[Congressional Record Volume 157, Number 110 (Thursday, July 21, 2011)]
[Senate]
[Pages S4797-S4798]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
WALL STREET REFORM AND CONSUMER PROTECTION ACT
Mr. LEVIN. Mr. President, we mark today the first anniversary of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. This law was
Congress's earnest attempt to answer a vital question: How do we avoid
a repeat of the financial catastrophe from which we are still
struggling to recover?
I would like to describe the findings of our Permanent Subcommittee
on Investigations report on the origins of the financial crisis, and
how those findings informed my thinking and that of some of our
colleagues about how to address Wall Street reform and design effective
legislation. Then I would like to talk about a specific provision in
the Dodd-Frank Act that my colleague, Jeff Merkley, and I--as well as
Senator Reed and others--fought hard to include in Dodd-Frank, and why
I believe that provision has the potential to remedy key failings of
our financial system that helped contribute to the financial crisis.
And then a few minutes on how, at the law's 1 year anniversary, we are
fighting a second battle, just as important as the first, on how to
implement Dodd-Frank.
Many of my colleagues, and particularly Republican colleagues
subscribe to the view that banks and the market know best. It is the
same view espoused by those who told us in the 1990s that we should
deregulate finance, give free rein to so-called financial innovation,
and place our trust in the belief that the market was ``self-
correcting.'' It was a big mistake, and it led us to the brink of
economic disaster, when only a massive taxpayer bailout of large banks
prevented a second Great Depression. I can't imagine how one could look
at those events and come to the conclusion that we need relaxed
regulations.
Our subcommittee reviewed literally tens of millions of documents,
interviewed hundreds of witnesses, and held four lengthy hearings. We
found that the financial crisis was the result of unchecked greed and
conflict of interest up and down the line. Financial institutions that
were too big to be allowed to fail engaged in reckless risk-taking in
pursuit of massive, but short-term, profits. Government regulators and
credit rating agencies, who were supposed to be the cops and
independent referees to keep those reckless impulses in check, instead
allowed or even encouraged them, in part because of their own conflicts
of interest, which gave them incentive to go along.
Our investigation started upstream, with mortgage lending. We looked
specifically at Washington Mutual Bank, which was the Nation's largest
thrift when it began a campaign of aggressive subprime mortgage
lending, even though the bank's top executives recognized there was an
unsustainable bubble in housing prices. We found massive evidence of
fraud in WaMu's lending, fraud that people inside and outside the bank
recognized. But bank executives ignored the red flags, allowing WaMu to
make its fraudulent and high-risk loans, package those loans, flooding
the financial system with toxic mortgages, and led their bank to the
largest bank failure in our history.
WaMu's primary regulator, the Office of Thrift Supervision, utterly
failed to stop WaMu's reckless lending, despite identifying and logging
nearly 500 serious deficiencies at the bank that they were supposed to
regulate over 5 years, doing nothing about it. The OTS director--
perhaps out of deference to the fact that fees from WaMu were the
biggest single source of OTS's budget--referred to WaMu as a
``constituent,'' which surely would come as a surprise to his agency's
real constituents, the American people, who counted on OTS to walk a
beat--and not to toe the WaMu line.
WaMu and other banks were aided and abetted in their pollution of the
financial system with toxic securities by credit rating agencies that
failed to accurately and objectively assess risks. Our investigation
examined ratings failures at Moody's and Standard & Poor's. The
testimony of employees of the two firms, corroborated by internal
documents, show that the rating agencies were more focused on growing
market share for themselves and increasing revenues than in improving
rating accuracy. In other words, their ratings failed in part because
they relied for their revenue on the same banks whose products they
were supposed to impartially assess, a conflict of interest that led to
AAA ratings being given to shoddy securities.
Wall Street firms facilitated this whole chain of shoddy securities.
They were hungry for mortgages, even poor quality mortgages, to package
and sell, taking in large fees to underwrite these toxic financial
assets. Some reaped huge returns by trading those assets for their own
profit. The subcommittee found that some investment banks, such as
Goldman Sachs, were engaged in conflicts of interest. Goldman misled
its clients. It packaged mortgage-backed securities in an attempt to
rid their own inventory of assets the firm's employees called ``junk,''
``crap'' and worse. Goldman Sachs bet secretly against their own
products, bet that they were failed, and not only sold these products
to unsuspecting clients, but misrepresented their own interest in the
transaction.
The four hearings we held in the spring of last year laid out this
evidence in damning detail. Those hearings took place as the Senate was
considering the legislation whose 1 year anniversary we are marking
today.
We saw the impact of our hearings on the law. For instance, Dodd-
Frank did away with the Office of Thrift Supervision, which failed so
completely in the years leading up to the crisis. Dodd-Frank included
important reforms in how credit rating agencies operate and attempted
to resolve some of
[[Page S4798]]
the conflicts of interest that tainted their work by taking steps to
keep financial firms from shopping for high ratings.
Dodd-Frank tackled abusive mortgage lending in many ways. We banned
the ``liar loans'' that WaMu and others issued so recklessly to
borrowers who provided little or no documentation of their ability to
pay. We required banks to keep some of the mortgage-backed securities
they issue on their books rather than making bad loans and selling 100
percent of them and the risk they carried. We prohibited banks from
paying their employees more when they persuade home buyers to take out
high-risk loans. We established a consumer protection agency with
authority to police abusive lending.
Throughout the debate, I focused in particular on an issue I see as
the connecting thread tat ran through our hearings and our report:
rampant, unchecked conflict of interest. The subcommittee's work showed
how time and again, institutions within the financial and regulatory
system chose their own short-term interests over the interests of their
clients.
We found a particularly vivid example in a $2 billion deal called
Hudson Mezzanine issued by Goldman Sachs. Hudson was a collateralized
debt obligation--that's a security that references or is backed by a
pool of loans and other assets, in this case mortgage loans. In
marketing Hudson to its clients, Goldman told clients that its
interests were ``aligned'' with the buyers of the CDO, and that the
CDO's assets had been ``sourced from the Street,'' in other words
outside of Goldman. In fact, most of the assets backing Hudson were
from Goldman's own inventory, assets the bank knew were risky and
wanted to unload. And far from being ``aligned'' with its clients,
Goldman's position was opposed to its own clients, because it held the
entire short side of the CDO, making a $2 billion bet that Hudson would
plunge in value. When it did, Goldman effectively took $2 billion out
of its clients' pockets and made a handsome profit. And injecting those
junk securities into the financial system did real damage to that
system.
The question of accountability is important here. I have said before,
it is up to the appropriate authorities, and not to us in the Senate,
to decide whether those responsible for transactions such as Hudson
should be punished. But what I can say is I think it is vitally
important that those authorities address and resolve that question.
That is why our subcommittee forwarded our report to law enforcement
authorities. They have the job of providing the Nation with the
accountability that so far has been lacking.
The congressional role is legislative. The amendment that Senator
Merkley and I offered on the Senate floor, known as Merkley-Levin,
codified the so-called Volcker rule, former Fed Chairman Paul Volcker's
recommendation that we rein in proprietary trading by banks. Firms such
as Lehman Brothers and Bear Stearns collapsed in part because their
pursuit of short-term profit led them to risky trades that blew up in
their faces. Merkley-Levin says that if you are a commercial bank
protected by taxpayer-funded Federal deposit insurance, you can't
engage in high-risk proprietary trading. Even if you are not a
traditional bank, but because of your size, your collapse would damage
the stability of the U.S. financial system. You are now required to
adhere to certain capital requirements and other limitations.
Merkley-Levin also breaks new ground in the area of conflict of
interest. It explicitly bans the kinds of conflict of interest we saw
so vividly in Goldman's Hudson transaction. It prohibits firms from
assembling an asset-backed security and selling it to clients while
betting against that same security, acting not as a market-maker, but
as an investor for its own profit. You are either for your client or
you are for yourself.
We had to fight hard for Merkley-Levin's passage. When the Senate
passed its version of Dodd-Frank, Republicans engaged in complicated
maneuvers on the floor to block the Senate from even considering our
amendment. But we succeeded in getting it included in the bill produced
by the House-Senate conference committee, and despite intense lobbying
by banks against Merkley-Levin, it is now law.
But the battle is far from over. Since passage, regulatory agencies
have been working to turn the provisions of Dodd-Frank into detailed
regulations and have been subjected to the same barrage of bank
lobbying that accompanied our debate in Congress. Banks have spent more
than $50 million so far this year lobbying to weaken Dodd-Frank.
Consumers and the American economy won an important victory one year
ago today. But that victory will not be secure until Dodd-Frank has
teeth--tough rules backed by conscientious enforcement. Some are
pulling every trick in the book to slow these regulations and weaken
their impact. But the success we had in passing Dodd-Frank shows that
the powerful interests don't always win.
Supporters of reform made their voices heard a year ago, and today,
they are working to ensure that Dodd-Frank is implemented forcefully.
They are telling regulators--many of whom once subscribed to the notion
that banks know best--that the American people will not allow a return
to policies that so recently did so much harm. Just like we need a cop
on the street to enforce the traffic laws, we need a cop on the beat on
Wall Street. Anything less threatens a repeat of disaster.
Anything less will also damage confidence in our financial system,
and we will not have a market that holds the confidence of investors
and potential investors. That should be everybody's goal. The free
market is incredibly important. We all depend on it for economic
growth. But that market must be honest. That is in the interest of
everyone. Whether you have invested in the market or thinking about
investing in the market, that is in the interest of the American
people. We are not talking about weakening the market--we are talking
about strengthening it. And that is just what the Dodd-Frank Act can
accomplish, if we implement it as Congress intended.
____________________