[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.
____________________