. I call them the anti-regulators. And that's what
they were.
Bill Moyers: This hearing that, where you testified this
week, looking into the bankruptcy at Lehman Brothers, had
something on this.
Timothy Geithner: And tragically, when we saw firms manage
themselves to the edge of failure, the government had
exceptionally limited authority to step in and to protect the
economy from those failures.
Ben Bernanke: In September 2008, no government agency had
sufficient authority to compel Lehman to operate in a safe
and sound manner and in a way that did not pose dangers to
the broader financial system.
Anton Valukas: What is clear is that the regulators were
not fully engaged and did not direct Lehman to alter the
conduct which we now know in retrospect led to Lehman's ruin.
Bill Moyers: The regulators were not fully engaged. I mean,
this is an old story. We all know about regulatory capture
where the regulated take control of the regulators.
William K. Black: Yeah, but this one is far worse. That's
not very candid testimony on anybody's part there. The Fed
had unique authority. And it had it since 1994 to regulate
every single mortgage lender in America. And you might think
the Fed would use that authority.
And you might especially think that, if you knew that
Gramlich, one of the Fed members, went personally to Alan
Greenspan and said, there's a housing bubble. And there's a
terrible crisis in non-prime. We need to send the examiners
in. We need to use our regulatory authority. And Greenspan
refused. Lehman was brought down primarily by selling liar's
loans. It was the biggest seller of liar's loans in the
world.
And when we look at these liar's loans, we find 90 percent
fraud. 90 percent. And we find that most of the frauds are
not induced by the borrower, but they're overwhelmingly done
by the loan brokers.
Bill Moyers: And liar's loans are?
William K. Black: A liar's loan is we don't get any
verified information from you about your income, your
employment, your job history or your assets.
Bill Moyers: You give me a loan, no questions asked?
William K. Black: No real questions asked. Certainly no
answers checked. In fact, we just had hearings last week
about WaMu, which is also a huge player----
Bill Moyers: Washington Mutual----
William K. Black [continuing]: In these frauds. Washington
Mutual, which used to make, run all those ads making fun of
bankers who, because they were stuffy and looked at loan
quality before they made a loan. Well, WaMu didn't do any of
that stuff. And of course, WaMu had just massive failures.
And who got in trouble at WaMu? Who got in trouble at Lehman?
You got in trouble if you told the truth. They fired the
people who found the problems. They promoted the people that
caused the problem, and they gave them massive bonuses.
Bill Moyers: I watched the testimony where you were present
the other day in the Lehman hearings. And there was a very
moving moment with a former vice-president of Lehman Brothers
who had gone and tried to blow the whistle, who tried to get
people to pay attention to what was going on. Take a look.
Matthew Lee: I hand-delivered my letter to the four
addressees and I'll give a quick timeline of what happened,
May 16th was a Friday, on the Monday I sat down with the
chief risk officer and discussed the letter, on the Wednesday
I sat down with the general counsel and the head of internal
audit, discussed the letter. On the Thursday I was on a
conference call to Brazil. Somebody came into my office,
pulled me out, and fired me on the spot without any
notification. I stayed, sorry.
Bill Moyers: Matthew Lee, vice-president of Lehman
Brothers, fired because he tried to blow the whistle. What
does that say to you?
William K. Black: Well, it tells me that they were covering
up the frauds, that they knew about the frauds and that they
were desperate to prevent other people from learning.
Bill Moyers: Matthew Lee told the accounting firm Ernst &
Young what was going on. Isn't the accounting firm supposed
to report this, once they learn from somebody like him that
there's fraud going on?
William K. Black: Yes, they're supposed to be the most
important gatekeeper. They're supposed to be independent.
They're supposed to be ultra-professional. But they have an
enormous problem, and it's compensation. And that is, the way
you rise to power within one of these big four accounting
firms is by being a rainmaker, bringing in the big clients.
And so, every single one of these major frauds we call
control frauds in the financial sphere has been--their weapon
of choice has been accounting. And every single one, for many
years, was able to get what we call clean opinions from one
of the most prestigious audit firms in the world, while they
were massively fraudulent and deeply insolvent.
Bill Moyers: I read an essay last night where you describe
what you call a criminogenic environment. What is a
criminogenic environment?
William K. Black: A criminogenic environment is a steal
from pathology, a pathogenic environment, an environment that
spreads disease. In this case, it's an environment that
spreads fraud. And there are two key elements. One we talked
about. If you don't regulate, you create a criminogenic
environment because you can get away with the frauds. The
second is compensation. And that has two elements. One is the
executive compensation that people have talked about that
creates the perverse incentives. But the second is for these
professionals. And for the lower level employees, to give the
bonuses. And it creates what we call a Gresham's dynamic. And
that just means cheaters prosper. And when cheaters prosper,
markets become perverse and they drive honesty out of the
market.
Bill Moyers: You also wrote that the New York Federal
Reserve knew about this so-called three-card monte routine.
But that, the man who led it, at the time, Timothy Geithner,
now the treasury secretary, testified that there was nothing
he could do.
Timothy Geithner: In our system the Federal Reserve was a
fire station, a fire station with important, if limited,
tools to put foam on the runway, to provide liquidity to
markets in extremis. However, the Federal Reserve, under the
laws of this land was not given any legal authority to set or
enforce limits on risk-taking by large financial institutions
like the independent investment banks, insurance companies
like AIG, Fannie and Freddie, or the hundreds of non-bank
financial firms that operated outside the constraints of the
banking system.
Bill Moyers: Now, what I hear is the gentleman who was then
chairman of the New York Fed, saying, I, we had this job to
do, but we didn't have the authority to do it.
William K. Black: Yeah.
Bill Moyers: We were the fire truck, but we didn't have any
water in our hose.
William K. Black: Yeah, this was pretty disingenuous,
because other portions of his testimony, he explained why
there was this gap. And he said it was because we repealed
Glass-Steagall. Well, the Fed pushed for the repeal of Glass-
Steagall.
Bill Moyers: Glass-Steagall was the act that was repealed
in the late nineties that separated regular banks from
investment banks, right?
William K. Black: Correct. So this is a deliberately
created regulatory black hole, created by the Fed. And then
the Fed comes into the hearing, eight years later, and said,
we were helpless. Helpless to do anything, because of a black
hole we designed.
Interview: Excerpts From Bill Moyers Journal, April 16, 2010, Guests:
Simon Johnson and James Kwak
Simon Johnson is a former chief economist at the
International Monetary Fund. He now teaches at MIT's Sloan
School of Management and is a Senior Fellow at the Peterson
Institute for International Economics.
James Kwak is studying law at Yale Law School--a career he
decided to pursue after working as a management consultant at
McKinsey & Company and co-founding the successful software
company, Guidewire. Together James Kwak and Simon Johnson run
the indispensable economic website BaselineScenario.com.
Welcome to you both.
Let me get to the blunt conclusion you reach in your book.
You say that two years after the devastating financial crisis
of '08 our country is still at the mercy of an oligarchy that
is bigger, more profitable, and more resistant to regulation
than ever. Correct?
Simon Johnson: Absolutely correct, Bill. The big banks
became stronger as a result of the bailout. That may seem
extraordinary, but it's really true. They're turning that
increased economic clout into more political power. And
they're using that political power to go out and take the
same sort of risks that got us into disaster in September
2008.
Bill Moyers: And your definition of oligarchy is?
Simon Johnson: Oligarchy is just--it's a very simple,
straightforward idea from Aristotle. It's political power
based on economic power. And it's the rise of the banks in
economic terms, which we document at length, that it'd turn
into political power. And they then feed that back into more
deregulation, more opportunities to go out and take reckless
risks and--and capture huge amounts of money.
Bill Moyers: And you say that these this oligarchy consists
of six megabanks. What are the six banks?
James Kwak: They are Goldman Sachs, Morgan Stanley,
JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.
Bill Moyers: And you write that they control 60 percent of
our gross national product?
James Kwak: They have assets equivalent to 60 percent of
our gross national product. And to put this in perspective,
in the mid-1990s, these six banks or their predecessors,
since there have been a lot of mergers, had less than 20
percent. Their assets were less than 20 percent of the gross
national product.
Bill Moyers: And what's the threat from an oligarchy of
this size and scale?
Simon Johnson: They can distort the system, Bill. They can
change the rules of the game to favor themselves. And
unfortunately, the way it works in modern finance is when the
rules favor you, you go out and you take a lot of risk. And
you blow up from time to time, because it's not your problem.
When it blows up, it's the taxpayer and it's the government
that has to sort it out.
[[Page H3006]]
Bill Moyers: So, you're not kidding when you say it's an
oligarchy?
James Kwak: Exactly. I think that in particular, we can see
how the oligarchy has actually become more powerful in the
last since the financial crisis. If we look at the way
they've behaved in Washington. For example, they've been
spending more than $1 million per day lobbying Congress and
fighting financial reform. I think that's for some time, the
financial sector got its way in Washington through the power
of ideology, through the power of persuasion. And in the last
year and a half, we've seen the gloves come off. They are
fighting as hard as they can to stop reform.
Simon Johnson: I know people react a little negatively when
you use this term for the United States. But it means
political power derived from economic power. That's what
we're looking at here. It's disproportionate, it's unfair, it
is very unproductive, by the way. Undermines business in this
society. And it's an oligarchy like we see in other
countries.
Mr. KING of Iowa. Reclaiming my time and, Mr. Speaker, I would point
out that it is unusual for Democrats and Republicans to share time
spontaneously on the floor, but it's because there is a bond of common
interest and a bond of a serious legislator that I recognize that's
here on the floor for a serious reason.
I thank the gentlelady from Ohio for the presentation.
I'm going to shift off now into the subject matters that I had on the
front of my mind, but I was compelled to address this and I appreciate
the response.
Mr. Speaker, I come here to the floor tonight to talk about a range
of issues. Perhaps if I would pick up on the financial side of this and
go through a list of some of the things that have happened that I think
contributed to the ``Great Recession'' that some refer to it as. And I
would take us back a long ways. I would take us far back to the time
that there became implicit guarantees that the Federal Government would
do bailouts.
I remember those years of the eighties that the gentlelady mentioned.
I went through 28 years of business, and I was highly leveraged going
into the farm crisis of the eighties. I know the pain of that. I lived
for 3\1/2\ years with a knot in my stomach that didn't go away unless
there was something incredibly distracting that would cause it to
disappear, and then I remember it would form again.
The SPEAKER pro tempore. The gentleman will suspend.
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