[Congressional Record Volume 156, Number 80 (Tuesday, May 25, 2010)]
[Senate]
[Pages S4206-S4208]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
FINANCIAL REGULATORY REFORM
Mr. LEVIN. Mr. President, a year and a half ago, the Permanent
Subcommittee on Investigations began a review of the causes of the
financial crisis. The subcommittee, which I chair, sought to answer a
fundamental question about a crisis that was, at that moment,
threatening to bring on a second Great Depression, and that has cost
millions of Americans their jobs, their homes, their businesses and
their savings. The question we sought to answer: How did this happen?
And we asked that question so that we could inform our colleagues and
the public on steps we might take to protect ourselves from the danger
of future crises.
The subcommittee examined millions of pages of documents, interviewed
hundreds of witnesses, and conducted four hearings with more than 30
hours of testimony. What we learned was sobering:
We learned that mortgage lenders such as Washington Mutual Bank
sought to boost their short-term profits by making increasingly risky
mortgage loans to borrowers increasingly unlikely to be able to repay
them. WaMu, as it was known, made hundreds of billions of dollars of
loans, many of which were laced with fraudulent borrower information,
and then packaged and sold these loans, dumping toxic assets into the
financial system like a polluter dumping poison into a river.
We learned that regulators such as the Office of Thrift Supervision
identified problems at WaMu on many occasions but failed to act against
them, and in fact hindered other Federal regulators like the Federal
Deposit Insurance Corporation from taking action.
We learned that credit rating agencies, institutions that investors
depended upon to make accurate, impartial assessments of the risks that
assets carried, failed completely in this task. This failure was caused
by faulty risk models and inadequate data, and by competitive pressures
as the credit rating agencies sought to obtain or enlarge their market
share and please the investment banks that were paying them for their
credit ratings. Because credit rating agencies were paid by the
financial institutions selling the financial products being rated,
conflicts of interest undermined the ratings process and led to a slew
of inflated AAA ratings for high-risk products whose ratings were later
downgraded, many to junk status.
We also learned that investment banks such as Goldman Sachs helped
feed the conveyor belt of toxic assets that nearly brought economic
ruin.
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Goldman Sachs repeatedly put its own interests and profits ahead of
the interests of its clients and our communities. Its misuse of exotic
and complex financial structures helped spread toxic mortgages
throughout the financial system. And when the system finally collapsed
under the weight of those toxic mortgages, Goldman profited from the
collapse.
The lesson of our findings is that this disaster was manmade. And yet
perhaps the most stunning finding came from our hearings themselves,
when top executives from institutions that collectively destroyed
millions of jobs and billions of dollars' of wealth repeatedly dodged
responsibility, saying the mistakes were someone else's, that they had
done nothing wrong, that those who questioned their actions simply
failed to understand how the financial system worked. Mr. President, if
Wall Street refuses to take responsibility for its actions, it is
incumbent on us to take responsibility for putting a cop back on the
beat on Wall Street.
The bill we approved last week contains many important provisions
that directly address the problems revealed in our investigation. Begin
with the lenders. The Consumer Financial Protection Bureau this
legislation will create is an important tool to protect borrowers and
the financial system from the abusive lending at banks such as WaMu
that helped bring about the crisis. Thanks to an amendment offered by
Senator Merkley, which I was proud to cosponsor, lenders will no longer
be able to pocket a quick profit by selling a ``liar loan,'' requiring
no documentation of wages or the ability to repay. Under Senator
Merkley's amendment, borrowers will be required to provide reliable
evidence of their income, either through a W-2, tax return, or other
such record. The amendment would also require lenders to verify
borrower income.
Together, those provisions essentially impose a ban on so-called
stated-income loans, which is exactly what is needed. Negative
amortization loans, in which borrowers can spend years making payments
so small that they end up owing thousands of dollars more than the
original loan amount, should also become rare. Putting a cop on the
beat means protecting all of us from the consequences of reckless
behavior by those who seek short-term gain at the expense of financial
stability.
It is also significant that lenders will be required to retain some
of the risk they create by keeping a portion of the mortgages they
securitize on their own books, ending the current situation in which
lenders can make risky loans and then dump all that risk into the
financial system. Under the Senate bill, securitizers of high-risk
mortgages will have to retain at least a 5 percent interest in any
mortgage-backed securities they issue. Mortgages that are very safe--
such as 30-year, fixed-rate mortgages with a historical default rate of
1 to 2 percent--will be exempted from this credit risk retention
requirement. Securitizers using mortgages with a credit risk that is
above the 1- to 2-percent default rate for traditional mortgages, but
below the 5-percent or more default rate associated with high-risk
mortgages, will have some risk retention requirement but one that is
less than the 5-percent requirement for high-risk mortgages. These risk
retention requirements are essential to rebuild investor confidence in
our mortgage-backed securities markets. This bill also addresses many
of the regulatory failures our investigation identified. The Office of
Thrift Supervision, which failed so badly in its oversight
responsibilities, is dissolved under this bill. The Federal Reserve
would be given important authority to oversee the largest financial
institutions, regardless of their legal status as bank holding
companies, investment banks or other entities, offering powerful
protection against risks to the stability of the financial system that
went unrecognized through the web of Federal regulation during this
crisis. The Consumer Financial Protection Bureau would be charged with
ending high-risk mortgages that not only hurt consumers, but undermined
the safety and soundness of U.S. banks and mortgage lenders.
This legislation includes substantial reform of credit rating
agencies. These agencies will now be liable to civil suits by private
parties for the quality of their analytical process, and required to
institute internal controls, devote sufficient resources, and improve
training and competence to improve the accuracy of their ratings. The
Securities and Exchange Commission will establish a new office to
oversee the agencies, another example of how we would put a cop back on
the beat. And thanks to the amendment offered by Senator Franken, which
I cosponsored, the bill has addressed the dangerous conflict of
interest under which the supposedly impartial analysis of financial
instruments is paid for by the issuers of those financial instruments.
While it would have been cleaner also to strike the existing statutory
ban on SEC oversight of the substance of ratings and the procedures and
methodologies used to produce those ratings, the Senate bill as written
essentially overrides that ban and enables the SEC to exercise the
oversight needed to ensure credit ratings are derived in a reasonable
and impartial manner.
We had an opportunity as well to address the issues identified in our
investigation with the actions of investment banks such as Goldman
Sachs. This legislation makes some progress there. Importantly, the
legislation will bring the shadowy derivatives market into the light,
requiring virtually all derivatives to be disclosed to regulators, that
most undergo a standardized clearing process, and that derivatives
dealers meet capital requirements that ensure, if their risky bets
fail, they can cover the losses from their own accounts, and not--as,
for instance, AIG did--come to taxpayers for a bailout.
One major failing during the debate on the bill was the Senate's
failure to approve Senator Dorgan's amendment to ban ``naked'' credit
default swaps, the ultimate gamble in the casino that Wall Street has
constructed in recent years. That amendment included a provision I had
sought to ban synthetic asset backed securities that magnify risk
without providing any economic benefit. The Dorgan amendment would have
reduced the high-risk, conflicts-ridden practices that too often are a
part of Wall Street today and would have rebuilt investor confidence in
our markets. I regret that the Senate did not see fit to add that
provision to the bill.
Of course, I wish the Senate had been allowed to consider the
amendment that Senator Merkley and I offered to rein in proprietary
trading and address the conflicts of interest that have become business
as usual on Wall Street. We had offered our amendment to a Brownback
amendment that was already pending on the floor. I am very disappointed
that Senator Brownback decided to withdraw his amendment, which meant
the Merkley-Levin amendment could not get a vote. The Dodd bill
includes a provision requiring regulators to study and implement
restrictions on proprietary trading, which is a step in the right
direction. But we have missed an opportunity to strengthen that
provision by putting in a statute, without the ability of agencies to
modify, prohibitions on risky trading by banks, and strict limits on
such trading by nonbanks. Of prime importance, our amendment would have
ended the conflicts of interest that now allow financial institutions
to assemble and sell complex financial instruments--even instruments
with a significant possibility of failure--and then bet that those
instruments will fail, profiting from bets against the very instruments
they constructed and from the clients they convinced to purchase those
products.
Mr. President, I do not understand how Senators can be shown the
damaging conflicts of interest identified by our investigation and not
see the need to address those conflicts. If we do not address them, we
will have poorly served our constituents and missed a chance to make a
future financial crisis less likely.
I have some additional regrets about the legislation. Amendments I
had drafted to impose a 1-year cooling off period before financial
regulators can take jobs at the financial institutions they regulated,
and to repair damage from a Supreme Court decision known as Gustafson
had been included in a planned managers' amendment, but that amendment
never received a vote. Important amendments to strengthen the authority
of the FDIC, close the London loophole that allows foreign trading
terminals to be established in the United States to trade U.S.
commodities without complying with U.S. trading rules, require
registration of
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private equity and venture capital funds, reverse the Stoneridge
decision barring shareholder suits against those who aid and abet
financial fraud, and other important issues were also not acted upon or
given a vote. I hope these issues will be addressed in conference.
Still, taken as a whole, the legislation we approved is an important
step toward policing Wall Street and rebuilding Main Street's defenses
from Wall Street's excesses. The millions of pages of documents and
long hours of testimony gathered by the Permanent Subcommittee on
Investigations present a detailed history of the financial crisis. But
all that complexity tells a pretty simple story, really, one of
unbridled greed that created unheeded risk, risk that exploded into the
worst recession in decades. Wall Street may not have learned the
lessons of that story, but the rest of the country has. We must act. We
must put the cop back on the Wall Street beat, or once again suffer the
consequences of Wall Street's greed. Hopefully, the Senate-House
conference will get us closer to that goal.
Mr. VOINOVICH. Mr. President, I rise today to explain my opposition
to the Restoring America's Financial Stability Act, which the Senate
passed last week. It is now clear that over the past decade or so,
certain factors played a critical role in leading our Nation into the
financial crisis that first reached critical mass and arrested the
credit markets in 2007, subsequently leading to the collapse of some of
our largest financial services firms, and culminated with a crash of
the stock market in late 2008 and again in early 2009. These underlying
factors and resulting events produced a widespread crisis and a
devastating recession with massive job loss and sustained record
unemployment, all of which continue to be felt by families throughout
Ohio and States across America. In response, we in Congress have taken
up legislation that supposedly aims to correct what went wrong and
restore safety, soundness, and stability to our financial markets to
foster recovery and fortify the foundation for a strong economy.
Why, then, have I opposed the passage of this legislation? Simply
put, because it does not get the job done. This legislation fails to
address the root causes of our current crisis, while severely
overreaching in its expanded regulation of businesses large and small
throughout the economy. While I was disappointed that a bill this
large, technical, and consequential was not properly and carefully
vetted through the committee process, and was then subject to political
abuse by the majority, I voted to bring the bill to the Senate floor
because I believe the American people wanted us to debate the issues
surrounding the financial collapse and bring forth legislation that
would work to minimize the possibility of a future collapse caused by
the same weaknesses. Although I was pleased with the debate process on
the Senate floor--Senators were allotted time to offer amendments,
debate was substantial, and amendments were germane--this reform
legislation ignores the root causes of the collapse and ultimately
fails to repair and strengthen our financial system.
First, the bill fails to address the main catalysts of the financial
meltdown, Fannie Mae and Freddie Mac, whose push to acquire subprime
mortgages--spurred by Congress--helped produce a bubble that burst and
sent shockwaves across global financial markets, sending the U.S. and
global economies into a tailspin. These now-government-owned
institutions, which failed in the midst of the financial crisis,
continue to drain taxpayers for billions of dollars. Just this month,
Fannie and Freddie requested an additional $19 billion of taxpayer
moneys to fund operations, bringing the total government assistance to
roughly $145 billion, or an average of $7.6 billion per month.
Moreover, the nonpartisan Congressional Budget Office recently
estimated that over the next decade, Fannie and Freddie could cost
taxpayers almost $400 billion. Yet these two giant, systemically risky
institutions, whose bailouts far outsize any of those given to other
financial institutions, are ignored in this bill.
Second, at the heart of this crisis were residential home loans
written to borrowers who did not have the ability to pay their
mortgages. When these borrowers defaulted on a massive scale,
widespread investment securities based on their mortgages lost
significant value, sending investors panicking and retreating while
portfolios collapsed and credit froze. These loans were made in large
part because of poor underwriting standards and a failure by many
lenders and brokers to ensure that buyers had the means to repay their
loans. During the debate on this bill, my colleague Senator Bob Corker
offered a commonsense amendment to establish sound underwriting
standards, including a minimum down payment, full documentation, and
proof of income and ability to pay back the mortgage. Amazingly, my
colleagues rejected this amendment, and thus virtually nothing in this
bill addresses this problem.
Third, the new consumer protection bureau created by this bill is too
wide in its regulatory scope and I believe it will saddle businesses
with new and often unnecessary burdens. It is granted authority to
reach its tentacles like an octopus into various sectors of the economy
and pull businesses that were not part of the problem under new
government regulation. Attempts by some of my colleagues to curtail the
largely unchecked reach of this new regulator were rejected.
Finally, new regulations related to over-the-counter derivatives fail
to adequately protect businesses across Ohio and other States that use
these risk management tools. Some of these businesses could be forced
to divert capital away from investments and job creation and instead
post margins with the clearinghouses that will oversee these contracts.
I have also heard many of these companies complain that they will now
be forced to use less customized derivative products, which would
result in more--rather than less--risk to these companies. As
businesses sideline more capital, they become less liquid; as they face
more risk, they become less creditworthy, and in turn have less access
to credit. I am fearful that these new burdens on businesses will do
little or nothing to prevent future collapses, and serve only to slow
any eventual economic recovery. In addition, under the Senate bill,
banks that commonly provide these financial products for businesses
would be prohibited from doing so any longer, and I am concerned that
the unintended consequence of this ban could be that businesses will
seek these products from foreign financial firms, which operate beyond
the scope of U.S. regulation.
In sum, not only does the Restoring America's Financial Stability Act
fail to address the root causes of the problem, it also overreaches in
its regulation, which will cost Ohioans jobs, hurt businesses that are
not connected with the meltdown, and harm credit at a time when job
recovery is still just inching forward. I am disappointed that many of
the amendments offered by my colleagues that would have addressed these
issues, as well as my other concerns with the bill, were not adopted. I
hope that this Senate bill will be improved in the conference committee
before it is returned to the Senate.
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