[Congressional Record Volume 156, Number 65 (Tuesday, May 4, 2010)]
[Senate]
[Pages S3056-S3059]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      FINANCIAL REGULATORY REFORM

  Mr. ALEXANDER. Madam President, the business before the Senate this 
week is financial regulation reform. It is hard to pick what the 
business should be this week. There is so much going on that is of 
great concern to so many of us.
  We have a briefing this afternoon on the dimensions of the oilspill 
in the Gulf of Mexico.
  Those of us in Tennessee are deeply concerned about the 1,000-year 
rain--an event that only happens every 1,000 years or so, according to 
some of the engineers in the Army Corps--that has wreaked havoc on 
middle Tennessee and which is beginning now to hurt west Tennessee.
  Also, we have the Arizona immigration debate, which the distinguished 
Senator from Illinois was discussing a little earlier.
  We have a new START treaty the President has asked us to consider.
  Just around the corner, we have a nomination coming for a vacancy on 
the Supreme Court of the United States which will dominate, as it 
should, the attention of this body for 2 or 3 months or so until it is 
thoroughly considered.
  Of course, the American people would like for us to focus on jobs.
  I have great respect for the Democratic Governor of Tennessee who was 
quoted in the Wall Street Journal yesterday saying the following:

       ``If I have 100 conversations with people, 95 of them will 
     be about jobs and none of them will be about cap-and-trade 
     and none of them will be about bank reform,'' said Tennessee 
     Gov. Phil Bredesen, a conservative Democrat, in an interview.

  That is according to the Wall Street Journal. Financial regulation 
reform is the current topic and financial regulation is important. The 
importance of it is that this is a country that produces, year in and 
year out, about 25 percent of all the money in the world. We sometimes 
forget how privileged we are in our standard of living. We are just 
about 5 percent of the people of the world, but 25 percent of the 
wealth of the world is created here. It is because entrepreneurs have 
an advantage. They can create new jobs one right after the other.
  Our well-being is not measured by the number of jobs we lose. It is 
measured by the difference of jobs we create and the number of jobs we 
lose. The problem we have right now is we are not creating enough new 
jobs in the United States of America. We need to focus on doing that.
  One aspect of that is the kind of system of financial regulation we 
have. All of us were appalled by some of the hi-jinks on Wall Street 
that helped lead us to the great recession in which we find ourselves 
and for which we had to take extraordinary action. The purpose of the 
financial regulation bill should be to minimize the possibility of 
those [Wall Street] hi-jinks occurring again, but at the same time, to 
leave an environment in the United States where we can create the 
largest number of good, new jobs. When I say ``we,'' I do not mean the 
government. We have had too much attention on creating government jobs.
  The one place the stimulus has worked is Washington, DC. Salaries are 
up here. There are more jobs here. The place where the stimulus is not 
working is out across the country where, if we continued with the 
economy over the next year at the rate of growth it had in the first 
quarter, which was 3.2 percent, we are told the unemployment rate at 
the end of the year will still be about 9 or 10 percent. Why? Because 
we are not creating enough new jobs in the private sector.
  As we deal with financial regulation, we must be careful to leave an 
environment in which we can continue to create jobs, which is why there 
are five major issues that have come toward us. I heard someone on 
television this morning say: There go the Republicans. They want to 
slow down the financial regulation bill. They cannot agree on it in the 
Senate.
  What we want to do--especially after the health care debate--is 
provide some checks and balances to make sure we have a good bill.
  These are the issues that are before the American people on this 
bill: Is there a Washington takeover of Main Street lending? Community 
banks, credit unions, plumbers, and dentists say there may be. We need 
to make sure there is not.
  The last thing we need to do is make it harder to get a loan in 
Nashville or Manchester or Knoxville or San Antonio. Because if you 
cannot get a loan, you can't hire a person, you can't invest in 
something, and you can't create a new job, and the economy does not 
move. That is the first issue: Is there a Washington takeover of Main 
Street lending.
  The second issue: What about this czarina or czar? What about this 
person the President would appoint to be in charge of millions of 
transactions in the consumer bureau? Unlike our other independent 
agencies, this person would barely be accountable to the President and 
would not be accountable to the Congress. Doesn't that lead to the 
possibility that this person could write some rules and regulations 
unaccountably and might make the same sort of mistake we made when we 
encouraged people to buy houses who could not afford to pay for them--
which most agree is the principal event that led us into the great 
recession that we now have? And that nearly led us into another 
depression, which brings us to the third issue: Why are we not dealing 
with the big housing agencies? Fannie Mae and Freddie Mac have about as 
much debt outstanding as the United States does, and we taxpayers 
implicitly guarantee their debt.
  In the health care debate, it was said: We do not add to the national 
debt with this bill. But we did not include doctors--we did not include 
paying doctors in the health care bill. That would be about like my 
going to the Congressional Budget Office and saying: Tell me how much 
it is going to cost to run the University of Tennessee for the next 10 
years, and the Congressional Budget Office might say to me: With or 
without the professors? If I wanted a low-ball number, I would say: Oh, 
give me a number without paying the professors.

  That is what we got in the health care bill. We left out $200 billion 
or $300 billion. The President's budget says it is $371 billion over 
the next 10 years because we assumed that we would not increase pay for 
doctors to serve Medicare patients, which would create for them a 21-
percent cut in pay. And for those Medicare patients, it begins to 
create a health care bridge to nowhere because no doctors are going to 
see them if they are not properly reimbursed.
  We are doing the same thing in financial regulation reform when we 
leave out Fannie Mae and Freddie Mac. Why are we leaving them out? It 
is not because they didn't make a contribution to the big recession we 
are in. Everyone agrees they did. The Democrats are leaving them out 
because if Democrats

[[Page S3057]]

put them in, we would have to deal with the $200 billion, $300 billion 
or $400 billion cost in the current year. According to the Wall Street 
Journal today, the Congressional Budget Office says the deficit would 
be about $291 billion bigger in 2009. So, Congress is going to put them 
in the drawer or put them under the table or act like they aren't 
there, and say to the American people: Hooray, we fixed financial 
regulation, but we're not dealing with housing? When we fix financial 
regulation without addressing Fannie Mae and Freddie Mac it's like not 
paying doctors when we pass a comprehensive health care bill. That is a 
third issue.
  There are a couple more issues. One is the so-called derivatives 
issue. The so-called derivatives issue is a complicated issue for many 
people, but the head of the Federal Deposit Insurance Corporation says 
the bill before us may actually create less regulation for these 
complicated transactions rather than more. This is an area in which we 
want to make sure we do not make a mistake.
  Then there is the so-called big bank bailout provision. Most 
Americans don't want a provision in the law that allows or encourages 
big banks to take risks that cause them to fail and take the rest of us 
down with them. So, the point of our debate ought to be to make sure in 
our financial regulation reform that we don't provide incentives for 
big banks to take imprudent risks that will cause them to fail and hurt 
us because they are so big.
  How are we making progress on this issue? As the Republican leader 
has said, we have Goldman Sachs and Citibank that have said they like 
the bill. I would say there are a number of people worried about the 
bill. I am hearing from community banks, credit unions, auto dealers, 
dentists, furniture retailers, plumbers, and candy companies with 
concerns.
  A New York Times article says: ``Senate Financial Bill Misguided, 
Some Academics Say.'' That was yesterday. A Professor at MIT says, `` . 
. . we need to proceed about this in a much more deliberate and 
rational and thoughtful way.'' That is what we would like to do.
  A professor at New York University says leaving out Fannie Mae and 
Freddie Mac from the discussion is ``outrageous.''
  FDIC Chairman Sheila Bair warns against new curbs on bank trading 
that I just mentioned.
  My point is that this is an opportunity for us on the Republican side 
and those on the Democratic side to take an important piece of 
legislation--not such a visible piece of legislation today because we 
have issues from immigration to the oilspill to the flooding in 
Tennessee--vastly important for our country and work together to make 
it better.
  Some progress, I understand, is being made on one of the five 
provisions. That is the too-big-to-fail provision. We will see what 
Senator Shelby has to say on that. But that still leaves the question 
of whether we ought to have an independent czarina or czar. That still 
leaves the question of whether we are dealing properly with 
derivatives. That still leaves the question of whether we ought to 
leave out of a financial reform bill the two great housing agencies 
that are just sticking there in front of us like a sore thumb, 
reminding us we have not done our job if we don't include them. And of 
great importance, why can't we simply have a provision in the bill that 
eliminates any possibility that we have a Washington takeover of Main 
Street? It is not the business of this bill to make it harder to extend 
and get credit up and down Main Street America.
  Madam President, I ask unanimous consent to have printed in the 
Record a series of articles.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                 [From the New York Times, May 3, 2010]

          Senate Financial Bill Misguided, Some Academics Say

                        (By Andrew Ross Sorkin)

       As Democrats close in on their goal of overhauling the 
     nation's financial regulations, several prominent experts say 
     that the legislation does not even address the right 
     problems, leaving the financial system vulnerable to another 
     major crisis, Binyamin Appelbaum and Sewell Chan report in 
     The New York Times.
       Some point to specific issues left largely untouched, like 
     the instability of capital markets that provide money for 
     lenders, or the government's role in the housing market, 
     including the future of the housing finance companies Fannie 
     Mae and Freddie Mac.
       Others simply argue that it is premature to pass sweeping 
     legislation while so much about the crisis remains unclear 
     and so many inquiries are in progress.
       ``Until we understand what the causes were, we may be 
     implementing ineffective and even counterproductive 
     reforms,'' said Andrew W. Lo, a finance professor at the 
     Massachusetts Institute of Technology. ``I understand the 
     need for action. I understand the need for something to be 
     done. But what I expect from political leaders is for them to 
     demonstrate leadership in telling the public that we need to 
     proceed about this in a much more deliberate and rational and 
     thoughtful way.''
       Senate Republicans echoed some of these concerns as they 
     delayed debate on the legislation last week. Democrats agree 
     that significant issues remain to be addressed. But they say 
     that the government must press forward in responding to the 
     problems that already are clear.
       The bill, which was introduced by Christopher J. Dodd, 
     chairman of the Senate Banking Committee, would extend 
     oversight to a wider range of financial institutions and 
     activities. It would create a new agency to protect borrowers 
     from abuse by lenders, including mortgage and credit card 
     companies. And it seeks to ensure that troubled companies, 
     however large, can be liquidated at no cost to taxpayers.
       A diverse group of critics, however, say the legislation 
     focuses on the precipitators of the recent crisis, like 
     abusive mortgage lending, rather than the mechanisms by which 
     the crisis spread.
       Gary B. Gorton, a finance professor at Yale, said the 
     financial system would remain vulnerable to panics because 
     the legislation would not improve the reliability of the 
     markets where lenders get money, by issuing short-term debt 
     called commercial paper or loans called repurchase agreements 
     or ``repos.''
       The recent crisis began as investors nervous about mounting 
     subprime mortgage losses started demanding higher returns, 
     then withholding money altogether. The government is now 
     moving to prevent abusive mortgage lending, but Mr. Gorton 
     said investors could just as easily be spooked by something 
     else.
       The flight of investors is the modern version of a bank 
     run, in which depositors line up to withdraw their money. The 
     banking industry was plagued by runs until the government 
     introduced deposit insurance during the Great Depression. 
     Professor Gorton said the industry had now entered a new era 
     of instability.
       ``It is unfortunate if we end up repeating history,'' 
     Professor Gorton said. ``It's basically tragic that we can't 
     understand the importance of this issue.''
       Treasury Secretary Timothy F. Geithner agreed in April 
     testimony before the House Financial Services Committee that 
     ``more work remains to be done in this area,'' but he said 
     that regulators could address the issue without legislation. 
     The government plans to require lenders to hold larger 
     reserves against unexpected losses and to require that they 
     keep money on hand to meet short-term needs.
       David A. Skeel Jr., a corporate law professor at the 
     University of Pennsylvania, said it would be a mistake for 
     Congress to leave the drafting of these standards to the 
     discretion of regulators.
       ``Regulators working right now will be tough,'' Professor 
     Skeel said. ``But we know from history that as soon as this 
     legislative moment passes, the ball is going to shift back 
     into Wall Street's court. As soon as the crisis passes, what 
     inevitably happens is that the people that are paying the 
     most attention are the banks.''
       A second group of critics say the government helped to seed 
     the crisis through its efforts to increase home ownership, 
     including the role of Fannie Mae and Freddie Mac in buying 
     mortgage loans to make more money available for lending. The 
     companies are now owned by the government after incurring 
     enormous losses on loans that borrowers could not afford to 
     repay.
       Lawrence J. White, a finance professor at New York 
     University, said it made no sense to overhaul financial 
     regulation without addressing the future of federal housing 
     policy. He said he was trying to find the strongest possible 
     words to describe the omission of Fannie Mae and Freddie Mac 
     from the legislation.
       ``It's outrageous,'' he finally said.
       Republicans have repeatedly criticized the administration 
     for advancing legislation that does not address the 
     companies' future. The Obama administration says drafting a 
     new housing policy is on its agenda for next year.
       Other critics warn that the proposed legislation would 
     insert the government deeply into the financial markets, 
     creating new distortions and seeding future crises. They say 
     the focus of financial reform should instead be on increased 
     transparency.
       Andrew Redleaf and Richard Vigilante, hedge fund managers 
     who started warning investors in 2006 that a housing crisis 
     was inevitable, proposed a minimalist version of reform in 
     their recent book ``Panic.'' They want to require all 
     financial institutions, including investment banks and hedge 
     funds

[[Page S3058]]

     like their own, to disclose, at least once a week, every 
     position in tradable securities.
       ``The Dodd bill is almost entirely irrelevant,'' Mr. 
     Vigilante said in a telephone interview. ``All it does is 
     strengthen what we've had for years,'' a system that depends 
     on judgments made by regulators behind closed doors.
       Proponents of the legislation say that it significantly 
     expands transparency, for example by requiring many 
     derivatives contracts to trade in public view. But they say 
     that the government also needs to expand the scope of its 
     oversight because the worst excesses that led to the crisis 
     began and flourished at nonbank financial institutions that 
     were not subject to federal regulation.
       The most basic critique comes from Professor Lo and others 
     who say that Congress is moving too quickly. The origins of 
     the crisis remain a subject of intense controversy. 
     Investigations continue to unearth surprising information. 
     The Financial Crisis Inquiry Commission, a bipartisan panel 
     created by Congress, is not scheduled to report until 
     December. Why not wait, they ask, until the targets are 
     clearer?
       Phil Angelides, the chairman of the inquiry commission and 
     a Democrat, says that the problems raised by the crisis will 
     not be solved in one stroke and that he supports the 
     Democratic push to begin the process soon.
       But the critics point to the words of Nicholas F. Brady, a 
     former Treasury secretary who led the bipartisan 
     investigation into the 1987 stock market crash: ``You can't 
     fix what you can't explain.''
                                  ____


                [From the Washington Post, May 4, 2010]

     Derivatives-Spinoff Proposal Opposed as Part of Overhaul Bill

                           (By Brady Dennis)

       A dramatic proposal that could force banks to spin off 
     their derivatives businesses, potentially costing them 
     billions of dollars in revenue, has run into opposition on 
     multiple fronts as the Senate prepares to take up legislation 
     to remake financial regulations.
       Obama administration officials, industry groups, banking 
     regulators and lawmakers from both sides of the aisle have 
     taken aim at the measure proposed by Sen. Blanche Lincoln (D-
     AR), chairman of the Senate agriculture committee.
       Their main objection: If a central goal of regulatory 
     overhaul is to make financial markets more transparent and 
     accountable, Lincoln's provision would have the opposite 
     effect. Barring banks from trading in derivatives would force 
     those lucrative business into corners of the market where 
     there's even less oversight, critics warn.
       ``If all derivatives market-making activities were moved 
     outside of bank holding companies, most of the activity would 
     no doubt continue, but in less regulated and more highly 
     leveraged venues,'' Federal Deposit Insurance Corp. Chairman 
     Sheila C. Bair wrote in a recent letter to lawmakers.
       She said that Lincoln's measure could push $294 trillion 
     worth of derivatives deals beyond the reach of regulators. If 
     some FDIC-insured banks simply transferred this type of 
     business to affiliated firms, it could still pose a danger 
     because the affiliates would not be required to set aside as 
     much capital as banks to cover losses from derivatives 
     trading, Bair said.
       She added that a possible unintended consequence of the 
     legislation ``would be weakened, not strengthened, protection 
     of the insured bank and the Deposit Insurance Fund, which I 
     know is not the result any of us want.'' She said this danger 
     exists because financial troubles at an affiliate could in 
     times of crisis threaten the bank. Some administration 
     officials share Bair's worry that the provision could 
     undermine the goal of making derivatives trading less opaque.
       ``You'd rather make sure that it's regulated,'' said one 
     administration official, who spoke on the condition of 
     anonymity because the matter has not been resolved. ``The 
     whole principle of [regulatory] reform is not to push things 
     into dark corners.''
       Federal Reserve officials expressed their reservations to 
     Lincoln's staff members when they were working with their 
     counterparts from the Senate banking committee to combine 
     legislation passed by each panel. The agriculture and banking 
     committees both have had a traditional interest in 
     derivatives, which originated decades ago with trading in 
     farm products.
       In a memo, Fed officials said that forcing banks to 
     separate derivatives trading from banking operations would 
     ``impair financial stability and strong prudential regulation 
     of derivatives,'' ``have serious consequences for the 
     competitiveness of U.S. financial institutions'' and ``be 
     highly disruptive and costly, both for banks and their 
     customers.''
       Lincoln has stood by her proposal, which has garnered 
     support from consumer advocates, saying she wants to protect 
     bank depositors from risky trading activities. ``It ensures 
     banks get back to the business of banking,'' said Courtney 
     Rowe, Lincoln's spokeswoman.
       But other lawmakers have raised concerns.
       ``As we try to put in place new rules around derivatives, 
     we don't want to push the whole derivatives market 
     offshore,'' Sen. Mark Warner (D-VA) said recently on the 
     Senate floor.
       Sen. Judd Gregg (R-NH) said Monday that Lincoln's measure 
     would not only push derivatives transactions offshore but 
     would constrict credit to Main Street businesses that benefit 
     from the ability to hedge against changes in asset prices.
       ``This is a real job killer. It would cause contraction in 
     the economy,'' Gregg said. ``It's really a poor idea, and it 
     has no purpose, in my opinion, that's constructive. It's just 
     a punitive exercise aimed at Wall Street.''
       Amendments aimed at killing the Lincoln provision are 
     likely to emerge as lawmakers begin this week to consider 
     dozens of changes to the financial overhaul bill, according 
     to congressional sources.
                                  ____


              [From the Wall Street Journal, May 4, 2010]

                    What About Fan and Fred Reform?

                         (By Robert G. Wilmers)

       Congress may be making progress crafting new regulations 
     for the financial-services industry, but it has yet to begin 
     reforming two institutions that played a key role in the 2008 
     credit crisis--Fannie Mae and Freddie Mac.
       We cannot reform these government-sponsored enterprises 
     unless we fully confront the extent to which their outrageous 
     behavior and reckless business practices have affected the 
     entire commercial banking sector and the U.S. economy as a 
     whole.
       At the end of 2009, their total debt outstanding--either 
     held directly on their balance sheets or as guarantees on 
     mortgage securities they'd sold to investors--was $8.1 
     trillion. That compares to $7.8 trillion in total marketable 
     debt outstanding for the entire U.S. government. The debt has 
     the implicit guarantee of the federal government but is not 
     reflected on the national balance sheet.
       The public has focused more on taxpayer bailouts of banks, 
     auto makers and insurance companies. But the scale of the 
     rescue required in September 2008 when Fannie and Freddie 
     were forced into conservatorship--their version of 
     bankruptcy--was staggering. To date, the federal government 
     has been forced to pump $126 billion into Fannie and Freddie. 
     That's far more than AIG, which absorbed $70 billion of 
     government largess, and General Motors and Chrysler, which 
     shared $77 billion. Banks received $205 billion, of which 
     $136 billion has been repaid.
       Fannie and Freddie continue to operate deeply in the red, 
     with no end in sight. The Congressional Budget Office 
     estimated that if their operating costs and subsidies were 
     included in our accounting of the overall federal deficit--as 
     properly they should be--the 2009 deficit would be greater by 
     $291 billion.
       Worst of all are the tracts of foreclosed homes left behind 
     by households lured into inappropriate mortgages by the lax 
     credit standards made possible by Fannie Mae and Freddie Mac 
     and their promise to purchase and securitize millions of 
     subprime mortgages.
       All this happened in the name of the ``American Dream'' of 
     home ownership. But there's no evidence Fannie and Freddie 
     helped much, if at all, to make this dream come true. Despite 
     all their initiatives since the early 1970s, shortly after 
     they were incorporated as private corporations protected by 
     government charters, the percentage of American households 
     owning homes has increased by merely four percentage points 
     to 67%.
       In contrast, between 1991 and 2008, home ownership in Italy 
     and the Netherlands increased by 12 percentage points. It 
     increased by nine points in Portugal and Greece. At least 14 
     other developed countries have home ownership rates higher 
     than in the U.S. They include Hungary, Iceland, Ireland, 
     Poland and Spain.
       Canada doesn't have the equivalent of Fannie and Freddie. 
     Nor does it permit the deduction of mortgage interest from an 
     individual's taxes. Nevertheless, its home ownership rate is 
     68%. Canadian banks have weathered the financial crisis 
     particularly well and required no government bailouts.
       This mediocre U.S. home ownership record developed despite 
     the fact that Fannie and Freddie were allowed to operate as a 
     tax-advantaged duopoly, supposedly to allow them to lower the 
     cost of mortgage finance. But a great deal of their taxpayer 
     subsidy did not actually help make housing less expensive for 
     home buyers.
       According to a 2004 Congressional Budget Office study, the 
     two GSEs enjoyed $23 billion in subsidies in 2003--primarily 
     in the form of lower borrowing costs and exemption from state 
     and local taxation. But they passed on only $13 billion to 
     home buyers. Nevertheless, one former Fannie Mae CEO, 
     Franklin Raines, received $91 million in compensation from 
     1998 through 2003. In 2006, the top five Fannie Mae 
     executives shared $34 million in compensation, while their 
     counterparts at Freddie Mac shared $35 million. In 2009, even 
     after the financial crash and as these two GSEs fell deeper 
     into the red, the top five executives at Fannie Mae received 
     $19 million in compensation and the CEO earned $6 million.
       This is not private enterprise--it's crony capitalism, in 
     which public subsidies are turned into private riches. From 
     2001 through 2006, Fannie and Freddie spent $123 million to 
     lobby Congress--the second-highest lobbying total (after the 
     U.S. Chamber of Commerce) in the country. That lobbying was 
     complemented by sizable direct political contributions to 
     members of Congress.
       Changing this terrible situation will not be easy. The 
     mortgage market has come to be structured around Fannie and 
     Freddie and powerful interests are allied with the status 
     quo. I recall a personal conversation with a member of 
     Congress who, despite saying he understood my concerns about 
     the two GSEs,

[[Page S3059]]

     admitted he would never push for significant change because 
     ``they've done so much for me, my colleagues and my staff.''
       Nonetheless, Congress must get to work on the reform of 
     Fannie Mae and Freddie Mac. A healthy housing market, a 
     healthy financial system and even the bond rating of the 
     federal government depend on it.

  The ACTING PRESIDENT pro tempore. The Senator from Florida.

                          ____________________