[Congressional Record Volume 156, Number 104 (Wednesday, July 14, 2010)]
[Senate]
[Pages S5840-S5842]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      FINANCIAL REGULATORY REFORM

  Mr. LEVIN. Mr. President, roughly 2 years ago, our Nation suffered a 
catastrophe. It was not a hurricane or an earthquake. It was no act of 
God. It was a man-made disaster, manufactured in the boiler rooms of 
unscrupulous mortgage lenders and the offices of pay-for-hire credit 
rating agencies, in the headquarters of sluggish regulators, and then 
vastly expanded in its negative impact in the boardrooms of Wall Street 
financial firms.
  The financial crisis they all helped create has cost millions of 
Americans their jobs, their homes, and their financial security. It has 
endangered businesses large and small. It continues to weigh down our 
economy today. It required trillions of dollars of government aid just 
to keep the crisis from sliding into a depression.
  Addressing the causes of this crisis, in an effort to ensure that it 
is not repeated, is our very serious obligation. We now have before us, 
months in the making, something that constitutes our best efforts to 
carry out that obligation. The legislation before us contains many 
important provisions.
  But it is, in sum, an attempt to build a firewall between the worst 
high-risk excesses of Wall Street on the one hand and the jobs and 
homes and futures of ordinary Americans on the other. I strongly 
support the Dodd-Frank bill and encourage our colleagues to do the 
same.
  Senator Dodd spoke at some length a few minutes ago about this bill. 
He said that he cannot legislate integrity, wisdom, passion, or 
competency. That is surely true. But without Senator Dodd's integrity, 
wisdom, passion, and competency, we would not be where we are today, on 
the threshold of making a generationally important reform of the 
financial community.
  Senator Dodd made reference to the Permanent Subcommittee on 
Investigations, and the investigations which we held into the financial 
crisis. I have seen up close and personal and in detail the worst of 
those excesses. Our colleagues on the subcommittee, including my 
ranking member, Senator Coburn, my very active member on that 
subcommittee, Senator Kaufman, and others, we saw these excesses in 
four different hearings.
  For over almost a year and a half, our subcommittee devoted our 
resources to examining some of the causes and consequences of the 
financial crisis. We issued dozens of subpoenas. We examined millions 
of pages of documents. We conducted over 100 interviews. We took more 
than 30 hours of testimony during those four public hearings.
  Those hearings focused on the practices of risky mortgage lenders, 
using Washington Mutual, WaMu, as a case history. We focused in the 
second hearing on the failures of the regulators to rein in WaMu's 
risky practices, in a third hearing on the inaccurate risk assessments 
of credit rating agencies, and then in the fourth hearing on the 
egregious practices of some Wall Street investment banks using, as a 
case history, Goldman Sachs.
  In each of those hearings, we learned important facts about how the 
financial industry and those tasked with

[[Page S5841]]

overseeing it failed in their obligations, plunging the Nation into 
crisis and a deep recession. I want to set out how the legislation 
before us addresses many of the lessons we learned in the 
subcommittee's investigation.
  Our hearings began with a case study of Washington Mutual Bank, a 
$300 billion Seattle-based thrift, that, thanks to its reckless 
lending, became the largest bank failure in America's history. In the 
pursuit of higher and higher profits, WaMu's management turned its 
focus from traditional mortgage lending to high-risk subprime and 
adjustable-rate mortgage loans.
  In doing so, it engaged in practices that endangered the bank, its 
borrowers, and the economy at large. It sold loans to borrowers that it 
knew or should have known would be unable to repay. It paid its 
salespeople more if they sold higher risk loans, with higher interest 
rates or other terms that made them more difficult to repay.
  Internal audits repeatedly found high levels of fraud and abuse in 
the bank's loans. But business continued as usual. WaMu then dumped 
these risky loans into the financial system, selling them or packaging 
them into mortgage-backed securities that Wall Street eagerly scooped 
up, flooding the stream of commerce with toxic assets like a polluter 
dumping poison into a river.
  WaMu collapsed in 2008, leaving behind a trail of shattered 
homeowners and investors. Its case history was emblematic of a whole 
host of irresponsible mortgage lenders that loaded up our mortgage 
markets with toxic securities.
  The legislation before us does much to address these problems. A 
consumer financial protection bureau will bring new scrutiny to the 
practices of financial companies, providing important oversight that 
can end the kind of abusive and even fraudulent practices used by WaMu 
and other mortgage lenders.
  Other provisions will require those who create mortgage-backed 
securities, such as WaMu, and the investment banks it used, to retain a 
portion of the risk of securities that are backed by those high-risk 
loans, such as subprime mortgages or option ARMs so that securitizers 
will not be able to offload all that risk onto the market and walk away 
from the losses that occur down the road.
  Still another set of provisions in this bill ban so-called liar 
loans, which allowed WaMu and others to sell loans without any 
documentation of a borrower's income or ability to repay.
  The bill also prohibits the practice of paying salespeople more for 
gouging homeowners with higher rates or other terms that make loans 
harder to repay. Each of those reforms addresses critical problems 
exposed in our subcommittee's hearings, which helped to build the 
legislative history supporting the need for this bill.
  Most of the reforms also require implementing regulations. I hope 
that those writing the regulations will pay heed to the problems 
uncovered in our hearings and take the steps needed to protect our 
mortgage markets from future abuses.
  WaMu might not have been able to engage in its worst practices for as 
long as it did had it been confronted by Federal regulators. Instead, 
our investigation found that the Office of Thrift Supervision, WaMu's 
primary regulators, was more a lapdog than a watchdog. Repeatedly its 
examiners identified enormous problems with the bank's lending and 
securitization operation. Yet higher-ups in the Office of Thrift 
Supervision failed to take appropriate action. When the Federal Deposit 
Insurance Corporation sought to address the obvious problems in WaMu, 
the Office of Thrift Supervision, OTS, erected roadblocks that 
prevented action.
  Documents show that the head of OTS referred to Washington Mutual as 
their agency's constituent, perhaps reflecting an awareness that the 
country's largest thrift was also the OTS's largest single source of 
funding.
  I am also afraid that comment calling Washington Mutual a constituent 
of its regulatory agency also ignored the obligation that should result 
from an agency being a fiduciary whose constituents are not the people 
they regulate but are the people of the United States of America.
  Clearly, OTS has outlived its usefulness, and the legislation before 
us dissolves the OTS. In addition, a new Financial Stability Oversight 
Council will have broad authority to monitor individual financial 
institutions as well as the system at large to catch problem 
institutions such as WaMu and problematic practices such as high risk 
lending before they endanger the financial system as a whole.
  Credit-rating agencies also failed their essential role in this 
crisis. Our investigation found these agencies, which supposedly supply 
expert and objective analysis of credit risk, used faulty risk models 
and assigned super-safe AAA ratings to products later revealed to be 
little better than junk. Paid by the Wall Street firms whose products 
they were supposed to objectively assess, they sought market share by 
working with these firms to ensure the high ratings needed to sell 
risky products to risk-averse investors such as pension funds and 
university endowments. They failed to account for overwhelming evidence 
that fraud was a major factor in a growing number of mortgage loans.
  The Dodd-Frank bill sets up a new office in the Securities and 
Exchange Commission to oversee and examine the work of the credit-
rating agencies. I pay tribute, by the way, to Senator Franken for the 
work he did in this area in the amendment he offered to the Senate. The 
Dodd-Frank bill requires the agencies to disclose their methodology and 
their track records. It allows investors to file private causes of 
action against such agencies that fail to thoroughly investigate 
products they rate.
  The bill also tasks the SEC with examining the clear conflict of 
interest involved in Wall Street firms shopping for the highest rating 
among the various rating agencies. I am hopeful, at the end of the 
study, the SEC will adopt the approach taken in the Franken amendment 
that won bipartisan support in the Senate, and establish an 
intermediary that will separate the credit-rating firms from the 
investment banks that press them for high ratings in return for 
lucrative compensation. As part of their work, I hope the SEC will take 
an in-depth look at the documents and testimony in our subcommittee 
hearings that laid bear the conflicts of interest that undermine the 
accuracy of credit ratings.
  Wall Street investment banks also played the major role in the 
crisis. Seeking ever higher profits, they aggressively marketed the 
mortgage-backed securities and exotic derivatives tied to the mortgage 
market that were at the heart of the crisis. Increasingly, those banks 
drew their profits not from helping client investors prosper but by 
trading for their own accounts, often in direct conflict with their 
clients' interests. Internal e-mails that the subcommittee disclosed 
showed Goldman Sachs repeatedly marketed mortgage-related financial 
instruments that it created and knew to be faulty, junk, and worse. 
After it did so, it then made the large bets against those very same 
instruments. Our investigation also showed Goldman Sachs made a large 
bet that the mortgage market as a whole was headed down, a bet it 
denies to this very day that it made, despite a mountain of evidence 
contained in the firm's own documents that it did so.
  With Senator Merkley, I worked to address the outrageous conflicts of 
interest revealed in our hearings on investment banks. The Dodd-Frank 
bill makes important progress on this front. It sharply limits the 
risky proprietary trading that Goldman Sachs and other Wall Street 
firms used to rack up enormous profits while endangering the stability 
of the financial system.
  While I wish the bill was more forceful in limiting these risky 
trades, especially in terms of limiting financial firm investments in 
hedge funds and private equity funds, the language in this bill will 
add substantial strength to the stability of the financial system.
  In addition, the bill includes language to end the conflicts of 
interest revealed in our investigation of Goldman Sachs. No longer will 
financial firms be able to package and sell asset-backed products to 
investors and then bet against those same products. Those conflicts of 
interest will end, unless the regulators water down our strong language 
with weak enforcement.
  The Dodd-Frank bill contains other much needed measures as well. It 
will

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bring new transparency and accountability to the shadowy market in 
derivatives. It will protect taxpayers from the need to engage in the 
kind of multibillion-dollar bailouts required in the current crisis by 
allowing for an orderly resolution of failing financial firms. It 
empowers regulators to establish tough new capital requirements that 
make it harder for firms to become so big they endanger the stability 
of the system. It requires hedge funds to register with the SEC and 
provide information about their once-hidden operations. It also 
strengthens the process for shareholders to select corporate directors 
and to limit excessive executive pay.
  We have seen all too clearly the consequences of lax regulation and 
tepid oversight, the consequences of assuming that Wall Street can 
police itself. That attitude has put millions of Americans in 
unemployment lines, has plastered foreclosure signs on millions of 
American homes, and has pumped billions of dollars of taxpayer money 
into Wall Street firms that happily profited from their risky bets and 
then leaned on the rest of us to bail them out when the bill came due.
  I say to those colleagues who are considering voting against this 
bill: Knowing what our investigation and others have discovered, how 
can you oppose this effort to erect a wall between Wall Street's never-
ending appetite for reckless risk and the rest of the American economy?
  It is time to put the cop back on the beat on Wall Street. It is time 
to end Wall Street's ``heads we win, tails you lose'' game. It is time 
to prevent as best we can the next manmade disaster threatening our 
jobs, our homes, and our businesses. It is time to pass this major 
financial reform legislation, and I hope we will see a strong vote for 
it in the day ahead.

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