[Congressional Record Volume 162, Number 171 (Wednesday, November 30, 2016)]
[Senate]
[Pages S6617-S6618]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
DONALD TRUMP'S FINANCIAL PLANS
Ms. WARREN. Mr. President, I ask unanimous consent that the following
statement by former Representative Barney Frank entitled ``Trump's
financial plans promise another Great Recession'' be printed in the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
[From the Boston Globe, Nov. 28, 2016]
Trump's Financial Plans Promise Another Great Recession
(By Barney Frank)
Apparently, one aspect of American greatness that Donald
Trump seeks to recreate is the Great Recession of 2008. He
calls for a complete repeal of all the rules that were
adopted to govern the financial industry in response to that
crisis, restoring to it the freedom to create unlimited debt
throughout the economy, with no requirement that serious
attention be given to the ability of the indebted to meet
their obligations.
By the '90s, the business of lending had been transformed
by securitization. Lenders sold the right to repayment of
loans, eliminating their incentive to worry about the
borrowers' solvency. The financial institutions that bought
the loans then packaged them into securities and sold pieces
of these throughout the economy. Other large institutions
then sold insurance against the failure of these securities
to pay. The use of derivative forms greatly magnified the
amounts of money at stake.
When imprudently granted mortgage loans began to default,
so did securities, leading to investor losses, and demands
that the insurers make good on their pledges. Faced with a
shutdown of the economy caused by the spreading inability of
the indebted to repay, and the consequent refusal of anyone
to advance funds to anyone else, the Bush administration
bailed out multinational insurance company AIG, asked
Congress for general bailout authority, and intensified the
work that it had begun along with Congress to create rules to
prevent a recurrence.
Modified by the Obama administration and Congress, these
rules evolved into the Dodd-Frank Wall Street Reform and
Consumer Protection Act, which was designed to prohibit
abusive practices, and diminish the negative impact from the
misjudgments that are inevitable in a system in which risk-
taking is necessary.
Here are some of the most significant changes that will
result if Trump succeeds in wiping the law off the books,
with real-world reminders of the ``great'' financial system
he would restore.
The abolition of the law's restrictions on granting
mortgages to borrowers who are highly unlikely to repay means
we will see successors to Countrywide, the mortgage-granting
machine that gave us countrywide defaults.
The removal of the regulations governing trading in
derivatives means Goldman Sachs, J.P. Morgan Chase, and
others can return to the unrestricted dissemination
throughout the economy of securities composed of bad
mortgages, even when, in Goldman's case, the packager knew
enough about the weakness of what it was selling to bet its
own money that it would fail to pay off.
An end to the rule that participants in derivative trades
either do so through exchanges or otherwise demonstrate that
they have the funds to meet their obligations to their
trading partners brings back the situation that prevailed
when three of the five leading investment companies--Bear
[[Page S6618]]
Stearns, Merrill Lynch, and Lehman Brothers--were unable
either to pay their own debts or collect what they were owed
by others, and AIG told Federal officials it was 170 billion
dollars short of meeting its obligations to pay off what it
owed those who had bought their credit default swaps
(insurance against the failure of mortgage-backed
securities).
This leads to the next result of a return to the good old
days: It will put Federal officials back to having to choose
between letting a company go bankrupt--Lehman--with its
disruptive effect, or bailing it out--AIG. We repealed the
provision that allowed the Fed to advance 170 billion dollars
to pay AIG's debts while letting it stay in business. It
replacement--which Trump would repeal, reinstating the
unrestricted bailout authority--empowers officials to pay
only as much off the debt of the bankrupt entity as is needed
to maintain economic stability, but only after putting it out
of business, and with a requirement that no money paid out
from taxpayers be recouped by assessment on the surviving
large financial companies.
Trump's plan to wipe out the provision that purchasers of
loans who then package them for resale to bear responsibility
for the first 5 percent of the losses that occur means the
investing public will once again be wholly dependent on the
rating agencies--whose blend of incompetence and dishonesty
was chronicled in The Big Short.'' (My one objection to the
way in which the law has been administrated is the failure to
apply this provision to home mortgages, but the power to do
so remains in the law if experience calls for it.)
The disappearance of the Consumer Financial Protection
Bureau will return to the status quo in which consumers
harmed by the abusive behavior of a massive financial
institutions could only turn to the federal agencies whose
primary mission was to worry about the health of these
entities. Had there not been a consumer bureau, Wells Fargo
might still be creating false credit card accounts.
I do favor some adjustments to lessen the scrutiny given to
small and medium-size banks, although not in the area of
consumer protection.
But the major beneficiaries of total repeal are the largest
financial entities. I understand why those who believe
absolutely in an unregulated market advocate a return to the
process that risks repeating 2008. I do not understand how
this stance complies with Trump's promise to vindicate the
interests of average working people against those who stand
at the top of the economic structure.
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