[Congressional Record Volume 156, Number 69 (Monday, May 10, 2010)]
[Senate]
[Pages S3457-S3470]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




           RESTORING AMERICAN FINANCIAL STABILITY ACT OF 2010

  The ACTING PRESIDENT pro tempore. Under the previous order, the 
Senate will resume consideration of S. 3217, which the clerk will 
report.
  The legislative clerk read as follows:

       A bill (S. 3217) to promote the financial stability of the 
     United States by improving accountability and transparency in 
     the financial system, to end ``too big to fail,'' to protect 
     the American taxpayer by ending bailouts, to protect 
     consumers from abusive financial services practices, and for 
     other purposes.

  Pending:

       Reid (for Dodd/Lincoln) amendment No. 3739, in the nature 
     of a substitute.
       Sanders/Dodd modified amendment No. 3738 (to amendment No. 
     3739), to require the nonpartisan Government Accountability 
     Office to conduct an independent audit of the Board of 
     Governors of the Federal Reserve System that does not 
     interfere with monetary policy, to let the American people 
     know the names of the recipients of over $2,000,000,000,000 
     in taxpayer assistance from the Federal Reserve System.

  Mr. DODD. Mr. President, I suggest the absence of a quorum.
  The ACTING PRESIDENT pro tempore. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. DODD. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The ACTING PRESIDENT pro tempore. Without objection, it is so 
ordered.


                      Senator Bob Bennett of Utah

  Mr. DODD. Mr. President, I want to share a few thoughts, if I may, 
for a minute or so on the pending matter before us. But before I do 
that--and at a later time I will speak at greater length about this--I 
want to express my regrets over the decision made in Utah over the 
weekend regarding Bob Bennett, our colleague.
  I have served with Bob for 18 years. We have been on the Banking 
Committee together during that time. Obviously, we have differences of 
opinion on a lot of policy questions. In fact, the majority of policy 
questions we have had our differences on. But at critical moments, Bob 
Bennett was always someone you could talk to, someone you could 
approach with an idea or an issue.
  He went through a tough battle over the last number of weeks and did 
not prevail in his convention over the weekend in Utah. But I want to 
express to him and Joyce how much this institution will miss them in 
the coming year. He is a thoughtful, considerate individual. He is 
deliberate in his views and accessible when it comes to others' ideas. 
In my view, it will be a loss for the institution that he will not be 
back. That is coming from a Democrat on this side of the aisle.
  I realize there is a contest coming up, but I didn't want the day to 
begin or end without expressing my disappointment over the results in 
Utah. I know that is probably not appropriate for Democrats, making 
comments about Republican races, but Bob Bennett is one fine U.S. 
Senator, and he has played an invaluable role, a critical role at 
critical junctures over the last number of years that I have served 
with him.
  Now, Mr. President, I want to make some comments about the bill 
before us. It has been nearly 7 weeks since the Banking Committee 
approved legislation to reform Wall Street. It has been more than 3 
years since our committee began work on this very important topic. It 
was in January or early February of 2007 that I became chairman of the 
Banking Committee for the first time, and, obviously, the news even at 
that early date was about the mortgage foreclosure issue.
  A lot of work has gone on in the Banking Committee. We have literally 
had dozens and dozens of hearings and meetings with people on how best 
to

[[Page S3458]]

address this economic decline that we have suffered--with 8\1/2\ 
million jobs being lost and 7 million homes in foreclosure. In fact, 
over the weekend there was a report that nearly 4 million households 
are severely delinquent on their mortgages, and 250,000 homes have been 
seized--are in foreclosure--since the first 3 months of this.
  Even though we have 4 million homes delinquent on their mortgages, 
which is the largest backlog since the crisis began, there is some 
positive news on job creation--290,000 jobs in the month of April, 
which is 121,000 more jobs created in the first few months of the year 
than were anticipated. We are clearly seeing an economy that seems to 
be improving. But when we have 4 million homes that are underwater, we 
also realize we are far from out of this difficulty, particularly if 
you are a working family.
  We also, of course, saw last Thursday a market decline of 1,000 
points in almost 17 minutes. The Presiding Officer and I, in fact, 
talked about this over the weekend, and I appreciate his insights and 
observations on the matter as someone who spent time working in this 
field before getting involved in public life. There are a number of 
ideas emerging as to how this happened, and my hope is that as early as 
next week our Banking Committee will have an informal meeting with 
people from the Securities and Exchange Commission and the Commodity 
Futures Trading Commission, as well as others, to hear what they think 
happened and what steps they are taking to minimize that event from 
occurring again.
  Then, of course, over the weekend we had the stories emerging about 
Europe and the Euro and what was occurring in Greece and other nations 
in danger of going to default because of the huge debt problems that 
exist. Tomorrow morning, our committee will be briefed by the Federal 
Reserve as well as the Secretary of the Treasury on exactly what plans 
have been put in place in Europe.
  I do not want to dwell on either of those points at this juncture 
except to make this point. Here we have an event totally unrelated to 
mismanagement of investment banks or financial institutions in the case 
of a market decline as precipitous as we saw Thursday and events that 
are beyond the borders of our own nation that will have an impact at 
home. We are told this is not going to have any kind of severe impact--
at least we don't believe it will at this juncture. But we do live in a 
highly sophisticated, computerized world with this flash trading, as it 
is called--``high frequency trading,'' as it is referred to--where 
literally within microseconds buyers and sellers are matched up. What 
the system doesn't accommodate for is panic, unfortunately, and 
apparently the circuit breakers necessary in market-wide exchanges to 
minimize these kinds of events when they occur and also events that 
occur in a small country in the Mediterranean--such as Greece or 
Portugal or Spain or other countries--where their debt situations pose 
risks globally.
  So what is critically important, in my view, is, while our 
legislation before us it not going to stop crises from occurring, what 
we try to do is provide our government with the necessary tools so we 
can respond when crises occur. No one can stop the rain from coming. It 
will happen. It will happen again and again. What you can do, however, 
is make sure the roof is going to be solid enough so it doesn't leak or 
that you are not going to be in a situation where, when things break 
down in the next crisis, no matter how modest it may be, it endangers 
the job creation as we saw in this country--as we are today seeing 
massive losses occurring, retirement accounts declining. The value of 
homes has gone down some 30 percent in the last several years. Again, 
there are some indications that things are improving here at home, and 
we welcome that news. But if you are one of those 8.5 million who lost 
a job or home or if you are a retiree who watched your savings 
disappear overnight, as many did in this country, then this positive 
news, while it is welcome, is hardly any relief to you.
  So it is critically important because we are in no better shape today 
despite advances and the progress we have made on this bill. If 
something were to happen tonight or tomorrow in our own country or 
something happened elsewhere that would have the contagion effect, it 
is called, to spread here or elsewhere, we have not yet passed this 
legislation. We don't have any more provisions in place than we did in 
the fall of 2008 when the problems exploded. While we have written 
strong provisions in this bill that never would allow an institution to 
become too big to fail, the fact is that has only been adopted in a 
bill that has yet to be passed in this body, yet to be reconciled with 
the language from the other Chamber in this Congress and to be signed 
into law by the President.
  It is important that we get this job done. We have had a good debate 
up until now. With the guidance of our leadership, we will begin 
tomorrow to consider some amendments, allowing for some adequate 
debate--hopefully not too long on each of these ideas. And there are a 
lot of ideas we have, both Democrats and Republicans. We can have our 
votes on these matters and either include them or exclude them on the 
legislation. But we need to get this job done, I hope this week--at the 
very latest, the end of this week--so we can work with the other body 
and resolve the differences and get this legislation to the President.
  I would be the last one to suggest that what we have written here 
takes care of every imaginable situation. It doesn't at all. What it 
does is it ends too big to fail and puts in place a consumer protection 
bureau that has never existed before in our Nation so that average 
citizens might have some redress when a mortgage broker or company 
takes advantage of them. We try to put in place an early warning system 
so when matters like those that happened in Europe or other places 
occur, we can respond to them early and adequately so they don't 
explode and expand to affect everyone else in economy. We also deal 
with some of these exotic instruments that were totally unregulated and 
operated in the shadow economy of our Nation.
  There are other provisions in the bill, but those are the four at 
least major goals. As I said a moment ago, I know there are other 
circumstances people wanted to accommodate in this legislation. But, as 
my colleague from New Hampshire pointed out the other day, some of 
these other issues are so complex, they will need adequate study, and 
trying to sort of hurl them into this bill or eliminate things without 
any alternative being proposed is not exactly the wise way to be 
dealing with matters as important as the financial sector of our 
Nation.
  I am grateful to our colleagues for what they have done already. As 
many have pointed out, this has been a worthwhile process. It has taken 
a long time considering the implications--none of us, obviously, want 
to have the so-called unintended consequences. No matter how good we 
think our ideas are, we need to make sure what we are doing is not 
going to provoke its own set of difficulties.
  We have to finish our work on this legislation, not just in 
recognition of what has happened but in preparation for what may happen 
next. As we have seen in recent days, the shocks to our system are as 
inevitable as rainfall. Throughout Europe, as we have seen, countries 
are bracing for the effects of the Greek crisis, effects which respect 
no boundaries and offer no safe haven for anyone. Right here at home, 
our market stumbled, as we saw last week with our stock market tumbling 
hundreds of points before righting itself.
  Again, as I made reference to a moment ago, the rain is coming, but 
we need to fix our roof so we don't all suffer as a result of the 
inevitability of rain. The issues raised by the crisis in Greece and 
last week's stock market scare require our attention--and they have it.
  I have asked Senator Jack Reed of Rhode Island, who chairs the 
subcommittee dealing with the Securities and Exchange Commission, to 
prepare for hearings on the stock market issue so we can get to the 
bottom of what happened.
  As I mentioned, our staff is working to ensure our government does 
its part to help contain the crisis in Europe--at least to watch it and 
determine whether there are any spillover effects. But these events are 
reminders that our work on this legislation must look through the 
windshield at the crises to come, not just in the rearview mirror at 
the one from which we are now just

[[Page S3459]]

emerging. They are a further reminder that our work does not end with 
this legislation.
  I urge my colleagues to join us in making a final push to get this 
bill done so we can move on to those other emerging issues. When we do, 
we can face these challenges with the knowledge that we have 
strengthened our financial system; that although we cannot prevent 
crises from occurring, we can prepare for them so their effects are not 
felt by ordinary Americans to the extent they have been in the last 
number of years. That is all we are really trying to do. I always get 
uneasy when I hear authors of bills claim they are going to solve every 
problem known to mankind in that issue area. We are not, unfortunately. 
We do the best we can under the circumstances.
  Again, last Thursday's and the weekend's events are a constant 
reminder that we live in an ever-shrinking world and we are affected by 
events far beyond our shores. It is not just because some company did 
something wrong. It can happen far away and yet have implications here. 
But we need to make sure the next generation will have tools on hand so 
they can spot problems early on and take steps to minimize their 
effects here at home when they occur. That is the goal of this bill. It 
is not an insignificant one; it is an important one.
  I thank my colleagues. They have been extremely constructive and 
thoughtful over the last week or so. We had a good weekend. A lot of 
people stepped forward, and we were able to work out some language that 
I think will allow various provisions to be adopted. More work needs to 
be done, but I am confident we can achieve that goal.
  I would be remiss if I didn't acknowledge once again my thanks to the 
Presiding Officer, a new Member of this body and the banking committee 
but he has made invaluable contributions to this product. While not a 
chairman of even a subcommittee yet, he has acted as a very senior 
Member in many ways because of the knowledge he has brought to this 
discussion and debate. That has been, as I said, invaluable to this 
chairman of the committee, and I thank him personally for his efforts 
in that regard.
  I see my friend and colleague from Maine, and I yield the floor.
  The ACTING PRESIDENT pro tempore. The Senator from Maine.
  Ms. COLLINS. Mr. President, I rise today to speak on behalf of an 
amendment I filed to direct regulators to impose tough risk- and size-
based capital standards on financial institutions as they grow in size 
or engage in risky business practices. I am pleased to offer this 
amendment on behalf of Senator Shaheen and myself.
  Our amendment is aimed at addressing the too-big-to-fail problem at 
the root of the current crisis by requiring financial firms to have 
adequate amounts of cash and other liquid assets to survive financial 
crises without turning to the taxpayers for a bailout. It is critical 
to our ability to avoid future crises that this amendment be adopted.
  I am very pleased that the FDIC Chairman, Sheila Bair, has strongly 
endorsed our amendment. In a recent letter to me, Chairman Bair called 
this proposal:

     . . . a critical element to ensure that U.S. financial 
     institutions hold sufficient capital to absorb losses during 
     future periods of financial stress. With new resolution 
     authority, taxpayers will no longer bail out large financial 
     institutions. This makes it imperative that they have 
     sufficient capital to stand on their own in times of 
     adversity.

  Chairman Bair also noted the importance of ensuring that bank holding 
companies and large nonbanks are held to the same capital and risk 
standards that are applied to insured banks in order to protect against 
excessive leverage that could destabilize our financial system. As 
Chairman Bair put it, ``The amendment accomplishes this goal simply and 
directly.''
  It makes no sense that capital and risk standards for our Nation's 
largest financial institutions are more lenient than those that apply 
to small depository banks, when the failure of larger institutions is 
much more likely to have a broad economic impact. Yet that is currently 
the case. We must give the regulators the tools to end and the 
direction to address this problem. If financial firms, including bank 
holding companies, were required to meet stronger capital standards, 
they would be far less likely to fail and to trigger the kind of 
cascade of economic harm we have been experiencing since 2008.
  The Collins-Shaheen amendment directs Federal regulators to impose 
minimum leverage and risk-based capital requirements on banks, bank 
holding companies, and those nonbank financial firms identified by the 
new Financial Stability Oversight Council for supervision by the 
Federal Reserve. Neither current law nor the bill before us requires 
regulators to adjust capital standards for risk factors as financial 
institutions grow in size and engage in risky practices.
  The current Senate financial regulatory reform bill also does not 
require regulators to apply minimum capital and risk measures across 
financial institutions, as would be required by our amendment. As the 
FDIC Chairman has noted about the current financial crisis, ``Far from 
being a source of strength to banks . . . holding companies became a 
source of weakness, requiring financial support.''
  She went on to caution that ``they should not be allowed to operate 
under consolidated capital requirements that are numerically lower and 
qualitatively less stringent than those that apply to insured banks.''
  Our amendment would tighten the standards that would apply to larger 
financial institutions by requiring them to meet, at a minimum, the 
standards that already apply to small banks. This only makes sense. If 
a small bank fails, the FDIC can close down that bank over a weekend, 
allow it to operate, avoid a run on the bank, and deal with it in an 
orderly way. But if a large bank holding company fails, it is so 
interconnected in our economy that it sets off a cascade of dire 
economic consequences. That was the point that the chairman of the 
Banking Committee was just making. We live in such an interconnected 
global financial system now.
  So, from my point of view, a view that is shared by the Chairman of 
the FDIC, it is only prudent for us to empower the regulators to 
impose, at a minimum, the same kinds of capital and leverage 
requirements and restrictions that apply to small insured banks.
  I ask unanimous consent that the letter from Chairman Bair be printed 
in the Record immediately following my remarks.
  The ACTING PRESIDENT pro tempore. Without objection, it is so 
ordered.
  (See exhibit 1.)
  Ms. COLLINS. I had the privilege of serving the people of Maine as a 
financial regulator for 5 years about 20 years ago. This is an issue 
about which I care deeply and am committed to helping forge a solution 
to, so that never again can the problems and the excesses of Wall 
Street have such dire consequences for Main Street.
  Increasing capital requirements as firms grow provides a disincentive 
to their becoming too big to fail in the first place, and ensures an 
adequate capital cushion in difficult economic times. Our amendment 
directs the regulators to establish capital standards that take size 
and risk into account.
  Our amendment strengthens the economic foundation of large financial 
firms, increases oversight and accountability, and helps prevent the 
excesses that contributed to a deep recession that has cost millions of 
Americans their jobs.
  Let me conclude by thanking the chairman of the Banking Committee and 
the ranking member of the Banking Committee and members such as the 
Presiding Officer and Senator Corker and Senator Gregg for their work 
on this very complex issue. More than a year ago I introduced a 
financial regulatory reform bill. I had the pleasure of discussing the 
bill with the chairman of the Banking Committee, and I am pleased with 
much of what is in his bill at this point in the debate.
  I hope we can continue to make further changes, such as the amendment 
I have proposed with Senator Shaheen, but I do want to salute the 
members of the Banking Committee. I know this is enormously complex 
and, at times, a thankless task. But it is so important. In fact, I 
argued that we should have dealt with financial regulatory reform last 
year. I think it is that important to the future of our economy. We 
realize we were operating with regulatory

[[Page S3460]]

black holes that allowed, for example, trillions of dollars of credit 
default swaps to develop with no one having oversight or visibility as 
far as their impact on the financial market.
  They were not regulated as insurance, even though I personally 
believe they act as an insurance product, nor were they regulated by 
the banking regulators. The creation of the Council of Regulators in 
this bill has not received a great deal of discussion, but I think it 
is one of the most important provisions in this reform, and it is one 
that has widespread bipartisan support. It was the key feature of the 
bill I introduced last year. I have discussed it with the Presiding 
Officer as well.
  I personally still believe we need an independent chairman of that 
council rather than the Secretary of the Treasury. I think we need to 
broaden the makeup of the council to include some State regulators so 
that the insurance area is covered, and State securities 
administrators, since they play such a critical role. I think those 
State regulators should be brought on to the council in a nonvoting 
capacity given the constitutional issues. But that council is 
absolutely critical. I think we should add the regulator for credit 
unions to that council. What we want is a council with as broad an 
overview as possible, bringing together everyone who has a role so we 
do not have these regulatory gaps, these black holes developing in the 
future, and so that we can bring the collective wisdom of these 
officials to the table.
  So that is an example of a provision of this bill that I think is 
extraordinarily important. But perhaps because it does have widespread 
support, it has not generated much discussion on this floor. So I 
wanted to mention that and salute the committee for what I think is a 
provision that is going to make a real difference in preventing the 
kinds of problems we saw that triggered the recession of 2008.
  I also want to commend Senator Levin and Senator Coburn for their 
work on the Permanent Subcommittee on Investigations, the Senate's 
premiere investigative subcommittee which is part of the Homeland 
Security Governmental Affairs Committee which Senator Lieberman and I 
have the privilege of leading. They have given us great insight into 
the role of everyone from sloppy mortgage brokers and bankers who threw 
underwriting standards out the window and made loans that never should 
have been made to people who could not possibly repay them.
  They have looked at the role of credit rating agencies that also did 
not perform in the way we would like. They have looked at the role of 
investment banks such as Goldman Sachs. We need to take the lessons we 
have learned, the great depth of knowledge in this body, and work 
together in a bipartisan way. That is what we have been doing in the 
last couple of weeks.
  In closing, let me just say, we have made a lot of progress. I am 
confident we can get there. Let's not pull the plug on this debate 
prematurely. There are a lot of amendments that are good-faith 
amendments that are still out there. Let's work through them and 
continue to strengthen and improve this bill which has so many 
excellent features to it.
  At the end of the day, I hope we can vote on a bill that will command 
the support of 70 Members of this body. I would like it to be all 100, 
but let's aim for 70. In doing so we can demonstrate to the American 
people that we can come together and work on an issue that really 
matters--matters to our economy, to the American homeowners, to our 
small businesses, to anyone who has a retirement account. It matters to 
every American.
  I yield the floor.

                               Exhibit 1

                                                   Federal Deposit


                                        Insurance Corporation,

                                      Washington, DC, May 7, 2010.
     Hon. Susan M. Collins,
     Ranking Minority Member, Committee on Homeland Security and 
         Governmental Affairs, U.S. Senate, Washington, DC.
       Dear Senator Collins: I am writing to express my strong 
     support for your amendment number 3879 to ensure strong 
     capital requirements for our nation's financial institutions. 
     This amendment is a critical element to ensure that U.S. 
     financial institutions hold sufficient capital to absorb 
     losses during future periods of financial stress. With new 
     resolution authority, taxpayers will no longer bail out large 
     financial institutions. This makes it imperative that they 
     have sufficient capital to stand on their own in times of 
     adversity.
       During the crisis, FDIC-insured subsidiary banks became the 
     source of strength both to the holding companies and holding 
     company affiliates. Far from being a source of strength to 
     banks as Congress intended, holding companies became a source 
     of weakness requiring federal support. If, in the future, 
     bank holding companies are to become sources of financial 
     stability for insured banks, then they cannot operate under 
     consolidated capital requirements that are numerically lower 
     and qualitatively less stringent than those applying to 
     insured banks. This amendment would address this issue by 
     requiring bank holding companies to operate under capital 
     standards at least as stringent as those applying to banks.
       The crisis also demonstrated the dangers of excessive 
     leverage undertaken by large nonbanks outside of the scope of 
     federal bank regulation. Notable examples included the 
     excessive leverage of the largest investment banks during the 
     run-up to the crisis, and the extremely high leverage of 
     Fannie Mae and Freddie Mac. To remedy this and prevent 
     regulatory gaps and arbitrage, large nonbank financial 
     institutions deemed to be systemic must be held to the same, 
     or higher, capital standards as those applying to banks and 
     bank holding companies. Again, the amendment accomplishes 
     this goal simply and directly.
       Finally, and more broadly, the crisis identified the 
     dangers of a regulatory mindset focused exclusively on the 
     soundness of individual banks without reference to the ``big 
     picture.'' For example, an individual overnight repo may be 
     safe, but widespread financing of illiquid securities with 
     overnight repos left the system vulnerable to a liquidity 
     crisis. A financial system-wide view requires regulators, 
     working in conjunction with the new Financial Services 
     Oversight Panel, to develop capital regulations to address 
     the risks of activities that affect the broader financial 
     system, beyond the bank that is engaging in the activity.
       We at the FDIC remain committed to working with you towards 
     a stronger financial system. This amendment will be an 
     important step in accomplishing this goal.
       If you have further questions or comments, please do not 
     hesitate to contact me or Paul Nash, Deputy for External 
     Affairs.
           Sincerely,
                                                   Sheila C. Bair,
                                                         Chairman.

  The ACTING PRESIDENT pro tempore. The Senator from Connecticut is 
recognized.
  Mr. DODD. Before my friend and fellow New Englander leaves the floor, 
let me thank her for her comments, but also let me thank her for this 
whole notion of leverage and capital standards as well. It is something 
we feel equally strongly about.
  We have provisions in the bill, but anything can be strengthened. We 
are very interested in the idea that the Senator from Maine and Senator 
Shaheen have brought to the table, and invite, at this moment, their 
staff and others to get with ours and take a look and see if we 
cannot--and I will talk to Senator Shelby as well because it is 
important.
  There has been some debate, and I go back and forth in this regard. I 
have always resisted the idea that the Senate should set accounting 
standards. We have had some times in the past on stock options--I 
recall a few years ago the debate was whether we would set the 
accounting standard on stock options.
  I thought there was a very persuasive argument made by the industry 
that pointed out that we should probably consider them as a tool to 
attract, particularly, startup companies. But as attracted as I was to 
their ideas, I did not want to open the box of beginning to set 
accounting standards in Congress. We have competency here, but 
sometimes we get beyond our competency.
  The issue was sort of the same on capital leverage, that we have to 
have stronger leverage and capital standards. The debate is, should we 
actually set the leverage here or do we say we want strong standards 
and defer to our regulators to determine exactly what that standard 
ought to be? Clearly, we need to have better leverage and better 
capital standards. If we do not, these large institutions--my colleague 
from Maine is absolutely correct in this regard, that we will end up 
then having these institutions that are interconnected. If we do not 
demand greater accountability through that requirement, then we expose 
ourselves to the very kinds of things we are seeing elsewhere.
  So I thank her for this, and over the next day or so let's see if we 
can take a look at the Senator's amendment and adopt it as well. I 
thank her for her ideas as well on the oversight council we have 
crafted. Actually, many of us

[[Page S3461]]

like the idea of having an independent chair. We had this debate.
  The Secretary of the Treasury was not my first choice, the 
independent chair--but as my colleague from Maine knows, having chaired 
committees, when you are trying to get a committee to agree on 
something, the idea is the one that prevailed--having the Secretary of 
the Treasury was the one that prevailed, as the Presiding Officer will 
recall in those discussions. But, clearly, as to the idea of having the 
credit unions, the Senator makes a lot of sense. It is a major part of 
our economy, and having the State regulators at least represented at 
that table makes sense to me as well.
  So maybe before this is over we can accommodate some of those 
additional ideas. But I thank the Senator immensely for her 
contribution, and I appreciate, as well, that she understands how long 
and arduous this has been to get to the best we can. When we have 100 
of us here dealing with something of this magnitude, it is harder to 
put that together. But we are getting there. And I agree with her that 
we ought to be able to finish. It does not mean we are going to satisfy 
everyone, and it cannot go on forever, but we certainly ought to 
accommodate as many different ideas as we can and make our judgments on 
them to include them in the bill.
  I thank her immensely for her contribution.
  I suggest the absence of a quorum.
  The ACTING PRESIDENT pro tempore. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. KYL. I ask unanimous consent that the order for the quorum call 
be rescinded.
  The ACTING PRESIDENT pro tempore. Without objection, it is so 
ordered.
  Mr. KYL. Mr. President, as the debate over Wall Street enters a 
pivotal stage, we should ask ourselves, what is financial regulatory 
reform about? We all agree that one of the main objectives of the 
legislation is to ensure taxpayers will no longer be forced to bail out 
or subsidize financial institutions that engage in risky behavior. That 
means ending so-called too big to fail. Unfortunately, the legislation 
we are now considering does not mention the two institutions that have 
come to epitomize too big to fail. I am referring to the two 
government-sponsored enterprises, the so-called GSEs, Fannie Mae and 
Freddie Mac, which are currently in Federal conservatorship. The 
egregious behavior of these two institutions has rippled throughout the 
entire commercial banking sector and our economy as a whole.
  Let's recall how central the two GSEs were to the housing bubble. 
Fannie and Freddie represent the dangers of what former American 
Enterprise Institute president Chris DeMuth has described as ``fusion 
enterprise,'' or the ``intermingling of politics and power with finance 
and commerce.'' This is a perverse business model that allows companies 
to reap enormous private profits while enjoying either implicit or 
explicit public backing. It is the model that enabled Fannie and 
Freddie to inflate the subprime mortgage bubble.
  For years some of my colleagues and I have urged this Chamber to 
impose stronger regulations on Fannie and Freddie. As chairman of the 
Senate Republican Policy Committee, I authored several papers on the 
threats posed by the size of their mortgage-backed securities 
portfolios. I was particularly concerned that the government's implicit 
guarantee of these institutions permitted them to operate without 
adequate capital, to assume more risk than competing financial 
institutions, and to borrow at a below-market rate of interest. Of 
course, that is just what happened. Smaller companies got crushed while 
Fannie and Freddie engaged in increasingly risky lending with the 
backing of the Federal Government. Wall Street understood how it 
worked. So when Fannie and Freddie wanted these toxic loans, the 
mortgage markets would produce them. Between 2004 and 2007, Fannie and 
Freddie became the largest buyers of subprime and Alt-A mortgages. And 
although these two institutions had their own dedicated regulator, the 
Office of Federal Housing Enterprise Oversight still allowed the 
situation to spiral out of control. Fannie and Freddie made mortgages 
available to too many people who could not afford them. That easy 
credit fueled rapidly rising home prices. As prices rose, so did also 
the demand for even larger mortgages, so Fannie and Freddie looked for 
ways to make even more mortgage credit available to borrowers with a 
questionable ability to repay.
  By 2008, the two GSEs held nearly $5 trillion in mortgages and 
mortgage-backed securities. They were overleveraged and too big to 
fail. It was a textbook example of moral hazard on a massive scale. 
``Worst of all,'' M&T Bank CEO Robert Wilmers recently wrote in the 
Wall Street Journal, ``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.''
  Congress would have done well to support a bill adopted by the 
Banking Committee in 2005 under then-Chairman Shelby. The bill would 
have established a new regulator for Fannie and Freddie and given that 
regulator authority to make sure the GSEs maintained adequate amounts 
of capital, had adequately liquidity and reserves, properly managed 
their interest rate risk, and controlled their asset investment 
portfolio growth. But the legislation was filibustered. Its opponents 
included then-Senator Obama.
  As American Enterprise Institute scholar Peter Wallison, who has 
written extensively on this topic, concluded:

       If legislation along the lines of the Senate committee's 
     bill had been enacted in that year, many, if not all, the 
     losses that Fannie and Freddie have suffered, and will suffer 
     in the future, might have been avoided.

  But, of course, we didn't avoid that fate. And today, Fannie and 
Freddie continue to impose on the taxpayers while accruing massive 
debt. In fact, their total debt outstanding, the debt held on their 
balance sheets or as mortgage security guarantees, is an astounding 
$8.1 trillion. This is debt that is not reflected on the national 
balance sheet. Last Wednesday, Freddie Mac announced it will need an 
additional capital injection of $10.6 billion. That is from the 
taxpayers. That is after it lost $6.7 billion during the first quarter 
of this year. In 10 of the last 11 quarters, Freddie Mac has lost a 
total of $82 billion which is twice the amount it earned over the 
previous 30 years.
  This morning it was reported that Fannie too has asked taxpayers for 
more money, $8.4 billion, to cover its soaring losses. The combined 
government loss for both companies now stands at $145 billion, 
according to the Associated Press. Where will this end? Weren't we 
supposed to end taxpayer liability for entities too big to fail?
  The McCain amendment, which we will be voting on hopefully tomorrow, 
will provide us with another opportunity to target the problems caused 
by Fannie and Freddie. The McCain amendment would end the 
conservatorship within 2 years and place both companies into 
receivership if they are not viable. It would also reduce the 
companies' mortgage holdings over the next 3 years, reimpose 
restrictions on the size of the mortgages they can buy, and force them 
to pay State and local taxes just as private companies do.
  As the Wall Street Journal editorialized Thursday:

       If the housing giants are no longer subsidized, they will 
     become small enough to fail. That means they will stop 
     lending money to people who can't pay them back, and in turn, 
     they will stop endangering taxpayers. This is a genuine anti-
     bailout vote.

  They were referring to the McCain amendment.
  Let's be clear. Every day Fannie and Freddie remain in their current 
form is a day U.S. taxpayers are subsidizing their activities. 
Financial regulatory reform must include a restructuring of Fannie Mae 
and Freddie Mac. That is why I urge my colleagues to support the McCain 
amendment tomorrow and end too big to fail.
  I ask unanimous consent to have printed in the Record the Wall Street 
Journal editorial titled ``What About Fan and Fred Reform?'' by Robert 
G. Wilmers, to which I referred.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                     [From the Wall Street Journal]

                    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

[[Page S3462]]

     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 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 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, 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.

  Mr. KYL. I suggest the absence of a quorum.
  The ACTING PRESIDENT pro tempore. The clerk will call the roll.
  The bill clerk proceeded to call the roll.
  Mr. CRAPO. I ask unanimous consent that the order for the quorum call 
be rescinded.
  The PRESIDING OFFICER (Mr. Merkley). Without objection, it is so 
ordered.
  Mr. CRAPO. Mr. President, I stand today to discuss the McCain 
amendment as well. We have had a lot of debate about the financial 
regulatory legislation before us. A lot of the debate has focused on 
the content of the bill, with concerns being raised by some such as 
myself about whether we truly are ending too big to fail and truly are 
ending bailouts and whether we are going too far in creating yet again 
a big government response to an issue that needs to have a more 
effective response rather than more government, a response that will 
hammer Main Street, not Wall Street, and create yet again another big 
expansion of government in this Congress. We have seen way too much of 
that in way too many parts of our economy so far, and some of us are 
concerned about that.

  But what I want to talk about today is what is noticeably absent in 
the bill; that is, the reform of Fannie Mae and Freddie Mac, our 
government-sponsored entities--actually, our government-managed 
entities now--and the fact that these entities are at the core of the 
financial crisis we are dealing with and yet are not even touched by 
this legislation.
  Americans remain rightly outraged that their tax dollars were used to 
bail out irresponsible Wall Street firms and auto companies. I have 
voted against these bailouts, and I have been working with my 
colleagues to make sure we do not set the stage for yet more government 
bailouts. The most expensive government bailouts of all, however, will 
be those of Fannie Mae and Freddie Mac--the largest housing lenders 
that purchased home loans, packaged them into investments, and then 
guaranteed them against default.
  I think a little history of how we got to where we are is 
appropriate. Congress chartered Fannie Mae and Freddie Mac to provide 
access to home financing by maintaining liquidity in the secondary 
market. According to Peter Wallison of the American Enterprise 
Institute:

       Their implicit, or assumed, government backing enabled them 
     to drive all competition out of the middle-class housing 
     sector, permitting Fannie and Freddie to acquire over $5 
     trillion in mortgages, which they either held in portfolios 
     totaling approximately $1.5 trillion or securitized as 
     mortgage backed securities.

  Continuing his quote:

       In pursuing their mission to support low and middle-income 
     housing--also called affordable housing--Fannie and Freddie 
     assumed the credit risk on almost 11 million subprime and 
     other high-risk mortgages and contributed substantially to 
     the growth of a housing bubble. When the bubble began to 
     deflate in 2007, they began to suffer huge losses.

  But I want to go back and talk a little bit about the history before 
2007, when it became evident to everyone what was happening to Fannie 
Mae and Freddie Mac in our housing markets, because it did not just 
become known then. As my colleague, Senator Sessions, has already 
mentioned on the floor today in his earlier remarks, the Banking 
Committee was heavily engaged in reviewing this issue for several years 
leading up to this, as was the Office of Federal Housing Enterprise 
Oversight at HUD and the Fed and a number of other analysts.
  Senator Sessions quoted a letter. I believe it was from then-Chairman 
Greenspan of the Fed, who noted we needed to put focus on Fannie and 
Freddie then--this was back in the 2004 to 2005 timeframe--and that if 
we did not establish much tighter regulatory control over Fannie and 
Freddie, their excesses were going to create systemic risk that would 
put the taxpayer in extreme jeopardy.
  The committee itself focused very heavily on this same dynamic. In 
May of 2006, we had established legislation that would have, had it 
been able to be passed on the floor of this Senate, created a strong, 
new regulator for Fannie Mae and Freddie Mac and begun the process of 
setting the right capital standards and the right regulatory 
environment in which we could control this excessive growth and set the 
process in place for us to take Fannie Mae or Freddie Mac into 
receivership or into trust if they eventually failed, as it began 
looking as if they would.
  The Office of Federal Housing Enterprise Oversight completed a 
multiyear special examination of Fannie Mae and

[[Page S3463]]

issued a report describing OFHEO's findings and recommendations in May 
of 2006. OFHEO found the following:
  Fannie Mae senior management promoted a false image of the enterprise 
as one of the lowest risk financial institutions in the world.
  A large number of Fannie Mae's accounting policies and practices did 
not comply with generally accepted accounting principles.
  Fannie Mae had serious problems of internal control, financial 
reporting, and corporate governance, resulting in Fannie Mae 
overstating reported income and capital.
  Between 1998 and 2004, Fannie Mae senior management deliberately and 
intentionally manipulated accounting to hit earnings targets so that 
senior management maximized the bonuses and other executive 
compensation they received.
  Fannie Mae's board of directors failed to be sufficiently informed, 
to act independently of its chairman and other senior executives, and 
to exercise the requisite oversight over the enterprise's operations.
  And then the final finding of the report: Despite rapid growth and 
changing accounting and legal requirements, Fannie Mae senior 
management did not make investments in accounting systems, computer 
systems, other infrastructure and staffing needed to support a sound 
internal control system, proper accounting, and GAAP-consistent 
financial reporting.
  Again, as a result of these findings and of an increasing awareness 
of the threat that was being posed by the excesses at Fannie Mae and 
Freddie Mac, the Banking Committee, on which I served then and still 
serve, developed legislation to address these very excesses and to 
create the kind of regulatory structure in which we could control these 
problems.
  Along with 26 of my colleagues, in May of 2006 I signed a letter to 
then-majority leader Bill Frist and to the chairman of the Banking 
Committee then, Senator Richard Shelby. In the letter, we stated:

       We are concerned that if effective regulatory reform 
     legislation for the housing-finance government sponsored 
     entities is not enacted this year--

  Remember, this is 2006--

     American taxpayers will continue to be exposed to the 
     enormous risk that Fannie Mae and Freddie Mac pose to the 
     housing market, the overall financial system, and the economy 
     as a whole. Therefore, we offer you our support in bringing 
     the Federal Housing Enterprise Regulatory Reform Act (S. 190) 
     to the floor and allowing the Senate to debate the merits of 
     this bill, which was passed by the Senate Banking Committee.

  I might note that when we debated this bill back in 2006, it came out 
on a straight party-line vote from the Banking Committee--all the 
Republicans voting for it, all the Democrats opposing it.
  As history shows us, we never were able to get that bill to the floor 
because although we had 55 Republican votes, it takes 60 votes to move 
legislation on the floor of the Senate in the face of filibusters, and 
that bill was filibustered. We were not able to get the additional 
support to get it past the filibuster.
  I would like to quote from a recently written editorial about this 
chapter of the Fannie Mae-Freddie Mac history. Peter Wallison, in an 
April 20, 2010, editorial in the Wall Street Journal, wrote:

       One chapter in this story took place in July 2005, when the 
     Senate Banking Committee, then controlled by the Republicans, 
     adopted tough regulatory legislation for the GSEs on a party-
     line vote. . . . The bill would have established a new 
     regulator for Fannie and Freddie and given it authority to 
     ensure that they maintained adequate capital, properly 
     managed their interest rate risk, had adequate liquidity and 
     reserves, and controlled their asset and investment portfolio 
     growth.
       These authorities were necessary to control the GSEs' risk-
     taking, but opposition by Fannie and Freddie--then the most 
     politically powerful firms in the country--had consistently 
     prevented reform.

  He goes on to say:

       The date of the Senate Banking Committee's action is 
     important. It was in 2005 that the GSEs--which had been 
     acquiring increasing numbers of subprime and Alt-A loans for 
     many years in order to meet their HUD-imposed affordable 
     housing requirements--accelerated the purchases that led to 
     their 2008 insolvency. If legislation--

  And this is the key part of the editorial--

     along the lines of the Senate committee's bill had been 
     enacted in that year, many if not all the losses that Fannie 
     and Freddie have suffered, and will suffer in the future, 
     might have been avoided.

  What happened was the bill was stalled. Fannie and Freddie collapsed. 
When it became evident the losses were going to occur, there was a rush 
on the floor of the Senate to get back to that bill, and in 2008 the 
bill passed--after the horse was out of the barn. At least, though, we 
did get it passed in 2008, and Fannie and Freddie were taken into 
conservatorship.
  Where are we now? The Congressional Budget Office has estimated that 
in the wake of the housing bubble and the unprecedented deflation in 
housing values that resulted, the government's cost to bail out Fannie 
Mae and Freddie Mac will eventually reach $381 billion. As we talk on 
this floor about bailouts, this is the biggest bailout of all. It 
exceeds, in fact, all of the other bailouts together, by far. Yet it is 
unlimited. I mean that literally.
  Last Christmas Eve, in what was considered by many to be a Christmas 
Eve taxpayer massacre, the Treasury Department announced it was lifting 
the $400 billion loss cap on these two companies, creating a 
potentially unlimited liability and effectively providing the full 
faith and credit of the government to support their debt.
  To date, the Federal Government has already provided about $126 
billion to $130 billion to Fannie and Freddie. As I just indicated, the 
Congressional Budget Office estimates that will ultimately top $380 
billion, and many believe that is a conservative number--direct 
taxpayer bailouts that are not even mentioned in this bill.
  It reminds me of the fight back in 2005 when we were trying to get 
the legislation to reform Fannie and Freddie passed then, and here we 
are knowing what we need to do--seeing these bailouts, knowing the 
American taxpayers want those bailouts to stop--and we are being 
resisted in trying to bring an amendment just to add Fannie Mae and 
Freddie Mac--GSE--reform to the bill.
  Last week, Freddie Mac announced it had lost $8 billion, as others on 
the floor have just said, in the first quarter and has requested 
another $10.6 billion to add to this mounting bailout.
  As the government has pledged more and more money to cover these 
companies' losses, it has assured the public that planning is underway 
for overhauling these firms so that the bailouts will end. In December, 
the administration said it expected to release a preliminary report on 
how to remake Fannie and Freddie around February 1. But February 1 has 
come and gone, and no plan has been provided, and now we are being told 
it will be another year before the government proposes how to 
restructure these firms. Eighteen months after they were seized to 
prevent their collapse, the companies remain wards of the state in what 
has become the single costliest component of bailouts in our financial 
system.
  In September of 2008, the Federal Housing Finance Agency placed 
Fannie Mae and Freddie Mac into that conservatorship I talked about, 
which allows the regulator to establish control and oversight of a 
company to put it in a sound and solvent condition. Since being placed 
in conservatorship, Fannie Mae and Freddie Mac have actually become a 
bigger part of the market, which will make reform of them even more 
difficult. Last quarter, Fannie Mae and Freddie Mac were responsible 
for funding two-thirds of all U.S. home loans. That is primarily 
because there is nobody else able to play in the markets these days, 
except for these government--now completely government--controlled and 
financed entities. When you add in the Federal Housing Administration, 
the U.S. Government is behind 96.5 percent of all loans.
  What we have seen here is literally another government takeover. We 
have seen the government take over in the health care industry. We have 
seen the government take over in the auto industry. We have seen the 
government takeover of AIG and the insurance industry. We have seen the 
government take over in multiple parts of our financial industries and 
a greater government takeover being proposed in this bill. Yet we have 
the literal government control and management of Fannie Mae and Freddie 
Mac going unabated and unaddressed in the legislation that is before 
us.

[[Page S3464]]

  What does the legislation do?
  The longer Fannie Mae and Freddie Mac are allowed to operate in their 
current role--as political rather than business entities--the greater 
the financial losses will be for taxpayers and, frankly, the greater 
the risk they will simply continue endlessly in government control and 
government management, with the government managing yet one other big 
part of our economy perpetually.
  That is why the McCain amendment requires the current conservatorship 
of the companies to end in the next 2\1/2\ years and begin the process 
of shrinking their portfolios. If the companies are not viable at the 
end of that period, they would be placed into receivership, which is a 
form of bankruptcy restriction.
  Without a hard deadline, I am very concerned Congress will not act 
and, just like back in 2005, we will find gridlock here in the Senate 
stopping us from moving forward and be left with a nationalized Fannie 
Mae and Freddie Mac.
  The amendment would also reestablish the $200 billion cap and 
accelerate the 10-percent reductions of the mortgage portfolios, 
effectively requiring the companies to shrink those portfolios by 
holding a combined $100 billion from their current levels. This will 
also limit the losses taxpayers will face as a result of the blank 
check given by the administration in lifting all caps on December 24 of 
last year.
  It also includes Fannie Mae and Freddie Mac as a part of the Federal 
budget as long as either institution is under conservatorship or 
receivership. This is going to show the American people the true 
picture of how much of our national debt has increased by the bailout 
of these institutions.
  As an aside here, as most people probably did not realize, the Senate 
Budget Committee recently acted on a proposed budget for the Congress 
this year. We were supposed to have declared and created a budget for 
us to operate under months ago, but because of, I think, an 
unwillingness to literally put it out there--how much money this 
government is spending--the committee and the Senate have not acted on 
a budget yet. But the Budget Committee actually did finally act on one. 
I didn't vote for it. It is more spending--trying to spend ourselves 
into prosperity again as the last budget was--but at least we acted.
  In that Budget Committee process, I brought forth an amendment to 
require that Fannie Mae and Freddie Mac debt be added to our national 
debt calculations. Why would I do that? According to the Congressional 
Budget Office Director Douglas Elmendorf:

       After the U.S. Government assumed control in 2008 of Fannie 
     Mae and Freddie Mac, two Federally-chartered institutions 
     that provided credit guarantees for almost half--

  and by the way, as I indicated, now it is two-thirds--

     of all the outstanding residential mortgages in the United 
     States, the Congressional Budget Office concluded that the 
     institutions had effectively become government entities whose 
     operations should be included in the Federal budget.

  So here we have the Director of the Congressional Budget Office 
saying we run these companies, we are financially backing these 
companies, we should at least include them in our budget.
  The purpose of my amendment then--and the same language that is in 
this amendment on the floor today--is to include in the debt 
calculations of the budget resolution the debt obligations of Fannie 
Mae and Freddie Mac. This allows the American people to see a true 
picture of how much our national debt has been increased by the bailout 
of these institutions. At the end of calendar year 2009, per the 
financial statements, those figures are $774 billion for Fannie Mae and 
$781 billion for Freddie Mac, for a total of $1.555 trillion of debt. 
That is debt the United States holds today that is not being disclosed 
to the American public as part of our debt because of our interesting 
budget procedures.
  To put into perspective how large these entities are, their combined 
total books of business are nearly $5.5 trillion. The Congressional 
Budget Office has estimated that in the wake of the housing bubble and 
the unprecedented deflation in housing values that resulted, the 
government's cost to bail out Fannie Mae and Freddie Mac, as I 
indicated earlier, will eventually reach $381 billion, and that 
estimate may be too optimistic.
  I also already mentioned that last Christmas Eve the Treasury lifted 
the cap. We actually had a cap so that the taxpayer was at least 
protected at $400 billion. Last Christmas Eve--and I told my colleagues 
earlier some called it the ``Christmas Eve Taxpayer Massacre''--
Treasury lifted that cap so there now is no limit to the amount of debt 
we will assume and pay for as taxpayers as a result of this bailout of 
Fannie Mae and Freddie Mac. According to a January 2010 CBO background 
paper entitled ``CBO's Budgetary Treatment of Fannie Mae and Freddie 
Mac,'' CBO:

     believes that the Federal Government's current financial and 
     operational relationship with Fannie Mae and Freddie Mac 
     warrants their inclusion in the budget.

  By contrast, the administration has taken a different approach by 
continuing to treat Fannie Mae and Freddie Mac as outside the Federal 
budget, recording and projecting outlays equal to amounts of any cash 
infusions made by Treasury into the entities.
  The Office of Management and Budget of the U.S. Government fiscal 
year 2011 states:

       Under the approach in the budget--

  This is the President's budget--

     all of the GSEs' transactions with the public are 
     nonbudgetary because the GSEs are not considered to be 
     government agencies.

  So we have the administration saying they are not considered to be 
government agencies, and, therefore, we aren't going to consider their 
debt and their financing, and we have the Congressional Budget Office 
saying they should be. CBO has included the GSEs in its budget 
baseline, but does not include the debt in its calculations because of 
their narrow view of how to calculate the Federal debt.
  In light of all these facts, I think it is evident that we need to 
have transparency and we need to start telling the American people 
exactly what it means, that we have taken Fannie Mae and Freddie Mac 
into receivership, and that we are not going to put their finances in 
the Federal budget.
  Going back to what the amendment we are debating here today does, in 
addition to putting Fannie Mae and Freddie Mac in the budget, it 
establishes a Senate-confirmed special inspector general within the 
Government Accountability Office with responsibility for investigating 
and reporting to Congress on decisions made with respect to the 
conservatorships of Fannie Mae and Freddie Mac, and this special 
inspector general would provide quarterly reports to Congress. There is 
no one politically accountable to the public for the operation of these 
multitrillion-dollar entities since the President has yet to nominate 
anyone to officially run the Federal Housing Finance Agency and the 
Office of Special Inspector General. The office of the Special 
Inspector General for the Troubled Asset Relief Program has done a good 
job to inform the public and Congress about TARP, and we should follow 
this model with Fannie Mae and Freddie Mac. It is not credible to say 
we are protecting the taxpayer and fixing mortgage financing and do 
nothing about Fannie Mae and Freddie Mac.
  Let me conclude by reading from a couple of editorials. If you scan 
the news today about this issue, you will see editorials across this 
country. I think one of them said ``the silence on this issue is 
deafening.'' Others have said there is a huge hole in the legislation. 
The title of another one: ``Congress Remains Missing In Action on Two 
Key Causes of the Financial Crisis.''
  I wish to read from one of the Wall Street Journal editorials on May 
6 of this year. In part it says:

       One sign that the White House financial reform is less 
     potent than its advertising claims is that it doesn't even 
     attempt to reform the two companies at the heart of the 
     housing mania and panic--Fannie Mae and Freddie Mac. So we 
     are glad to see that yesterday GOP Senators John McCain, 
     Richard Shelby, and Judd Gregg introduced a Fannie and 
     Freddie reform amendment.

  Going on, it says:

       The Financial Crisis Inquiry Commission spent yesterday 
     focusing on financial leverage using Bear Stearns as an 
     example. But Fannie Mae and Freddie Mac were twice as 
     leveraged as Bear and much larger as a share of the mortgage 
     market. Fan and Fred owned or guaranteed $5 trillion in 
     mortgages and mortgage-backed securities when they collapsed 
     in September of 2008.


[[Page S3465]]


  This is a quote that has been read on the floor before, but it is 
exactly applicable.
  Again, quoting the editorial:

       Reforming the financial system without fixing Fannie and 
     Freddie is like declaring war on terror and ignoring the al-
     Qaida. Unreformed, they are sure to kill the taxpayers again. 
     Only yesterday--

this was on May 6--

     Freddie said it had lost $8 billion in the first quarter--

which I have already mentioned.
  Going on to another editorial, this one also in the Wall Street 
Journal by Robert Wilmers--and I quote just a part of it:

       At the end of 2009, their total debt outstanding--either 
     held directly by 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 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 deficit--as properly they should 
     be--the 2009 deficit would be greater by $291 billion.

  The point is simple. This bill is alleged to be focused on trying to 
solve the problem of bailouts. We will hear Senators on this floor say 
day in and day out that this bill will end bailouts and stop too big to 
fail. Yet the two largest enterprises which were at the core of the 
financial crisis are exempt from the provisions of the legislation. 
They are not even mentioned in the legislation. Apparently, they are 
too big to fail, because we in this Senate will not put them into a 
track of being resolved properly.
  As I indicated earlier, I am concerned that the same outcome is going 
to happen now that happened back in 2005 and 2006 when we tried before 
their collapse to put some restraint into place, and that we will not 
act, the net result of which will be that we will, in effect, 
nationalize Fannie and Freddie and have a huge portion of our Nation's 
mortgage market be run by the government.
  The McCain amendment will simply give us a track to move forward to 
stop that result from happening, and I encourage all of my colleagues 
to consider strongly supporting this amendment. If we don't, then I 
don't think we can honestly call this a bill that truly ends the 
bailouts in our country.
  Thank you very much, Mr. President.
  I note the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. FRANKEN. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. FRANKEN. Mr. President, I rise to speak again on the problem of 
credit rating agencies and the inherent conflicts of interest that 
drive the industry. The underlying Wall Street reform bill takes some 
steps in the right direction, but I believe we can go much further in 
addressing the fundamental problem--the opportunity to shop around for 
the highest rating.
  Currently, a bank that issues a security can shop its product around 
to one of the three biggest credit rating agencies--all three of them--
seeking out the highest possible rating. The credit rating agency 
promising the highest rating will get hired. This process ensures that 
the credit rating agency will not just be evaluating the risk of the 
financial product, it will be weighing its own business interests when 
offering up a rating. If the agency hands out a AAA rating, the 
customer will come back again; the banks will come back again. That 
incentive affects the ultimate rating the product receives. This 
ratings shopping leads to major conflicts of interest, and it was one 
of the major causes of the financial meltdown.
  You have probably heard of something in our court system called forum 
shopping. It is when an attorney seeks out the judge who will be most 
sympathetic to the case. If a prosecutor is bringing a case against a 
defendant for drunk driving, that prosecutor might negotiate with the 
court clerk to get the judge known for being tough on drunk drivers. 
You can imagine the problems forum shopping has created and the 
corruption it has bred.
  The courts have identified forum shopping as a practice that 
manipulates outcomes and undermines public confidence in the courts. 
Given these problems, the courts have sought out ways to reduce forum 
shopping. In fact, the majority of Federal courts now use some 
variation of a random drawing to match cases with judges, though each 
district court has discretion to make its own specific rules. 
Accommodations can be made for particular circumstances. For example, a 
subset of qualified judges can be set aside for particularly complex 
criminal cases, and the caseload of each judge can be taken into 
account. But overall, the primary selection method in most Federal 
courts is a rotating assignment system.
  This rotating assignment system is used in my home State of 
Minnesota. New York, the home State of Senator Schumer, who is joining 
me on this amendment, also uses a rotating system. The use of a 
rotating assignment system limits opportunities for forum shopping, 
increases public confidence in the court system, and reduces 
corruption.
  Let's return to the problem of credit rating agencies. I have filed 
an amendment that seeks to reduce the conflicts of interest inherent in 
the issuer-pays model. In this model, issuers of financial products 
have incentives to shop around for the best ratings possible. In order 
to retain business, credit rating agencies will issue ratings high 
enough to keep issuers coming back, as I said. The system incentivizes 
high ratings, not accurate ratings.
  The same solution used to address forum shopping in the courts can 
also be applied to reduce ratings shopping in the credit rating 
industries. My amendment allows for the same types of discretion 
awarded to individual district courts.
  A court can develop special provisions for the assignment of 
particularly complex cases. My amendment would allow a new credit 
rating agency board to designate certain ratings agencies as being 
qualified to rate the most complex products. A court can take into 
account the existing caseload of a particular judge. My amendment 
allows the board to take into account the institutional and technical 
capacity of credit raters.
  The rotating assignment model used in the court system can be used in 
the rating system. It hasn't eliminated every problem, but it has gone 
a long way to reduce the corruption and conflicts of interest in 
selecting judges for particular cases.
  My amendment will not eliminate every problem facing the credit 
rating agency industry, but it will go a long way toward reducing 
ratings shopping. Ratings shopping is the root of the problem, and it 
is what allows issuers to bargain with credit raters. If a credit ratee 
knows the issuer cannot simply walk away and turn to another rating 
agency, there is no pressure to issue a high rating just to retain the 
business transaction.
  My amendment will not reduce competition, nor does it seek to put any 
rating agency out of business--quite the opposite. My amendment 
actually will increase and incentivize true competition. By allowing a 
board to assign more work to credit raters producing accurate ratings 
and assign less work to those producing inaccurate ratings, the market 
will finally reward accuracy and no longer reward ratings inflation, 
which was the case during this whole fiasco and what led to it. It is 
only by limiting ratings shopping and adjusting the market's incentives 
that we will finally have credit rating agencies in which the public 
can have faith.
  The Wall Street reform bill includes many important provisions 
addressing the credit rating agency problem, such as increased 
disclosures and improved postrating surveillance, but I believe it 
doesn't get to the root of the problem. When the stability of such a 
significant

[[Page S3466]]

part of our economy is based, for better or worse, on the accuracy of 
these ratings, we can't take any more chances.
  I thank Senator Schumer and Senator Nelson for helping me lead this 
reform and Senator Wicker, who has recently joined our effort. I also 
appreciate that Senators Johnson, Whitehouse, Brown, Murray, Merkley, 
Bingaman, Lautenberg, Shaheen, Casey, and Sanders support this approach 
and have joined as cosponsors. I look forward to other colleagues 
joining us, and, ultimately, I hope this bipartisan amendment will be 
taken up and passed by the Senate.
  I yield the floor and suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. McCONNELL. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. McCONNELL. Mr. President, I am going to proceed for a few moments 
on my leader time.
  The PRESIDING OFFICER. The Senator is recognized.


                        Treatment of Terrorists

  Mr. McCONNELL. Mr. President, we continue to learn more about the 
terrorist who attempted to kill scores of innocent Americans in Times 
Square earlier this month.
  The President's assistant for counterterrorism, John Brennan, now 
says Faisal Shahzad was working on behalf of the Pakistan Taliban, or 
TTP, all along.
  What this event and the aftermath have shown is that the 
administration has what can most charitably be described as an evolving 
strategy on dealing with captured terrorists.
  This was perfectly clear over the weekend when Attorney General 
Holder said in reference to the Times Square bomber that America is 
``now dealing with international terrorists,'' and this may require 
changes to when and how terrorists are issued Miranda warnings.
  Now dealing with international terrorists? I remind the Attorney 
General that we have been very much at war with international terrorism 
for a long time and that we face threats in this war from those who 
attacked us on 9/11, al-Qaida's associated groups, those who attack our 
troops every day in Afghanistan and Iraq, the man who tried to blow up 
a plane over Detroit on Christmas, and men such as the one who plotted 
to maim and kill Americans in Times Square.
  Once the administration realizes this, a lot of other questions will 
become a lot clearer. Unfortunately, the administration seems too often 
to have a trial-and-error approach.
  On Guantanamo, they tried to close it and realized it was not that 
easy. On the question of the proper venue for trials, they announced 
they would try 9/11 mastermind Khaleid Sheikh Mohammed in New York City 
and then realized maybe that was not a good idea. When it came to the 
Christmas Day bomber, they treated him like a common criminal and then 
realized that might not have been the best route either.
  Now, after learning the Times Square bomber is actually a tool of the 
Pakistani Taliban, they are wondering out loud again if they should 
revisit their approach to administering Miranda warnings.
  Let's make it easy for the Attorney General. Every terrorist--every 
single one of them--every terrorist should be treated like one.
  In the first months of the administration, the President signed 
Executive orders ending the CIA's interrogation program, demanding the 
closure of Guantanamo within a year, and essentially putting the 
Attorney General in charge of the war on terror.
  More than a year after these Executive orders were signed and after 
several failed terrorist attacks on the homeland, the administration 
finally--finally--seems to realize the war on terror is not a simple 
matter of law enforcement. A clear and forceful strategy is needed just 
as much at home as it is needed abroad.
  Republicans have been saying this all along. It is time the 
administration decides on a strategy that recognizes the implications 
of the war we are in and the dangers we face, not only abroad but right 
at home.
  Mr. President, I yield the floor.
  The PRESIDING OFFICER. The Senator from Connecticut.
  Mr. DODD. Mr. President, I wish to take a few minutes, if I may. I 
listened with some interest this afternoon, as I did last week, to my 
colleague and friend from Arizona talk about his amendment regarding 
government-sponsored enterprises, specifically Fannie and Freddie. I 
wish to respond to some of those comments and some comments today about 
these two agencies and their value, their present condition, and what 
needs to be done.
  First, there is a little revisionist history in all of this that 
seems to be important. In 2005, the House Financial Services Committee, 
under the leadership of Mike Oxley, a Republican from Ohio, chairman of 
the committee, passed bipartisan legislation dealing with Fannie Mae 
and Freddie Mac. Senate Democrats picked up that proposal. It stalled 
in the committee over here despite support for it. The Republican-
controlled committee then passed a bill. They never filed it, never 
brought it up for a vote on the floor of the Senate in 2005.
  I became chairman of the Banking Committee in 2007. As the Presiding 
Officer will recall, when he arrived in 2008, we had a significant 
number of hearings and discussions about Fannie and Freddie. In the 
summer of 2008, the Banking Committee passed a comprehensive overhaul 
of the regulations of Fannie and Freddie, including establishment of a 
tough new regulator, the FHFA, limited portfolio holdings of Fannie and 
Freddie, and we increased their capital requirements. The authority to 
put Fannie and Freddie into receivership was also adopted. We required 
internal controls and risk management and reviving and approving new 
products.
  The committee voted 19 to 2 on a very strong bipartisan basis in the 
summer of 2008, and overwhelmingly on the floor, this body supported 
those efforts by a vote of 72 to 13. That was in the summer and fall of 
2008.
  When I hear the comments being made that nothing has been done about 
Fannie and Freddie--Mike Oxley tried and failed. I cannot repeat on the 
floor of the Chamber the words Mike Oxley used to describe the 
minority's handling of reform when he was accused later of not having 
an effective reform package. The Republican chairman of that committee 
had very strong language to describe the failure of our Republican 
friends to pick up his efforts, his bipartisan efforts, in 2005. As I 
say, in 2008, by a vote of 72 to 13, this body adopted the committee's 
recommendations--adopted 19 to 2 in the Banking Committee--to put 
strong regulations over Fannie and Freddie. So that is as a backdrop.

  I will be the first to recognize that more needs to be done, clearly, 
in terms of coming up with a whole new financing structure for the 
housing market. There is no doubt about that. But as my colleague from 
New Hampshire has pointed out--and while it wasn't part of the whole 
reform package included in this 1,400-page bill because it probably 
would have doubled the size of this legislation--the issue is far too 
complex at this juncture to include those kinds of reforms in this 
bill. That is not to suggest they do not need to be done, but it will 
take a separate undertaking, it seems to me and most who have looked at 
it, to decide what is that alternative idea.
  So when we have the McCain amendment, as in the Ensign amendment the 
other night, I would urge my colleagues to vote against it. All their 
amendments do is to get rid of Fannie and Freddie. There is no 
alternative idea here. The McCain amendment says that in 24 months you 
have to get rid of Fannie and Freddie. Well, that is a nice idea, but 
what are the implications if we get rid of it?
  Today, 97 percent of all mortgages are backed by Fannie and Freddie. 
If you want to see interest rates go up, if you get rid of the only 
entity that is purchasing these mortgages today--and that is Fannie and 
Freddie, by and large--who will purchase them? If they are not 
purchased, what happens to interest rates and home values? If you think 
the market took a plunge last Thursday, adopt the McCain amendment. It 
is a reckless amendment. There is no alternative whatsoever included in 
that proposal.

[[Page S3467]]

  Let me identify the three major problems with it, aside from the fact 
it doesn't offer any alternative whatsoever as to how we end up with a 
financing mechanism for housing in this country. Remember, we are the 
only Nation on the face of the planet today that provides a 30-year, 
fixed-rate mortgage for homeowners. It is the reason why we have had a 
relatively high percentage of our population in home ownership. It also 
is the single largest wealth creator for most families--home 
ownership--not to mention the value it is to a family, a neighborhood, 
a community.
  When people have an equity interest--when they can accrue equity over 
time--it leads to long-term financial security, retirement security, 
and it has made a difference in how middle-income families have been 
able to afford a higher education for their children. All these 
benefits accrue. No other Nation on Earth provides that kind of 
stability and long-term security that we have in the housing market, 
and it doesn't happen miraculously. It happens because we have had a 
financing mechanism that has provided for that kind of assurance at a 
relatively low cost.
  So when you look at the amendment, it severs all Federal involvement 
with these mortgage securitization, government-sponsored enterprises 
within 24 months. That is the McCain amendment. Before people jump on 
board with what a great idea this is, consider the implications and 
then be prepared to explain them when they happen. There is no reform 
here. It just gets rids of something without replacing it with 
anything, except somehow the private market is going to pick up. There 
is no private market for that today, and we need an alternative idea. 
Some have mentioned a public utility concept, others have mentioned 
various other ideas, all of which we have listened to. But, frankly, 
there is a lot of debate about what that alternative ought to be.
  So to draft a bill to take in all these other ideas for housing, 
frankly, as the Senator from New Hampshire has said, was far too 
complex, given all the other challenges we are faced with in this 
legislation, to try to deal with too big to fail, consumer protection, 
finally getting some clarity and regulation over exotic instruments, 
providing some long-term radar system, as we describe it, to identify 
problems as they emerge, whether in Greece or someplace else, not to 
mention all the other provisions, dealing with underwriting standards, 
capital requirements, leverage, and all the rest. This bill is 1,400 
pages, not to mention the bill passed out of the Agriculture Committee, 
which adds, of course, a whole other title VII to the bill.
  So when you consider what is in here, I hope my colleagues will be 
careful before they jump on what is a politically charged issue and 
understand what the implications may be if it is adopted. The McCain 
amendment, as I said, is reckless, it is poorly thought out, it poses 
significant risk to the housing markets that have only recently begun 
to stabilize, by the way. We are seeing just in the last few weeks that 
finally prices are beginning to move up in the housing area, new 
stakeholders are occurring, and things are beginning to move in the 
right direction.
  You can say a lot of things, but if you don't have stability in the 
housing market, this recovery will not occur. It is a critical 
component of recovery and to pull the rug out from underneath this 
particular effort right now would be a major blow to our economy and I 
think would set us back on our heels at the worst possible moment. As I 
said earlier, major reforms to the housing financing system are clearly 
necessary. I will be the first to acknowledge that--all should. As we 
can't go back to the system of the past and the status quo of the GSEs 
under Federal conservatorship--by the way, Fannie and Freddie are under 
conservatorship because of our 2008 legislation--it is untenable. We 
can't continue with that, and we need to replace it, but such changes 
must be thoughtful and deliberate.
  In the near term, we must ensure that changes affecting the Federal 
role in Fannie and Freddie do not jeopardize the fragile economic 
recovery. Over the long term, we must be careful in structuring the 
housing financing system in a way that guarantees continued mortgage 
liquidity with minimum economic disruptions.
  The McCain amendment falls short in several respects. First of all, 
it imposes significant risk to our economic recovery. Some 95 to 97 
percent of mortgage originations are currently backed by the Federal 
Government--95 to 97 percent, the vast majority of this coming through 
Fannie and Freddie. The McCain amendment would cause significant 
uncertainty among investors and GSE-issued mortgage-backed securities, 
threatening the primary source of mortgage credit that we have at this 
time. Pull away the credit we have, what replaces it? In this 
amendment, nothing, without offering any alternative sources of 
liquidity. Such a precipitous drop in mortgage liquidity could severely 
threaten this fragile recovery we are presently feeling.
  Second, the McCain amendment fails to ensure sufficient mortgage 
credit would be available in the future. Private securitization of the 
GSEs account for, as I said, some $9 trillion of the $14 trillion in 
total outstanding mortgages in the United States today. With the future 
of private securitization highly uncertain--in fact, that is a mild 
statement given the present economic circumstances--policymakers 
seeking to reform the housing financing system must ensure that the 
system of the future will provide sufficient liquidity to meet the 
mortgage needs of all Americans. The McCain amendment would eliminate 
existing sources of mortgage liquidity while remaining silent on the 
more difficult question of how to replace them.
  So you may not like what you have here, but you are replacing it with 
nothing. What are the alternatives to go to in the housing market?
  Thirdly, the McCain amendment neglects to replace the public purposes 
served by GSEs. The GSEs were poorly run, but they clearly served a 
number of public purposes, such as making the 30-year fixed-rate 
mortgage broadly available for American home buyers. This does not go 
to the question of the underwriting standards. That was a disaster with 
unregulated brokers and mortgage companies. But putting aside that 
question, which we address--and there are other ideas on how to further 
address the underwriting requirements--there is the idea that the 
average family in this country could purchase and have a chance to get 
in that starter home, to put them on the pathway to home ownership and 
all that means to families--what it has meant to our country to make 
that available, not just to the affluent and the well-heeled but to 
families even at the lower end of the economic spectrum--to have that 
kind of job that could provide that income to support a mortgage; what 
it means to be able to say to your family: We own our home. This is 
where we live. We have a vested interest in our community, in our 
neighborhood.

  You can talk to anyone about social policy and home equity interest 
in a neighborhood, and it changes a neighborhood. It makes a 
difference. So when you start stripping away, pulling out the rug from 
underneath the financing scheme for doing this today, the mechanism for 
doing it, then you undermine the very ability to have that long-term, 
stable mortgage that a family can count on. Watching their equity grow, 
under normal circumstances, makes such a difference. It is why this 
economic disaster we have been through over the last couple years is so 
harmful.
  I said earlier there are 4 million homes today that are underwater--4 
million of them underwater--and 250,000 homes in the first 3 months of 
this year have been seized because of the economic conditions. So 
housing is critical. It is where this crisis began because of the 
shoddy underwriting requirements that are out there and luring people 
into subprime mortgages. By the way, that is the alternative. When you 
strip away the financing mechanism, what you are left with is subprime 
lending. That is what goes on, luring people into those circumstances.
  So, Mr. President, you are entitled to your own opinion but not your 
own facts in this debate. The fact is, there was an effort in 2005, led 
by a Republican chairman in the housing committee in the House, and he 
has some very choice words for those who suggest that effort wasn't 
real to make a change here. I regret deeply that Mr.

[[Page S3468]]

Oxley didn't prevail in his ideas here in the Senate. He passed it in 
the House, but it was squashed over here.
  Then, in 2008, as I said, by votes of 19 to 2 and 72 to 13 on the 
floor of this Chamber, we did pass legislation that provided for a 
comprehensive overhaul of the regulation of Fannie and Freddie. It made 
a substantial change, but far more needs to be done. I acknowledge 
that, clearly. But let's not, in the face of that acknowledgment, strip 
away that ability in this bill, within 24 months, without replacing it 
with anything, putting our economic recovery at great risk. I predict 
to you, as certain as I am standing here, if the McCain amendment were 
to pass, that is the outcome, count on it, in my view.
  So I caution my colleagues, despite the political mantra associated 
with all this, we are in a very delicate time. It is very important 
that we use our heads and carefully deliberate on how we are moving. By 
a vote of 59 to 35, we rejected the Ensign amendment last week. It was 
the right outcome. If we reverse that vote tomorrow or in the next 
day--whenever the McCain amendment comes up--and we will have a side-
by-side amendment, by the way, to explain what the committee is doing 
further and what needs to be done to get us on the right track so 
people can be supportive of some alternative ideas here--then I think 
we will set ourselves back.
  In light of what has happened in Europe over the weekend, still may 
unfold here, right now we don't need to be sending messages to the 
markets without any alternative ideas in place as to how to come up 
with a housing finance system that is as worthy of the very people who 
counted on that ability to have that fixed-rate mortgage, to watch 
their family prosper and grow and become stable, as this has over the 
years.
  I know others want to be heard on probably other matters, but this is 
a very important issue, and my hope is my colleagues will pay careful 
attention to this and not succumb to the temporary temptation to follow 
because there are some groups out there that have never liked this 
anyway. They have never liked the idea of this program. Clearly, as I 
say, reforms are needed.
  With that, I yield the floor.
  The PRESIDING OFFICER (Mr. Levin). The Senator from Oregon.
  Mr. MERKLEY. Mr. President, I am honored to rise to address the 
Volcker amendment, which I am pleased to be able to cosponsor with my 
colleague and friend who is now presiding over the Senate. I thank 
Senator Levin for the outstanding job he has done in shining the light 
on the need for financial reform through his Permanent Subcommittee on 
Investigations.
  I also wish to thank Senator Dodd for shepherding this important 
financial reform and bringing such a significant and solid bill to the 
floor of the Senate, and I thank him for working with several of us to 
strengthen the approach proposed in the Volcker amendment. I look 
forward to having a chance to present that on the floor and appreciate 
very much Senator Dodd's support.
  The goal of our financial system is to efficiently aggregate and 
allocate capital. That is sometimes done through banks that make loans, 
and that is sometimes done through pools of investors who put their 
money together and ask managers to find the highest return. But these 
two functions of lending and high-risk investing, although both 
critical to the capital system of aggregating and allocating our 
dollars, are in fact very different. This Volcker amendment is all 
about creating the right balance between these two so they work 
collectively to make a more efficient, stronger financial system rather 
than working at odds with each other.

  This bill has three components. The first is to get high-risk trading 
out of our banks on which families and small businesses depend. The 
second is to establish higher capital requirements for high-risk 
investing or hedge funds. The third is to eliminate conflicts of 
interest, conflicts of interest that have proceeded to undermine the 
integrity of our securities system.
  I want to try to give kind of an analogy so we can all get our hands 
around these functions; that is, to try to imagine you are collecting 
fireworks. Fireworks are a wonderful thing, and you might want to have 
them for the Fourth of July or for New Year's. But you do not store 
them in your living room because, if they were to accidentally go off, 
you would burn down your house. The fireworks in this example is your 
high-risk investing, and your living room represents the lending 
depository banks that power up our economy by making their loans in our 
communities to our businesses and our families.
  To continue that analogy, you would want those fireworks stored not 
only not in your living room but not in any of the bedrooms of your 
house or any of the other rooms. You would want them stored out in your 
shed, in this case outside the bank holding company, so if the high-
risk investments do explode or go down you don't burn down your house. 
This leads to the second part of the Volcker amendment which says, 
while you are storing them in your shed, you should make it more fire 
resistant. Maybe that means putting in a sprinkler system or some other 
system. That is the second part. But the third part is to say those who 
design and sell the fireworks should not simultaneously be developing 
and designing fuses designed to fail and then taking bets that the 
fireworks would go off prematurely. This is a conflict-of-interest 
issue on which recent hearings have shined such a bright light.
  Turning, then, to this high-risk trading and the challenges it 
presented to our financial system, what I am putting up right now is a 
chart that shows the impact of high-risk trading on the meltdown that 
occurred in 2008 and 2009. We have Lehman Brothers that lost $30 
billion in trading; Merrill Lynch lost $20 billion in trading; Morgan 
Stanley over $10 billion; JPMorgan Chase over $10 billion, Goldman 
Sachs over $4 billion, and Bank of America over $7 billion. High-risk 
trading primarily on mortgage securities and derivatives of those 
securities blew a hole through almost every major Wall Street financial 
investment institution.
  I do not think anyone should, in light of these facts, be able to say 
that high-risk investing has nothing to do with the current crisis. It 
has pretty much everything to do with it, and that is why the 
Government stepped in to provide financial relief to these firms--huge 
amounts of money. Lehman Brothers went down because we didn't step in 
to assist them. Merrill Lynch basically was saved by being purchased by 
Bank of America which had a tremendous bailout; that is, $45 billion. 
Morgan Stanley got $10 billion in TARP funds; JPMorgan Chase, $25 
billion; Goldman Sachs, $10 billion; and, of course, the list goes on.
  This high-risk investing does not belong in our lending depository 
institutions. A bank that has access to the discount window of the Fed, 
a bank that has access to insured deposits, deposits insured by Uncle 
Sam, that bank should not be diverting those funds into the temptation 
of high-risk investing. Similarly, they should not be proceeding to 
allow the high-risk investing to blow up the lending side of a 
financial organization.
  The risk of an investment house going down is certainly higher during 
a recession. It is very high in a severe recession. That is just the 
time we need banks to be able to continue lending, to not let lending 
seize up.
  I can tell you, back home in Oregon business after business has come 
forward and said: Our credit line was cut in half or we went to 
refinance a commercial loan and the bank said we will not do it because 
the value has dropped or we can't make any more loans in that sector or 
perhaps we can't make any more loans at all because we have reached our 
leverage limits.
  Lending seized up in America, and it is a key factor in prolonging 
this recession. These are the reasons that, if you want to have high-
risk investing with the money from pools of investors--that is an 
important part of the capital allocation but do it at a safe distance 
from the lending depository function.
  The second piece of this--and back to my analogy that this is when 
you put the high-risk investing in the woodshed--is that you also make 
the woodshed more resilient, and that is enabling the regulators to say 
that as an investment house becomes more systemically significant those 
regulators

[[Page S3469]]

can raise or will raise the capital requirements necessary so that the 
leverage decreases as the firms become larger. This greatly reduces the 
chance that an investment house will go down during a recession or go 
down because of bad loans because they are putting up more capital 
against those investments.
  I want to come to the third part, the conflict-of-interest 
provisions. They will also be addressed at greater length by my 
colleague. By the way, I ask unanimous consent Senator Levin be allowed 
to follow directly behind me.
  The PRESIDING OFFICER. Is there objection? Without objection, it is 
so ordered.
  Mr. MERKLEY. Mr. President, he will elaborate on these provisions, 
but I want to put up my third chart because at the hearings my 
colleague had focused attention on a real challenge. Through those 
hearings some have observed that Goldman Sachs has become an ``iconic 
image of bankers with conflicts of interest.'' Let me try to again 
address that.
  If you are selling fireworks, you should not be in the business of 
designing bad fuses to put on those fireworks and then betting the 
fireworks will go off accidentally or, as another person has put it, if 
you are selling cars, you should not be selling cars without brakes and 
taking out insurance on the owners. That fundamentally undermines the 
integrity of the market, whether it is the fireworks market or car 
market. But those are analogies for our financial market.
  Integrity is so important. International capital flows to systems 
with integrity. It was after the Great Depression that we established 
reforms on Wall Street that led to decades in which the international 
community saw the American markets as the best organized, best policed 
safe place--no scams or minimal scams--that they could put their money.
  We want Wall Street to be able to continue to attract and aggregate 
and allocate that capital. That is an essential function.
  I note that this group of three commonsense reforms on this chart, 
going back to these three pieces--getting the high-risk trading out of 
the banks, increasing the capital requirements for investment firms 
that become systemically significant, and ending the conflicts of 
interest in securities--these commonsense reforms have a lot of 
support.
  In addition to Senator Levin, I thank 15 cosponsors who have jumped 
in to join this effort: Senator Brown, Senator Kaufman, Senator 
Shaheen, Senator Feinstein, Senator Casey, Senator Bill Nelson, Senator 
Burris, Senator Begich, Senator Inouye, Senator Whitehouse, Senator 
McCaskill, Senator Mark Udall, Senator Mikulski, Senator Sanders, and 
Senator Tom Udall. I encourage my colleagues on both sides of the aisle 
to consider jumping in to support these commonsense reforms.
  I note also that the supporters for this amendment include Paul 
Volcker; they include John Reed, the former chair and CEO of Citibank; 
they include the Independent Community Bankers of America, who 
recognize that community banks do better if the Wall Street system has 
integrity in allocating capital. The Main Street Alliance of Small 
Businesses supports this amendment, the AFL/CIO supports it, Americans 
for Financial Reform, and a dozen other organizations.

  I also note that a group has solicited support online. Here I have 
25,000 individuals from across the country, all 50 States, who sent 
this petition to the Senate. This is from the Progressive Change 
Campaign Committee, and these 25,000 citizens say:

       The big Wall Street banks gambled away our money on a 
     reckless housing bubble and then insisted we spend more money 
     bailing them out. We need you to support the Merkley-Levin 
     proposal to end this risky gambling and other conflicts of 
     interest.

  I conclude by saying we have a responsibility, following this great 
recession we are in now, to redesign the rules of the road for Wall 
Street, to increase integrity, to increase transparency, to decrease 
the conflicts of interest, and to make it work in the most efficient 
possible way. It is with that spirit these three commonsense proposals 
have been laid out.
  It has been a privilege to partner with the Presiding Officer, 
Senator Carl Levin, in this effort.
  I yield the floor. I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant bill clerk proceeded to call the roll.
  Mr. LEVIN. Mr. President, I ask unanimous consent the order for the 
quorum call be rescinded.
  The PRESIDING OFFICER (Mr. Merkley). Without objection, it is so 
ordered.
  Mr. LEVIN. Mr. President, first, let me commend the Presiding 
Officer. Senator Merkley has been an avid leader in doing something 
significantly important to end the role of proprietary trading, which 
is something that helped create a housing bubble, expanded that bubble, 
and the bubble burst and helped to sink this economy. This amendment we 
are offering is aimed at trying to rein in the excesses of those 
proprietary trades. It does it in a way which makes a lot of sense. A 
lot of work went into it.
  The Banking Committee, Senator Dodd, his staff, our staffs, and many 
other staffs and people outside of this body have worked very hard to 
make sure this will be a practical amendment. It is. I am proud to 
cosponsor it with the Presiding Officer, Senator Merkley, who has been 
such a great leader.
  As recent hearings that I chaired at the Permanent Subcommittee on 
Investigations demonstrated, many things caused the financial crisis 
that started the recession that we are climbing out of. But up and down 
the financial system--upstream, from mortgage brokers hustling dubious 
mortgages, to Wall Street firms downstream that sliced and diced 
securities, betting on those risky mortgages--there were failures and 
mistakes piled on top of plain old-fashioned fraud.
  At its heart, the financial crisis is a story of extreme greed and 
excessive risk. In the pursuit of ever larger profits, financial 
institutions took on ever-increasing risk while ignoring the danger 
that risk represented. When their bets failed and the risks came 
crashing down upon them, the financial system teetered on the brink of 
collapse. The economy plunged into what has become known as the great 
recession. Millions of Americans lost their jobs and homes, and 
taxpayers had to spend hundreds of billions of dollars to keep things 
from getting even worse. We cannot allow a repeat.
  The bill from Senator Dodd is a huge step in avoiding that repeat. We 
simply must never again allow Wall Street firms seeking to boost their 
bottom lines, borrowing millions, or billions in this case, of dollars, 
making risky bets and risky trades, pocketing the winnings when their 
bets go well, and going to taxpayers for salvation when the bets go 
south. That is surely true of what is known as proprietary trading.
  Too often, before and during the crisis and even today, financial 
institutions trade financial instruments often using large amounts of 
borrowed money to make risky bets for their own benefit, not on behalf 
of their clients.
  Today, Senator Merkley and I, along with our cosponsors, are 
introducing an amendment to Senator Dodd's financial regulatory reform 
bill that seeks to limit the damage these proprietary transactions can 
inflict on our economy and end the conflicts of interest which too 
often accompany them.
  I ask unanimous consent that Senator Jack Reed be added as a 
cosponsor of our amendment.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. LEVIN. Proprietary trading brings high amounts of risk directly 
into the financial infrastructure and has repeatedly and severely 
damaged the financial system. It was a large part of the banking 
collapse of 1929, which is why Glass-Steagall restrictions separating 
investment banks from commercial banks were enacted. In 1998, as Glass-
Steagall was being weakened, proprietary trading in complex derivatives 
left the major Wall Street banks facing billions in losses. The Federal 
Reserve organized the first massive bailout of a too big to fail 
nonbank, Long-Term Capital Management. And in our current crisis, 
proprietary trading in subprime securities and derivatives was the 
critical factor in the failure of major Wall Street firms in 2008.

[[Page S3470]]

  By April 2008, the Nation's largest financial firms had suffered $230 
billion in losses based on their proprietary trading. And by the end of 
2008, the taxpayers were forced to put up hundreds of billions of 
dollars in TARP funds to avoid the collapse of our economy. Lehman 
Brothers is one example. In 1998, it had ``only'' $28 billion in 
proprietary holdings. By 2007, its proprietary holdings had soared to 
$313 billion. When the values of these holdings declined in 2007 and 
2008, Lehman Brothers lost $32 billion, its losses exceeded its net 
worth, and by September 2008, the firm had collapsed in the largest 
bankruptcy in history.
  Senator Merkley and I propose an amendment that addresses these 
issues in the following ways:
  First, commercial banks and their affiliates would be barred from 
high-risk proprietary trading. The risk to the federal deposit fund is 
simply too great to allow commercial banks to gamble as they can today.
  This prohibition will not inhibit these institutions from serving 
their customers. Our amendment expressly permits carefully specified 
client-based transactions. That means that banks, through their broker-
dealer affiliates, could buy or sell securities and other instruments 
as requested by clients. Those affiliates can also, for example, act as 
underwriter for a client issuing new stocks or bonds, provided those 
transactions are not allowed to endanger the safety and soundness of 
the bank.
  Second, we limit proprietary trades at the largest nonbank financial 
institutions. These institutions would be required to keep enough 
capital on hand to ensure that they, and not the taxpayers, would cover 
their trading losses. That would limit the size of their proprietary 
activities. The regulators overseeing the financial system would be 
tasked with specifying the capital levels these institutions would be 
required to maintain, as well as limits on the amount of proprietary 
trading they could do, in order to protect the stability of the system. 
These restrictions would address one of the chronic problems that led 
to the crisis, that of financial institutions borrowing heavily to make 
their risky trades by leveraging their own funds, and jeopardizing the 
entire financial system when their risks overcame their own funds.
  Third, we would address one of the most dramatic findings of our 
subcommittee's recent hearings, that of firms betting against financial 
instruments they are assembling and selling. As our hearing on 
investment banks showed, Goldman Sachs assembled and sold mortgage-
related financial instruments, then placed large bets, for the firm's 
own accounts, against those very same instruments. In one case 
highlighted at the hearing, involving risky mortgage-backed securities, 
a Goldman trader bragged in an email that, although the firm lost $2.5 
million when the securities failed, Goldman made $5 million on a bet 
placed against those very same securities. The conflict of interest 
prohibition in our amendment is intended to prevent firms that 
assemble, underwrite, place or sponsor these instruments from making 
proprietary bets against those same instruments.
  Assembling and selling financial instruments to its clients while 
betting against those same instruments did injury to Goldman's clients. 
The fact that the firm described these instruments, in its own emails, 
as ``junk,'' added insult to injury. This isn't market making, bringing 
together two customers, a buyer and a seller, as Goldman executives 
claimed during our hearing. This is Goldman Sachs acting as its own 
secret client, betting against its customers. When members of the 
subcommittee asked Goldman executives about that conflict of interest, 
they answered by saying that we just understand, that this is how 
business is done on Wall Street. We understand all too well how 
business has been done on Wall Street. And that is why we must end the 
self-dealing and put a cop back on the beat on Wall Street.
  Our amendment would protect depositors and taxpayers from the risk of 
proprietary trading at commercial banks. It will protect taxpayers from 
the dilemma of having to pay for Wall Street's risky bets, or watch our 
financial system disintegrate. And it would protect investors and the 
financial system at large from the conflicts of interest that too often 
represent business as usual on Wall Street. It will strengthen 
protections already in place in the bill before us, and add new ones to 
guard the stability of a financial system on which our economy and 
American jobs depend.
  Senator Merkley and I have worked closely with a number of 
colleagues, including Senator Dodd, as well as officials from the 
Treasury Department and the Securities and Exchange Commission, to 
ensure that our legislation would address the problems we seek to 
address without endangering legitimate market activity and activity on 
behalf of clients. It has been endorsed by former Federal Reserve 
Chairman Paul Volcker; business leaders such as John Reed, the former 
Chair and CEO of Citibank; and major organizations calling for real 
Wall Street reform, including the Independent Community Bankers of 
America, Americans for Financial Reform, and the AFL-CIO.
  There is nothing wrong with Wall Street firms making a profit. What 
we oppose is the notion that in seeking such profit, these financial 
institutions can put depositors, clients, taxpayers, and the very 
safety of our financial system at risk. What we oppose is conflict of 
interest. I hope our colleagues will support these commonsense 
safeguards to strengthen the financial system and our economy.
  I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. DODD. Madam President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER (Mrs. Shaheen). Without objection, it is so 
ordered.
  Mr. DODD. Madam President, I ask unanimous consent that on Tuesday, 
May 11, after any leader time, the Senate resume consideration of S. 
3217, and debate concurrently the pending Sanders amendment No. 3738 
and the Vitter amendment No. 3760; that prior to a vote in relation to 
each amendment, there be a total debate limit of 80 minutes, with 20 
minutes each under the control of Senators Sanders, Vitter, Shelby, and 
Dodd, or their designees; that upon the use or yielding back of all 
time, the Senate proceed to a vote in relation to the Sanders 
amendment, followed by a vote in relation to the Vitter amendment, with 
no amendment in order to either amendment.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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