[Congressional Record Volume 159, Number 99 (Thursday, July 11, 2013)]
[Senate]
[Pages S5668-S5671]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. WARREN (for herself, Mr. McCain, Ms. Cantwell, and Mr. 
        King):
  S. 1282. A bill to reduce risks to the financial system by limiting 
banks' ability to engage in certain risky activities and limiting 
conflicts of interest, to reinstate certain Glass-Steagall Act 
protections that were repealed by the Gramm-Leach-Bliley Act, and for 
other purposes; to the Committee on Banking, Housing, and Urban 
Affairs.
  Mr. McCAIN. I am pleased to join my colleagues, Senator Warren of 
Massachusetts, Senator Cantwell of Washington, and Senator King of 
Maine, and also recognize the hard work of my friend from Ohio who has 
been heavily involved in this issue in the past.

[[Page S5669]]

  This legislation is bipartisan. The 21st Century Glass-Steagall Act, 
which will restore the much needed wall between investment and 
commercial banking to lessen risk, restore confidence in our banking 
system, and better protect the American taxpayer. The original 1933 
Glass-Steagall Act was put in place to respond to the financial crash 
of 1929.
  Similar to the 21st Century Glass-Steagall Act that we are 
introducing today, it put up a wall between commercial and investment 
banking with the idea of separating riskier investment banking from the 
core banking functions such as checking and savings accounts that 
Americans need in their everyday life.
  Commercial banks traditionally use their customer's deposit for the 
purpose of Main Street loans within their communities. They did not 
engage in high-risk ventures. Investment banks, however, managed money 
for those who could afford to take bigger risks in order to get a 
bigger return and who bore their own losses. Unfortunately, core 
provisions of the Glass-Steagall Act were repealed in 1999, shattering 
the wall dividing commercial banks and investment banks. Since that 
time, we have seen a culture of greed and excessive risk-taking take 
root in the banking world, where common sense and caution with other 
people's money no longer matters.
  When these two worlds collided, the investment bank culture 
prevailed, cutting off the credit lifeblood of Main Street firms, 
demanding greater returns that were achievable only through high 
leverage and huge risk-taking, which ultimately left the taxpayer with 
the fallout.
  Leading up to the 2008 financial crisis, the mantra of ``bigger is 
better'' took over, and sadly it still remains. The path forward 
focused on short-term gains rather than long-term planning. Banks 
became overleveraged in their haste to keep in the race. The more they 
lent, the more they made.
  Aggressive mortgages were underwritten for unqualified individuals 
who became homeowners saddled with loans they could not afford. Banks 
turned right around and bought portfolios of these shaky loans. I know 
the 2008 financial crisis did not happen solely because the wall of 
Glass-Steagall was knocked down. But I strongly believe the repeal of 
these core provisions played a significant role in changing the banking 
system in negative ways that contributed greatly to the 2008 financial 
crisis.
  I believe this culture of risky behavior is still in play. For 
example, the Senate Permanent Subcommittee on Investigations, on which 
I serve as ranking member, held a hearing in March of this year to 
discuss the findings of the subcommittee investigation report entitled, 
``JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and 
Abuses.''
  The hearing and the findings of the investigation described how 
traders at JPMorgan Chase made risky bets using excess deposits that 
were partially insured by the Federal Government. If they wanted to 
make these bets on deposits and money that was not insured by the 
Federal Government, the Senator from Massachusetts and I would not be 
here today.
  They used federally insured deposits, putting the taxpayers on the 
hook for their risky and ultimately failed investments. I say again, 
the Dodd-Frank bill, the whole purpose of it, as sold to this Congress 
and to the American people, was to ensure that no investment company or 
investment financial enterprise would ever be too big to fail again.
  Is there anybody who believes these institutions such as I just 
talked about, JPMorgan Chase and others, are not too big to fail? Of 
course they are still too big to fail. The investigation revealed 
startling failures and shed light on a complex and volatile world of 
synthetic credit derivatives.
  In a matter of months, JPMorgan Chase was able to vastly increase its 
exposure to risk while dodging oversight by Federal regulators. The 
trades ultimately cost the bank a staggering $6.2 billion in loss. This 
case represents another shameful demonstration of a bank engaged in 
wildly risky behavior. The London Whale incident matters to the Federal 
Government and the American taxpayer because the traders at JPMorgan 
Chase were making risky bets using excess deposits, a portion of which 
were federally insured.
  These excess deposits should have been used to provide loans for Main 
Street businesses. Instead, JPMorgan Chase used the money to bet on 
catastrophic risk. The 21st Century Glass-Steagall Act will return 
banking back to the basics by separating traditional banks that offer 
savings and checking accounts and are insured by the Federal Deposit 
Insurance Corporation from riskier financial institutions that offer 
other services such as investment banking, insurance, swaps dealing and 
hedge fund and private equity activities.
  I believe big Wall Street institutions should be free to engage in 
transactions with significant risk but not with federally insured 
deposits. The bill also addresses depository institutions' use of 
products that did not exist when Glass-Steagall was originally passed, 
such as structured and synthetic financial products, including complex 
derivatives and swaps.
  Finally, the bill provides financial institutions with a 5-year 
transition period to separate their activities. Many prominent 
individuals in the banking world support returning to a modern day 
Glass-Steagall banking system, including FDIC Vice Chairman Thomas 
Hoenig. Last year in his opinion piece in the Wall Street Journal, 
entitled ``No More Welfare For Banks. The FDIC and the taxpayer are the 
underwriters of too much private risk taking,'' he lays out his plan to 
strengthen the U.S. financial system by simplifying its structure and 
making its institutions more accountable for their mistakes, which he 
calls Glass-Steagall for today. He ends his piece by stating:

       Capitalism will always have crises and the recent crisis 
     had many contributing factors. However, the direct and 
     indirect expansion of the safety net to cover an ever-
     increasing number of complex and risky activities made this 
     crisis significantly worse. We have yet to correct the error. 
     It is time we did.

  I could not agree more. Almost 3 years ago, Congress passed Dodd-
Frank with the intent to overhaul our Nation's financial system. I did 
not vote for Dodd-Frank because it did little if anything to tackle the 
tough problems facing our financial sector.
  What Dodd-Frank did, though, was create thousands of pages of new and 
complicated rules. Is there any Member of this body who believes that 
Dodd-Frank has resulted in the end of too big to fail? The 21st Century 
Glass-Steagall Act may not end too big to fail on its own, but it moves 
the large financial institutions in the right direction, making them 
smaller and safer.
  This bill would rebuild the wall between commercial and investment 
banking that was successful for over 60 years and reduced risk for the 
American taxpayer.
  I ask unanimous consent that the Thomas Hoenig article be printed in 
the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

             [From The Wall Street Journal, June 10, 2012]

                       No More Welfare for Banks


The FDIC and the taxpayer are the underwriters of too much private risk 
                                taking.

                           (By Thomas Hoenig)

       I have a proposal to strengthen the U.S. financial system 
     by simplifying its structure and making its institutions more 
     accountable for their mistakes. Put simply, my proposal would 
     help prevent another 2008-style crisis by prohibiting banking 
     organizations from conducting broker-dealer or other trading 
     activities and by reforming money-market funds and the market 
     for short-term collateralized loans (repurchase agreements, 
     or repos). In other words, Glass-Steagall for today.
       Those opposed to taking these actions generally focus on 
     two themes. First, they say that if Glass-Steagall--enacted 
     in 1933 to separate commercial and investment banking--had 
     been in place, the crisis still would have occurred. Second, 
     they argue that requiring the separation of commercial 
     banking and broker-dealer activities is inconsistent with a 
     free-market economy and puts U.S. financial firms at a global 
     competitive disadvantage. Both assertions are wrong.
       Advocates of the first argument say the crisis was not 
     precipitated by trading activities within banking 
     organizations but by excessive mortgage lending by commercial 
     banks and by the failures of independent broker-dealers, such 
     as Lehman Brothers and Bear Stearns.
       This assertion ignores that the largest bank holding 
     companies and broker-dealers were engaged in high-risk 
     activities supported by explicit and implied government

[[Page S5670]]

     guarantees. Access to insured deposits or money-market funds 
     and repos fueled the activities of both groups, making them 
     susceptible to the freezing of markets and asset-price 
     declines.
       Before 1999, U.S. banking law kept banks, which are 
     protected by a public safety net (e.g., deposit insurance), 
     separate from broker-dealer activities, including trading and 
     market making. However, in 1999 the law changed to permit 
     bank holding companies to expand their activities to trading 
     and other business lines. Similarly, broker-dealers like Bear 
     Stearns, Lehman Brothers, Goldman Sachs and other ``shadow 
     banks'' were able to use money-market funds and repos to 
     assume a role similar to that of banks, funding long-term 
     asset purchases with the equivalent of very short-term 
     deposits. All were able to expand the size and complexity of 
     their balance sheets.
       While these changes took place, it also became evident that 
     large, complex institutions were considered too important to 
     the economy to be allowed to fail. A safety net was extended 
     beyond commercial banks to bank holding companies and broker-
     dealers. In the end, nobody--not managements, the market or 
     regulators--could adequately assess and control the risks of 
     these firms. When they foundered, banking organizations and 
     broker-dealers inflicted enormous damage on the economy, and 
     both received government bailouts.
       To illustrate my point, consider that if you or I want to 
     speculate on the market, we must risk our own wealth. If we 
     think the price of an asset is going to decline, we might 
     sell it ``short,'' expecting to profit by buying it back more 
     cheaply later and pocketing the difference. But if the price 
     increases, we either invest more of our own money to cover 
     the difference or we lose the original investment.
       In contrast, a bank can readily cover its position using 
     insured deposits or by borrowing from the Federal Reserve. 
     Large nonbank institutions can access money-market funds or 
     other credit because the market believes they will be bailed 
     out. Both types of companies can even double down in an 
     effort to stay in the game long enough to win the bet, which 
     supersizes losses when the bet doesn't pay off. The Federal 
     Deposit Insurance Corporation (FDIC) fund and the taxpayer 
     are the underwriters of this private risk-taking.
       This leads to the second criticism of my proposal--that 
     breaking up the banks is inconsistent with free markets and 
     our need to be competitive globally. The opposite is true. My 
     proposal seeks to return to capitalism by confining the 
     government's guarantee to that for which it was intended--to 
     protect the payments system and related activities inside 
     commercial banking. It ends the extension of the safety net's 
     subsidy to trading, market-making and hedge-fund activities. 
     This change will invigorate commercial banking and the 
     broker-dealer market by encouraging more equitable and 
     responsible competition within markets. It reduces the 
     welfare nature of our current financial system, making it 
     more self-reliant and more internationally competitive.
       Capitalism will always have crises and the recent crisis 
     had many contributing factors. However, the direct and 
     indirect expansion of the safety net to cover an ever-
     increasing number of complex and risky activities made this 
     crisis significantly worse. We have yet to correct the error. 
     It is time we did.

  Mr. McCAIN. I would like to thank the Senator from Massachusetts, 
whom I will freely admit has a great deal more knowledge, background, 
and expertise on this issue than I do. I appreciate her leadership. 
When the Senator sought to join us in the Senate, she committed to the 
people of Massachusetts and this country that she would be committed to 
certain significant reforms to ensure that we never again have the kind 
of crisis that devastated my State.
  Still today, nearly half the homes in my State are underwater, which 
means they are worth less than their mortgage payments, while Wall 
Street has been doing well for years. That bailout is one of the more 
unfair aspects that I have seen in American history. We cannot revisit 
or fix history, but we sure can make sure we have made every effort to 
make sure these large financial institutions do not gamble with 
taxpayers' money.
  I thank the Senator from Massachusetts. It is a pleasure to join her 
in this effort as her junior partner.
  I yield the floor.
  The PRESIDING OFFICER (Mr. Brown). The Senator from Massachusetts.
  Ms. WARREN. Mr. President, I rise in support of the senior Senator 
from Arizona and to support the 21st Century Glass-Steagall Act. I am 
honored to join Senators McCain, Cantwell, and King in introducing this 
bill. I particularly commend Senator McCain for his hard work and his 
long-time dedication on this issue.
  Senator McCain is a real leader in the Senate. While we do not agree 
on every issue, he is a fighter who stands for what he believes. 
Senator McCain has worked hard to shed light on the too-big-to-fail 
problem. He has been thinking about how to bring back elements of 
Glass-Steagall for years. I am proud to join with him to speak about 
the 21st Century Glass-Steagall Act. I am glad to be his partner in 
this endeavor.
  Washington is a partisan place. This Congress has its share of 
partisan bills. But we have all joined together today because we want a 
safe future for our kids and for our grandkids. We know that 5 years 
ago Wall Streets's high-risk bets nearly brought our economy to its 
knees, disrupting the lives and livelihoods of hard-working Americans.
  We know the economic downturn did not affect just Democrats or just 
Republicans or just Independents, it affected everyone.
  Over the past 5 years we have made some real progress in dialing back 
the risk of future crises. But despite the progress that has been made, 
the biggest banks continue to threaten the economy. The four biggest 
banks are now 30 percent larger than they were just 5 years ago. They 
have continued to engage in dangerous high-risk practices that could 
once again put our economy at risk.
  The big banks were not always allowed to take on big risk while 
enjoying the benefits of both explicit and implicit taxpayer 
guarantees. Four years after the 1929 crash, Congress passed the 
Banking Act, or the Glass-Steagall Act as it is known, which is best 
known for separating the risky activities of investment banks from the 
core depository functions such as savings accounts and checking 
accounts that consumers rely on every day.
  For years, Glass-Steagall played a central role in keeping our 
country safe. Traditional banking stayed separate from high-risk Wall 
Street banking. But big banks wanted the higher profits they could get 
from taking on more risk. Investors wanted access to the insured 
deposits of traditional banks. So Wall Street investors combined with 
the big banks to try to weaken and repeal Glass-Steagall. Starting in 
the 1980s, regulators at the Federal Reserve and the Office of the 
Comptroller of the Currency responded, reinterpreting longstanding 
legal terms in ways that slowly broke down the wall between investment 
banking and depository banking. Finally, after 12 attempts to repeal, 
Congress eliminated the core provisions of Glass-Steagall in 1999.
  The 21st Century Glass-Steagall Act will reestablish the wall between 
commercial and investment banking, make our financial system more 
stable and more secure, and protect American families.
  Like its 1933 predecessor, the 21st Century Glass-Steagall Act will 
separate traditional banks that offer checking and savings accounts and 
are insured by the FDIC from the riskier financial services. It will 
return banking--basic banking--to the basics.
  The 21st Century Glass-Steagall Act also puts in place some important 
improvements over the original Glass-Steagall. It reverses the 
interpretations the regulators used to weaken the original Glass-
Steagall. Our bill also recognizes that financial markets have become 
more complicated since the 1930s, and it separates depository 
institutions from products that did not exist when Glass-Steagall was 
originally passed, such as structured and synthetic financial products, 
including complex derivatives and swaps.
  The idea behind the bill is simple: Banking should be boring. Anyone 
who wants to take big risks should go to Wall Street, and they should 
stay away from the basic banking system.
  I wish to be clear--the 21st Century Glass-Steagall Act will not by 
itself end too big to fail and implicit government subsidies, but it 
will make financial institutions smaller, safer, and move us in the 
right direction. By separating depository institutions from riskier 
activities, large financial institutions will shrink in size and won't 
be able to rely on Federal depository insurance as a safety net for 
their high-risk activities. It will stop the game these banks have 
played for too long. Heads, the big banks win and take all the profits 
and, tails, the taxpayer gets stuck with all the losses.
  I ask my colleagues to join me in supporting this legislation to 
reduce the risk in the financial system and to

[[Page S5671]]

dial back the likelihood of future crises.
  Exactly 70 years ago the halls of the Senate filled with excitement 
and history when it passed the original Glass-Steagall. The financial 
industry at that time experienced some big immediate changes, but 
despite all kinds of claims to the contrary, Wall Street survived and 
the sky did not fall. In fact, the American people enjoyed a half 
century of financial stability and a strong, growing middle class. The 
regular financial crises that had occurred over and over before Glass-
Steagall faded away, and our economy became stronger and more stable.
  Few in Congress have been around long enough to have lived through 
the Great Depression that led to the first Glass-Steagall, but we were 
all around during the 2008 financial crisis. It has been 5 years since 
then, but our economy still has not fully recovered, and the downturn 
has had an impact everywhere--on our families, businesses, retirees, 
workers, schoolchildren, and college students. We need a banking system 
that serves the best interests of the American people, not just the few 
at the top. The 21st Century Glass-Steagall Act is an important step in 
the right direction. I ask my colleagues to join me in supporting this 
measure.
                                 ______