[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.

[[Page S4207]]

 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

[[Page S4208]]

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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