[Congressional Record (Bound Edition), Volume 145 (1999), Part 6]
[Senate]
[Pages 8827-8833]
[From the U.S. Government Publishing Office, www.gpo.gov]




              FINANCIAL SERVICES MODERNIZATION ACT OF 1999

  The Senate continued with the consideration of the bill.
  Mr. GRAMM. Mr. President, I ask unanimous consent that when Senator 
Shelby offers an amendment related to operating subsidiaries there be 2 
hours equally divided in the usual form prior to a motion to table, and 
that no amendments or other motions be in order to the amendment prior 
to the vote on tabling.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. GRAMM. I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. DORGAN. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. DORGAN. Mr. President, I have sought recognition, because I 
intend to offer a couple of amendments to the pending legislation. I 
would like to discuss the underlying bill just a bit more, and then 
also offer the amendments and discuss the amendments.
  I spoke earlier today about this legislation, which is called the 
Financial Services Modernization Act of 1999, and said then that I am 
probably part of a very small minority in this Chamber, but I feel very 
strongly that this is exactly the wrong bill at exactly the wrong time. 
It misses all the lessons of the past and, in my judgment, it creates 
definitions and moves in directions that will be counterproductive to 
our financial future.
  What does this bill do? It would permit common ownership of banks, 
insurance, and securities companies, and to a significant degree 
commercial firms as well. It will permit bank holding companies, 
affiliates, and bank subsidiaries to engage in a smorgasbord of 
expanded financial activities, including insurance and securities 
underwriting, and merchant banking all under the same roof.
  This bill will also, in my judgment, raise the likelihood of future 
massive taxpayer bailouts. It will fuel the consolidation and mergers 
in the banking and financial services industry at the expense of 
customers, farm businesses, family farmers, and others, and in some 
instances I think it inappropriately limits the ability of the banking 
and thrift institution regulators from monitoring activities between 
such institutions and their insurance or securities affiliates and 
subsidiaries raising significant safety and soundness consumer 
protection concerns.
  This morning I described what is happening in the financial services 
sector by showing a chart of big bank mergers just in the last year. 
You couldn't help but to have picked up a daily paper at some point 
last year and read a headline about another bank deciding to combine or 
merge with another large bank.
  April 6, Citicorp decided it was going to grab up Travelers Group and 
have a $698 billion combined asset corporation--not exactly a mom and 
pop, but two big very successful companies decide they want to get 
hitched.
  NationsBank apparently fell in love with BankAmerica. Bank One 
decided it wanted to be related to First Chicago, and Wells Fargo likes 
NorWest. So we have merger after merger, buyout after buyout, and the 
big banks get bigger.
  We already have a circumstance in this free market economy of ours in 
which you ought to have easy entry and easy exit into the marketplace 
and the right to make money and to lose money. We already have a 
circumstance in banking called ``too big to fail.'' If you are big 
enough, the ordinary market rules don't apply to you. You have the old 
Federal Reserve Board out there. And the Fed says we have a list of 
banks that are ``too big to fail,'' meaning they have become so big 
that if they were to fail and made some pretty dumb decisions, lose a 
lot of money, that their failure would be so catastrophic and such a 
shock to the economic system in this country that we couldn't possibly 
let that happen. So we have a list of banks at the Federal Reserve 
Board. That list says these banks are ``too big to fail''--no-fault 
capitalism. But the list is growing. That list of ``too big to fail'' 
banks in America is growing because the big banks are getting bigger, 
and this record-breaking orgy of mergers in our country moves now at an 
accelerated rate unabated.
  In the context of all of this--it is not just with banks but all 
financial services companies--at a time when banks, investment banks, 
underwriters of securities, insurance, and others are showing very 
handsome profits in our country, we are told, ``You know, what is 
really wrong here with America is we need to modernize this system. The 
lack of modernization is hurting us. In fact, some U.S. banks are able 
to do things overseas they can't do here. What a shame. It is awful to 
hold them back,'' we are told. ``So let us modernize.''
  In ranching parlance, this would be like if the horse gets out of the 
barn, you decide, ``Let's find out where the horse is and build a new 
barn around the horse.'' That is what this is all about. Where I grew 
up we raised

[[Page 8828]]

horses. When a horse got out of the barn, you know what we did. We went 
and chased the horse, caught the horse, and brought the horse back to 
the barn. That is not rocket science. I didn't have to take a lot of 
school courses to teach me that. You go bring the horse back.
  But now, what they have decided is no. We will just decide, all 
right, the horses are out of the barn, and in the way things are 
supposed to work, in a manner that preserves safety and soundness of 
our banks, in a manner that preserves separation of certain kinds of 
activities--some that are inherently risky as opposed to those that 
require safety and soundness--things have happened. We are persuaded to 
get rid of all of the old rules, and we will rewrite them in a way that 
circumstances and activities have been happening in our country. We'll 
say those who have done it, OK, that is where you are, a new day, we 
will call it modernization. We will just say it is just fine. Well, it 
is not fine with me.
  It is interesting that we live in 1999, now in the month of May, 
having experienced this remarkable economy. I am one who, with all of 
my colleagues, would say what a remarkable opportunity, to live in an 
economy that has virtually no inflation, has virtually full employment, 
seems to have economic growth that continues unabated, and whose stock 
market continues to set new records--23 days, another 1,000 points. You 
get the feeling, gee, the stock market is like one of those slot 
machines that pays off every time you pull the handle. Every time you 
put a quarter in you get a return back beyond what you put in.
  There are people who have begun to invest in this economy of ours 
through mutual funds, and in the markets and so on who apparently 
believe there is only one direction for our economy and only one 
direction for our markets, and that is up, and single digit returns are 
not sufficient. Returns are now expected of 15, 20, 25, 30 percent a 
year. Of course, that will not continue.
  We want a country with the twin economic goals of stable prices, full 
employment, and economic opportunity and growth. But we have been 
through periods in this country where when you sit down and add things 
up somehow the answer doesn't seem correct. This isn't all going to 
continue. One day in one way there will be adjustments. Companies 
selling 300 and 400 times earnings, we think that is going to continue? 
I don't think so.
  What has happened in recent years in this country, despite all of the 
good news, is a series of economic activities by firms that 20 and 40 
years ago would never have thought of engaging in those activities, and 
those activities which really represent kind of a new form of gambling 
by firms that should not be involved in gambling represents now an 
acceptable kind of behavior.
  Let me give you some examples of some of it. I started this morning. 
But I am going to read a bit more, because I think it is important for 
everybody to understand and hear this.
  I mentioned ``too big to fail''--big banks that have become so big 
that our Government says they can't be allowed to fail. Of course, we 
continue then every day to see more mergers to allow more banks to join 
that ``too big to fail'' list.
  It is not just the banks. I want to read the story again of Long Term 
Capital Management in an article from the Wall Street Journal last 
fall, because I think it is illustrative of not just what is happening 
at this moment in this chapter of our history but also what happened in 
1994 with the massive losses across our country in derivatives 
described in this Fortune article, ``The Risk That Won't Go Away,'' 
``Financial derivatives tightening their grip on the world economy, and 
no one knows how to control them.''
  Derivatives, unregulated hedge funds, banks, holding companies that 
now fuse and merge, banks underwriting securities, insurance--is all of 
that a cause for concern?
  Let me read a couple of things and see whether perhaps this can be 
interpreted in a manner differently than those who have drafted the 
current legislation.
  It is not a secret that I have said I think this current bill, the 
underlying bill, financial modernization for 1999, is a terrible bill. 
I don't mean disrespect to either the chairman of the committee or the 
ranking member of the committee. I don't mean any disrespect to them.
  This is moving this country in the wrong direction. This is terrible 
legislation to be considering at this point.
  Long Term Capital Management is a private company; big investors, all 
rich. You have to be rich to invest in Long Term Capital Management. 
You have to be smart. A smart operator with lots of money formed a 
private company called Long Term Capital Management and began betting. 
I will describe the bets in a moment.

       It was Aug. 21, [last year] a sultry Friday, and nearly 
     half the partners at Long-Term Capital Management LP were out 
     of the office.

  Inside, the associates that day logged on to their computer and they 
saw something that began to strike some fear in their hearts:

       U.S. Treasuries were skyrocketing, throwing their 
     relationship to other securities out of whack. The Dow Jones 
     Industrial Average was swooning--by noon, down 283 points. 
     The European bond market was in shambles. LTCM's [Long-Term 
     Capital Management, this hedge firm, their] bets were blowing 
     up, and no one could do anything about it.
       By 11 a.m. [in the morning] the fund had lost $150 million 
     in a wager [they made] on the prices of two telecommunication 
     stocks engaged in a takeover. Then, a single bet tied to the 
     U.S. bond market lost $100 million. Another $100 million 
     evaporated [the next hour] in a similar trade in Britain. By 
     day's end [this private hedge company] LTCM had hemorrhaged 
     half a billion dollars. Its equity had sunk to $3.1 billion--
     down a third for the year.

  This is the Wall Street Journal's recount of the story:

       Partners scrambled out of their offices and onto the 
     trading floor as associates stared at their screens in 
     disbelief. Making frantic phone calls around the globe, they 
     reached John Meriwether, the fund's founder, at a dinner in 
     Beijing. He boarded the next plane to the U.S. Eric 
     Rosenfeld, a top lieutenant, called in from Sun Valley, 
     Idaho, where he was settling in for a vacation. He left his 
     wife and children behind and made an all-night trip back to 
     Greenwich.

  Then the brass assembled the next morning. It is 7 o'clock now, 7 
a.m. on Sunday.

       One after another, LTCM's partners, calling in from Tokyo 
     and London, reported that their market had dried up. There 
     were no buyers, no sellers. It was all but impossible to 
     maneuver out of large trading bets [that they had.] They had 
     seen nothing like it.
       The carnage that weekend set off events unprecedented in 
     the world of high finance, culminating with a $3.625 billion 
     bailout funded by a consortium of 14 Wall Street banks and 
     engineered by the Federal Reserve [Board.] LTCM lost more 
     than 90 percent of its assets by the time it was bailed out, 
     and the markets were roiled for weeks. Longer term, it forced 
     many of the world's most sophisticated institutional 
     investors to redefine the ways they manage risk and triggered 
     calls for tougher regulation of hedge funds, those 
     freewheeling investment pools that cater to the wealthy.

  Here is a company that lost $3.6 billion. What happened? It gets 
bailed out in a consortium of banks investing at the behest of the 
Federal Reserve Board at meetings arranged by the Federal Reserve 
Board.
  We will hear a bit more about this case because it relates to an 
amendment I will be offering.

       In an industry populated by sharp money managers, LTCM had 
     the most renowned of all--including Nobel Prize winners 
     Robert Merton and Myron Scholes. But in the end, it wasn't 
     all rocket science. It was about smart marketing-appealing to 
     a wealthy clientele who wanted to be able to say their money 
     was being managed by a passel of Ph.D.s. And it was about 
     massive borrowing, up to $50 for every dollar invested. Long-
     Term Capital Management was, ultimately, like a supermarket--
     a high-volume, low-margin business, trying to eke out small 
     profits from thousands of individual transactions.
       ``Myron once told me they are sucking up nickels from all 
     over the world,'' says Merton Miller, a University of Chicago 
     business professor and himself a Nobel Prize winner in 
     economics.

  Continuing the quote:

       ``But because they are so leveraged, that amounts to a lot 
     of money.''
       All of which helps to explain how so many geniuses, 
     sometimes overcoming divisions within their ranks, got it so 
     wrong. And all the while, vanity, greed and a cult of 
     personality blinded some of the world's most reputable 
     financial institutions, from Wall

[[Page 8829]]

     Street stalwarts to Swiss banks, to the pitfalls inherent in 
     such a strategy.

  The reason I offer this is to say we are now talking today on the 
floor of the Senate about a strategy that says we want to ignore the 
lessons of history. We want to ignore the fact that in the go-go 1920s, 
everybody was making money at about everything, and banks decided to 
fuse their activities and be involved not just in banking, but also in 
underwriting securities and a range of other very risky enterprises. We 
are going to ignore those lessons we learned during that period.
  When studies were done to determine what happened in the 1920s, one 
of the things they discovered was what you expect. If you have 
something called banks whose perception of safety and soundness is at 
the root of their stability and viability, when banks are fusing their 
activities with inherently risky activities--underwriting securities, 
for example--ultimately those kinds of risks, those bets that exist, 
overcome the perception and the reality of safety and soundness, and 
people begin getting worried and nervous and pulling their money out of 
banks and we have bank failures.
  So the Congress in the 1930s passed a bill called Glass-Steagall 
which said: Learn the lessons; my gosh, let us not put activities 
together with banks that are so inherently risky. We should separate 
them forever.
  So we did. And we prohibited certain kinds of investment and 
acquisition by banks and required that certain enterprises do business 
and compete in their own sphere. Banks were prohibited from being 
involved in most of the securities issues, underwriting securities and 
insurance and more.
  Over the years that served this country pretty well. Banks have made 
the case in recent years--and they are right about this--everybody else 
has wanted to invade their territory. Everybody now wants to be a bank. 
If you are selling cars, you want to finance the cars; you want to be a 
bank. Everybody wants to create some sort of homogenized one-stop 
station where people can buy their insurance, buy their home, finance 
it. So banks say people are intruding on their turf and the only 
conceivable way we can compete is if we can compete on their turf as 
well. They want Glass-Steagall repealed.
  Guess what? Here it is. The bill that sits on the floor of the Senate 
today repeals Glass-Steagall. It forgets apparently 60 or 70 years of 
history. It will all be all right. Don't you see, the economy is 
growing, unemployment is down, inflation is down, the stock market is 
up. Don't you understand, Senator Dorgan?
  I guess not. Maybe I am hopelessly old fashioned. I think it is a 
fundamental mistake to decide to repeal Glass-Steagall and allow banks 
and all of the other financial industries to merge into a giant 
smorgasbord of financial services. Those who were around to vote to 
bail out the failed savings and loan industry, $500 billion of the 
taxpayers' money, are they going to want to be around 10 or 15 years 
from now when we see bailouts of hedge funds putting banks at risk? Or 
how about the banks not just bailing out a hedge fund but banks having 
the ownership of the hedge funds?
  That is what we have now. This bailout of Long Term Capital 
Management says we have significant investments by some of the largest 
banks in these hedge funds.
  Or how about derivatives? I am not an expert in this area, but I 
wonder how many Members of this body know about derivatives. How many 
know that banks in this country are trading in derivatives--not for 
customers, but in their own proprietary accounts? They could just as 
well set up a bingo parlor in their lobby. They could just as well 
decide to have a casino somewhere in their lobby. The kind of betting 
and wagering that is going on in proprietary trading of derivatives in 
an institution whose assets are guaranteed by the taxpayers of this 
country is just wrong. Someday somebody is going to wake up and say: 
Why didn't we understand that? Why didn't we understand the 
consequences of hundreds of billions of dollars or, yes, even trillions 
of dollars of wagers out there with deposits at risk? Why didn't we 
understand that did not make any sense?
  I wrote an article about this in 1994 that was published in the 
Washington Monthly. At that point there were $35 trillion in 
derivatives being traded. Now it is $70 trillion. It is hard for me to 
even say the number; $70 trillion in derivatives. Does anybody here 
know the exposure that exists in the largest banks of proprietary 
trading on derivatives? I will bet not. Does anybody understand what 
this bill does in these areas? It says: Hedge funds, we don't want to 
manage those; let them go, let them do what they will. How about 
derivatives? It doesn't do anything.
  This is a GAO report from May, 1994. It is 5 years ago: ``Financial 
Derivatives, Actions Needed To Protect The Financial System.'' That 
report has been available for 5 years to all of the Members of 
Congress. If this legislation really was a modernization bill for 
financial institutions, you would have a solution to this issue in it. 
It would include my amendment that says no institution whose deposits 
are guaranteed by the American taxpayer will trade derivatives in their 
proprietary accounts--none of them. We will not allow gambling in the 
bank lobby. But of course the bill does not have that, so I will offer 
the amendment and it will be defeated because it is not in vogue, it is 
not in fashion. This bill moves in the other direction. It says, not 
only are things not wrong, don't be alarmed by hedge funds and 
derivatives; it says, let's just do more of what we have been doing 
that has caused some of this alarm.
  As I mentioned, the piece of legislation before us repeals provisions 
of the Glass-Steagall Act that restrict the ability of banks and 
security underwriters to affiliate with one another. The bill repeals 
provisions in the Bank Holding Company Act by allowing a new category 
of financial holding company. This structure allows for a wide range of 
financial services to be affiliated, including commercial banking, 
securities underwriting, and merchant banking. And the new financial 
holding companies, by the way, may engage in the following: Lending and 
other traditional banking activities, insurance underwriting and agency 
activities, provide financial investment and economic advisory 
services, issue instruments representing interests in pooling of assets 
that a bank may own directly, securities underwriting and dealing, and 
mutual fund distribution, merchant banking. I think most listening to 
me understand my concern and deep reservations about the direction we 
are heading.
  What about timing? This bill almost came to the floor of the Senate 
last year. I was one of those who objected, and as a result the 
legislation was not enacted. In fact, some of the folks who bring it to 
the floor today also objected because of some other issues. But it is 
now on the floor. It is in a different form than was passed out by the 
committee last year. But what about timing? It seems to me the past 
experiences we have had with banking and financial conglomerates in 
this country in this century, whose collapse has led to the adoption of 
the very financial protection laws they seek to repeal today, ought to 
be a cautionary note to those of us in Congress and to the American 
people. It seems to me the recent experiences we had with a nearly 
$500-billion bailout of a collapsed savings and loan industry ought to 
have some consequences, at least in terms of awareness of those in 
Congress who had to go through that experience.
  It seems to me the question marks that hang over the international 
marketplace and the international economy ought to give pause to some--
a very difficult collapsed economy in some parts of Asia, a Russian 
economy that has virtually collapsed, economic problems in other parts 
of the world, a description in the country of Japan of the keiretsu--
the circumstances in a market system in Japan where a keiretsu allows 
the combining of virtually all economic activities into four or five 
firms that work together as partners to accomplish ends; you put the 
bank and the manufacturer all together.

[[Page 8830]]

  What has happened as a result of that Japanese experience? Would we 
want to trade our economy for the Japanese economy? I don't think so. 
One would think that would give some folks pause.
  Or how about the red flags that ought to have been flying for all of 
us with respect to the regulators' recent experiences dealing with 
excessive risk-taking in our system? Does it give anybody pause that on 
a Sunday night some of the smartest folks, the folks who were viewed as 
geniuses in New York, who put together this hedge fund, they had to be 
bailed out by the Federal Reserve Board running some folks across the 
street to convene an emergency meeting and then sitting there, 
apparently convening a group in which substantial numbers of large 
banks ante up billions of dollars to bail out a private firm? Is that a 
red flag for anybody? It suggests a conflict of interest for the 
Federal Reserve Board, of course, because they regulate the very banks 
that were incentivized to ante up money to bail out a private firm in 
order to avoid some sort of economic catastrophe, an economic 
catastrophe for the country. That is why the Fed was involved--because 
this private firm, too, was too big to fail. Does that raise any red 
flags with anybody? It does with me.
  Or we are told, if we do not do this, it is going to be a 
disadvantage. To whom? Are the banks doing well in this country? You 
are darned right they are doing well, making lots of money. Security 
underwriting firms, merchant banking firms, are we doing well? 
America's corporations, are they doing well? Sure. Look at the stock 
market. Look at the profit reports. When we pass this bill, everybody 
in this Chamber knows what is going to happen. The first thing that is 
going to happen is, we are going to have more and more and more mergers 
because this turns on the green light at the intersection. It says if 
you all want to get together and just get into one big financial swamp 
here and have a smorgasbord of financial services, then buy each other 
up, that's just fine. This orgy of mergers we have already seen will 
simply accelerate. Will that be good for this country? Of course not.
  Those who preach the loudest about the free market system do the 
least to protect it. I guarantee it is true. It has been true ever 
since I came to the Congress. Those who bellow the loudest about the 
free market do the very least in this country to protect it. We are 
going to have a fight a little later this year about antitrust 
enforcement. One way to be sure the free market remains free, open to 
fair, competitive competition, is to make sure you enforce your 
antitrust laws against cartels and monopolies. Interestingly enough, 
those, again, who talk a lot about the free market are the least likely 
to be supportive of aggressive antitrust enforcement, to make sure the 
market is free, open, and competitive.
  This is a highly complicated issue. I know there are big stakes all 
around. We have the biggest economic interests in the country working 
very hard to see their interests are served versus other interests.
  I understand all that, and I understand my view is not the prevailing 
view. George Gobel once said: ``Did you ever think the world was a 
tuxedo and you were a pair of brown shoes?'' I feel like George Gobel 
on this issue.
  I understand this bill is on the floor, and it is going to get passed 
by the Congress. People do not want to entertain this notion, that, 
gee, there might be some inherent risk out here. This is a case, as I 
said earlier, of deciding this is where the industry has decided it 
wants to go, so let's go ahead and put a lodge up so we can accommodate 
all their interests and where they want to be.
  We have been through this before. Where they want to be is not 
necessarily where this country ought to have them. This country ought 
to be concerned about safety and soundness of its financial 
institutions first and foremost. That does not fit--it has never fit--
with the understanding that you can merge the interests of banks and 
other financial and economic activities that are risky.
  When you put things together that require safety and soundness with 
enterprises that have an inherent high risk, you are begging for 
trouble, and this country will get it. Our banks say to us, ``Well, 
others have done it; you can do it in other countries.'' Do you want to 
trade our economy for any other country at the moment? I don't think 
so. What they are doing in other countries is not the litmus test for 
what we decide as Americans to do to strengthen our economy, and this 
bill, in my judgment, if passed, will represent a giant step backward 
for our economy.
  Let me ask one additional question. With all of the debate that I 
have heard since this legislation came to the floor of the Senate, do 
you know I have not heard anything about whether or why or if this bill 
is good for people. Nothing. I wonder if anybody can describe one 
single thing in this legislation that will be helpful to ordinary 
folks?
  This morning, I talked about the fact we have banks and credit card 
companies that are saying to their customers these days--it is 1999, so 
things have changed. I wonder what my grandmother would think if she 
heard me say there are banks and credit card companies saying to 
customers: If you pay off your bill every month, we are going to 
penalize you.
  Isn't that Byzantine--we are going to penalize you for paying off 
your bill. In the old days, you got penalized for not paying your bill. 
No, the way you make money is for people to carry over a balance and 
charge a high interest rate. People who use a credit card to purchase 
every month and pay the full bill off every month are not very good 
customers; credit card companies do not want those folks around.
  I read some examples this morning of companies that say, ``Well, you 
people, if you're going to pay off your bill like that, shame on you, 
we're going to charge you a service charge.''
  Shame on them. What has financial service come to with this sort of 
behavior?
  Another point. We have a circumstance in this country where --we are 
going to have a bankruptcy bill later this year, and we will have this 
discussion later--credit cards, of course, are distributed to everybody 
in America. I have a 12-year-old son. His name is Brendon. He is a 
great young guy, a wonderful baseball player. He is a great soccer 
player. He is a good student. For his benefit, I should say a great 
student, but he is a good student.
  I can describe how wonderful he is in a thousand different ways, but 
he is only 12. He received a letter in the mail one day from the Diners 
Club. The Diners Club said: Brendon Dorgan, we want to send you a 
preapproved Diners Club credit card. So my 12-year-old son appreciates 
Diners Club. I am sure he has an appetite to spend money. I see it from 
time to time. It is normally not on big purchases. Normally it is 
something sweet or something that fizzes at the 7-Eleven, but my son 
does not need a Diners Club card.
  Why would a 12-year-old get a Diners Club card? Why would Diners Club 
send my son a card? Because they send everybody a card. I assume it was 
a mistake, he got on the wrong list someplace. They send cards to 
college kids who have no income and no jobs and say, here is a 
preapproved bunch of credit for you; here is a card. It is just like a 
check. You go spend the money. We don't care you don't have a job. We 
don't care you don't have an income. Here is our card. Take it, please.
  That is what is going on in our country today--penalizing people for 
paying their bills, sending credit cards to 12-year-old kids, sending 
credit cards to people who have no income or no job. Why, my 
grandmother would be mortified to think that is the ethic we think 
makes sense in this kind of an economy.
  We cannot correct all of that in this discussion, but we can correct 
a couple things. I described not my son's credit card solicitation; I 
described derivatives traded on proprietary accounts in banks. I 
described potential regulation of risky hedge funds. Those are two big 
issues and very complicated issues. We can correct that.
  I intend to offer two amendments. I will send the first amendment to 
the

[[Page 8831]]

desk and then ask that it be set aside by consent, and then I will send 
to the desk the second one and describe it. The committee chairman and 
ranking member will then proceed with the bill. They have other 
amendments I know they are going to have to consider today. I know they 
want to move ahead and finish whatever business they have with this 
legislation.
  My hope of hopes is enough Members of the Senate will take a look at 
this bill in final form and say this is a terrible bill, a terrible 
idea coming at a terrible time, and enough Members would vote against 
it to say: This is not modernization, this is a huge step back in time, 
and a huge pit in which we have lost the lessons that we learned 
earlier in this century. I do not have great hope that will happen, 
but, who knows, lightening strikes and perhaps at the end of this day, 
Members of the Senate will say: You know, this wasn't such a good idea 
after all.


                           Amendment No. 312

(Purpose: To prohibit insured depository institutions and credit unions 
  from engaging in certain activities involving derivative financial 
                              instruments)

  Mr. DORGAN. Mr. President, the first amendment that I send to the 
desk is an amendment dealing with derivatives. I ask for its immediate 
consideration.
  The PRESIDING OFFICER. The clerk will report the amendment.
  The legislative assistant read as follows:

       The Senator from North Dakota [Mr. Dorgan] proposes an 
     amendment numbered 312.

  Mr. DORGAN. Mr. President, I ask unanimous consent that the reading 
of the amendment be dispensed with.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:

       At the appropriate place, insert the following:

     SEC. __. LIMITATION ON DERIVATIVES ACTIVITIES.

       (a) Insured Depository Institutions.--The Federal Deposit 
     Insurance Act (12 U.S.C. 1811 et seq.) is amended by adding 
     at the end the following new section:

     ``SEC. 45. DERIVATIVE INSTRUMENTS.

       ``(a) Derivatives Activities.--
       ``(1) General prohibition.--Except as provided in paragraph 
     (2), neither an insured depository institution, nor any 
     affiliate thereof, may purchase, sell, or engage in any 
     transaction involving a derivative financial instrument for 
     the account of that institution or affiliate.
       ``(2) Exceptions.--
       ``(A) Hedging transactions.--An insured depository 
     institution may purchase, sell, or engage in hedging 
     transactions to the extent that such activities are approved 
     by rule, regulation, or order of the appropriate Federal 
     banking agency issued in accordance with paragraph (3).
       ``(B) Separately capitalized affiliate.--A separately 
     capitalized affiliate of an insured depository institution 
     that is not itself an insured depository institution may 
     purchase, sell, or engage in a transaction involving a 
     derivative financial instrument if such affiliate complies 
     with all rules, regulations, or orders of the appropriate 
     Federal banking agency issued in accordance with paragraph 
     (3).
       ``(C) De minimis interests.--An insured depository 
     institution may purchase, sell, or engage in transactions 
     involving de minimis interests in derivative financial 
     instruments for the account of that institution to the extent 
     that such activity is defined and approved by rule, 
     regulation, or order of the appropriate Federal banking 
     agency issued in accordance with paragraph (3).
       ``(D) Existing interests.--During the 3-month period 
     beginning on the date of enactment of this section, nothing 
     in this section shall be construed--
       ``(i) as affecting an interest of an insured depository 
     institution in any derivative financial instrument that 
     existed on the date of enactment of this section; or
       ``(ii) as restricting the ability of the institution to 
     acquire reasonably related interests in other derivative 
     financial instruments for the purpose of resolving or 
     terminating an interest of the institution in any derivative 
     financial instrument that existed on the date of enactment of 
     this section.
       ``(3) Issuance of rules, regulations, and orders.--The 
     appropriate Federal banking agency shall issue appropriate 
     rules, regulations, and orders governing the exceptions 
     provided for in paragraph (2), including--
       ``(A) appropriate public notice requirements;
       ``(B) a requirement that any affiliate described in 
     paragraph (2)(B) shall clearly and conspicuously notify the 
     public that none of the assets of the affiliate, nor the risk 
     of loss associated with the transaction involving a 
     derivative financial instrument, are insured under Federal 
     law or otherwise guaranteed by the Federal Government or the 
     parent company of the affiliate; and
       ``(C) any other requirements that the appropriate Federal 
     banking agency considers to be appropriate.
       ``(b) Definitions.--For purposes of this section--
       ``(1) the term `derivative financial instrument' means--
       ``(A) an instrument the value of which is derived from the 
     value of stocks, bonds, other loan instruments, other assets, 
     interest or currency exchange rates, or indexes, including 
     qualified financial contracts (as defined in section 
     11(e)(8)); and
       ``(B) any other instrument that an appropriate Federal 
     banking agency determines, by regulation or order, to be a 
     derivative financial instrument for purposes of this section; 
     and
       ``(2) the term `hedging transaction' means any transaction 
     involving a derivative financial instrument if--
       ``(A) such transaction is entered into in the normal course 
     of the institution's business primarily--
       ``(i) to reduce risk of price change or currency 
     fluctuations with respect to property that is held or to be 
     held by the institution; or
       ``(ii) to reduce risk of interest rate or price changes or 
     currency fluctuations with respect to loans or other 
     investments made or to be made, or obligations incurred or to 
     be incurred, by the institution; and
       ``(B) before the close of the day on which such transaction 
     was entered into (or such earlier time as the appropriate 
     Federal banking agency may prescribe by regulation), the 
     institution clearly identifies such transaction as a hedging 
     transaction.''.
       (b) Insured Credit Unions.--Title II of the Federal Credit 
     Union Act (12 U.S.C. 1781 et seq.) is amended by adding at 
     the end the following new section:

     ``SEC. 215. DERIVATIVE INSTRUMENTS.

       ``(a) Derivative Activities.--Except as provided in 
     subsection (b), neither an insured credit union, nor any 
     affiliate thereof, may purchase, sell, or engage in any 
     transaction involving a derivative financial instrument.
       ``(b) Applicability of Section 45 of the Federal Deposit 
     Insurance Act.--Section 45 of the Federal Deposit Insurance 
     Act shall apply with respect to insured credit unions and 
     affiliates thereof and to the Board in the same manner that 
     such section applies to insured depository institutions and 
     affiliates thereof (as those terms are defined in section 3 
     of that Act) and shall be enforceable by the Board with 
     respect to insured credit unions and affiliates under this 
     Act.
       ``(c) Derivative Financial Instrument.--For purposes of 
     this section, the term `derivative financial instrument' 
     means--
       ``(1) an instrument the value of which is derived from the 
     value of stocks, bonds, other loan instruments, other assets, 
     interest or currency exchange rates, or indexes, including 
     qualified financial contracts (as such term is defined in 
     section 207(c)(8)(D)); and
       ``(2) any other instrument that the Board determines, by 
     regulation or order, to be a derivative financial instrument 
     for purposes of this section.''.
       (c) Bank Holding Companies.--Section 3 of the Bank Holding 
     Company Act of 1956 (12 U.S.C. 1842) is amended by adding at 
     the end the following new subsection:
       ``(h) Derivatives Activities.--
       ``(1) In general.--A subsidiary of a bank holding company 
     may purchase, sell, or engage in any transaction involving a 
     derivative financial instrument for the account of that 
     subsidiary if that subsidiary--
       ``(A) is not an insured depository institution or a 
     subsidiary of an insured depository institution; and
       ``(B) is separately capitalized from any affiliated insured 
     depository institution.
       ``(2) Applicability of section 45 of the federal deposit 
     insurance act.--Section 45 of the Federal Deposit Insurance 
     Act shall apply with respect to bank holding companies and 
     the Board in the same manner that section applies to an 
     insured depository institution (as such term is defined in 
     section 3 of that Act) and shall be enforceable by the Board 
     with respect to bank holding companies under this Act.
       ``(3) Derivative financial instrument.--For purposes of 
     this subsection, the term `derivative financial instrument' 
     means--
       ``(A) an instrument the value of which is derived from the 
     value of stocks, bonds, other loan instruments, other assets, 
     interest or currency exchange rates, or indexes, including 
     qualified financial contracts (as such term is defined in 
     section 207(c)(8)(D)); and
       ``(B) any other instrument that the Board determines, by 
     regulation or order, to be a derivative financial instrument 
     for purposes of this subsection.''.

  Mr. DORGAN. Mr. President, I will not explain this in great detail, 
except to say, as I described in my earlier remarks, my intention is to 
say it is inconsistent with the obligations and our expectations of 
institutions whose deposits are insured by depository insurance and, in 
fact, guaranteed by the American taxpayer for them to be trading in 
derivatives on their own proprietary accounts.

[[Page 8832]]

  I understand banks being a conduit for the trading of derivatives for 
customers, but for banks in their own proprietary accounts to be taking 
the kinds of risks that exist in derivatives I think exposes all 
taxpayers in this country who are the guarantors of that deposit 
insurance to those kinds of risks. They may just as well put some kind 
of a slot machine in the lobby of a bank if they are going to trade in 
derivatives on their own account.
  I say to the people who own the capital in these banks, if you want 
to gamble, go to Las Vegas. If you want to trade in derivatives, God 
bless you. Do it with your own money. Do not do it through the deposits 
that are guaranteed by the American people and by deposit insurance. My 
amendment prohibits the trading of derivatives on their proprietary 
account.
  I ask unanimous consent that the amendment be set aside.
  The PRESIDING OFFICER. Without objection, it is so ordered.


                           Amendment No. 313

  (Purpose: To subject certain hedge funds to the requirements of the 
                    Investment Company Act of 1940)

  Mr. DORGAN. Mr. President, I send a second amendment to the desk and 
ask for its immediate consideration.
  The PRESIDING OFFICER. The clerk will report the amendment.
  The legislative assistant read as follows:

       The Senator from North Dakota [Mr. Dorgan] proposes an 
     amendment numbered 313.

  Mr. DORGAN. Mr. President, I ask unanimous consent that the reading 
of the amendment be dispensed with.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment is as follows:

       At the end of title III, insert the following:

     SEC. 312. TREATMENT OF LARGE HEDGE FUNDS UNDER INVESTMENT 
                   COMPANY ACT OF 1940.

       Section 3(c) of the Investment Company Act of 1940 (15 
     U.S.C. 80a-3(c)) is amended--
       (1) in paragraph (1), in the first sentence, by inserting 
     ``, which has total assets of less than $1,000,000,000, and'' 
     after ``hundred persons''; and
       (2) in paragraph (7), in the first sentence, by inserting 
     ``which has total assets of less than $1,000,000,000,'' after 
     ``qualified purchasers,''.

  Mr. DORGAN. Mr. President, I want to tell a story as I describe this 
amendment. About 10 years ago, I was serving in the House of 
Representatives on the Ways and Means Committee. Ten years ago, as you 
might recall, in this country we had the marketing of junk bonds; that 
is, noninvestment grade bonds by Drexel Burnham and Michael Milken. 
Junk bonds were used increasingly for hostile takeovers. It was a go-go 
economy. They held conferences and talked about how you could turn a 
minnow into a whale and arm a minnow with junk bonds and they will go 
and bite the tail off the whale. You had little companies buying big 
companies. It was a remarkable thing to see.
  One of the things that occurred to me was how unhealthy and unholy it 
was in this country that junk bond sellers were parking junk bonds with 
savings and loans. Our savings and loans, whose deposits were insured 
by the Federal Government, were then ending up with junk bonds, 
noninvestment-grade bonds, in their portfolios, so that if the 
enterprise went belly up, the American taxpayers would end up paying 
the bill.
  Let me give you the creme de la creme, the hood ornament on the 
excess. The hood ornament was that we had one of biggest casinos in the 
country built in Atlantic City, glitzy and big. Junk bonds were for the 
casino, noninvestment-grade bonds. With junk bonds they build the 
casino. The junk bonds get parked with the savings and loan. The 
savings and loan goes belly up. Guess who ends up with the junk bonds 
that are nonperforming and a big casino. The American taxpayer. The 
U.S. Government and the American taxpayer end up holding junk bonds 
that are nonperforming junk bonds in a casino.
  How did that happen? Because it was all right according to our 
regulators, and all right according to law, for our savings and loans 
to go out and buy junk bonds and load up. One California S&L had, I 
think, nearly 60 percent of its assets involved in junk bonds.
  So I got an amendment passed. It is now law. Some people have never 
forgiven me for it, because I got an amendment passed that said savings 
and loans--that is, those whose deposits are insured by the Federal 
Government--cannot purchase junk bonds and must divest those they have.
  I had a devil of a time getting it passed, just an awful time. I got 
it passed. It became law and caused all kinds of chaos for those who 
were parking all these bonds at S&Ls, playing the financial roulette 
game they were playing. It was the right thing to have done for the 
taxpayers of this.
  I mention that only because financial institutions will do what they 
must and will do what they can under the rules as long as we are 
looking the other way. I am not saying they are all irresponsible. I am 
saying they are all going to try to pursue the largest rate of return 
they can possibly pursue, especially if you have the deposits 
underwritten. Those institutions are going to take advantage of these 
opportunities. It was true in the 1980s; it will be true in the next 
decade as well.
  The lesson with respect to junk bonds, the lesson with respect to 
derivatives and hedge funds, is that we have to be vigilant. Did the 
bank regulators jump on this and deal with it? No. In fact, the 
Secretary of the Treasury would come to the Ways and Means Committee. I 
would say: Mr. Secretary, we have a crisis going on here. What on earth 
are you doing? Sitting on your hands? Oh, no, Congressman Dorgan, there 
isn't a crisis at all; there's no problem. There is no problem here at 
all.
  Well, the problem turned out to be hundreds of billions of dollars 
for the American taxpayer, because those who were supposed to be 
involved in regulation looked the other way.
  As we pass this piece of legislation today, we would do ourselves a 
favor, I think, passing an amendment that would prohibit proprietary 
trading in derivatives by banks and also passing the amendment I just 
sent to the desk that would provide regulation for risky hedge funds 
that have at least $1 billion or more in assets. It is a handful of 
hedge funds, perhaps fewer than 50. They have aggressive leverage. It 
seems to me that while I would like to be more aggressive in the 
regulation of hedge funds, at least this should be a start in dealing 
with this issue.
  Mr. President, I will not offer a third amendment. I will offer only 
these two amendments. I believe that the legislation is inappropriate 
at this time, and I intend to vote against the legislation on final 
passage. As I have said on a couple occasions this afternoon, I think 
this is a giant step backward. I think it is exactly the wrong 
direction for our country. I think it does nothing for ordinary people, 
does not address any of the issues. It is something that will make a 
number of the largest enterprises in this country that are already 
making substantial profits very, very happy. I guarantee every Member 
of this body that if this legislation is passed, when you wake up day 
after day, week after week, and month after month, you will read the 
news of more and more and more mergers and greater concentration.
  Then don't you come to the floor of the Senate and talk to me about 
competition and don't you come to the floor of the Senate and started 
preaching about free markets. The opportunity to respond to real 
competition and free markets, in my judgment, is, by turning this 
legislation down, enforcing strong antitrust enforcement, and being 
thoughtful about the things we have to do in the future to preserve the 
safety and soundness of our banks and, yes, to encourage investment and 
encourage economic activity in other sectors of our economy.
  Let me conclude by saying I am not someone who thinks that big firms 
are bad. I don't believe that at all. Nobody is going to build a 757 
jet airplane in the garage in Regent, ND. Economies of scale are 
important. Some of the largest enterprises in our country have 
contributed mightily to this country and its economy. But I also 
believe that what contributes most to this country is good old-
fashioned healthy competition, broad-based economic ownership. I know 
it is a timeworn and, some consider, old-fashioned Jeffersonian notion 
of democracy that

[[Page 8833]]

broad-based economic ownership is what eventually guarantees economic 
freedom and what eventually underscores and guarantees political 
freedom as well. That is something that is very important to this 
country's future.
  We do not advance in that direction by passing legislation that will 
further concentrate and further provide inducements for more mergers 
and bigger, more concentration and bigger companies. That will not 
advance this country's interests.
  Mr. President, I yield the floor, and I suggest the absence of a 
quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative assistant proceeded to call the roll.
  Mr. GRAMM. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. GRAMM. Mr. President, our current blueprint is that we are going 
to vote on the unitary thrift amendment at 3:45. Each side will have 3 
minutes to speak on that issue. I will ask Senator Gorton to speak on 
behalf of the majority.
  At the conclusion of that vote, the Shelby amendment will be 
considered. That is the amendment which would allow banks to provide 
broad financial services within the structure of the bank rather than 
through the holding company. We have agreed to a 2-hour debate on that 
amendment. If we were on that amendment, say, at 10 after 4, we would 
be through with that amendment at 10 after 6.
  I do not know of another major amendment. I urge my colleagues who 
have amendments, since we have a lot of Members hoping not to be here 
tomorrow--Members walking by do not object to that, I assume--who would 
like to catch a flight back to their States at a reasonable hour, if 
they could, not to convenience me or to convenience my colleague, 
Senator Sarbanes, but to convenience all 100 Members of the Senate, I 
urge Senators who have amendments to come to the floor and present 
them. Please don't show up at 6:10 and say, oh, by the way, I just had 
an idea last night while I was having dessert that I would like to redo 
the whole banking system of the United States of America and I would 
like to change the number of people on the Federal Reserve Bank board 
and I talked to the newspaperman today and he thought it was a great 
idea.
  If you have an amendment, I hope you will come and let us look at it 
and talk about it. Hopefully, we can take some of these amendments and 
save time. I urge my colleagues, for the convenience of all of our 
Members, if you have amendments, to come down here before 4 and let us 
talk about them.
  Please don't show up when the Shelby amendment is finished at 6:10 
and say I have all these ideas and I want to deal with them.
  I thank my colleagues in advance for their cooperation.
  Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative assistant proceeded to call the roll.
  Mr. GRAMM. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. GRAMM. Mr. President, I ask unanimous consent that the pending 
unanimous-consent agreement that we are operating under be temporarily 
set aside so that Senator Schumer can offer an amendment. If I 
understand the amendment correctly, I intend to accept it, and I assume 
Senator Sarbanes will accept it. I think it is important to go ahead 
and get that amendment out of the way. Whenever he is ready, I wanted 
to be sure that we were in a position that he could be recognized 
without undoing any of the agreements on the vote at 3:45, or the 
unanimous-consent request on the Shelby amendment, starting whenever 
that vote is finished.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. GRAMM. Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER (Mr. Fitzgerald). The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. BYRD. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

                          ____________________