[Congressional Record (Bound Edition), Volume 154 (2008), Part 14]
[House]
[Pages 20007-20010]
[From the U.S. Government Publishing Office, www.gpo.gov]




              THE LATEST REALITY GAME--WALL STREET BAILOUT

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentlewoman from Ohio (Ms. Kaptur) is recognized for 5 minutes.
  Ms. KAPTUR. Mr. Speaker, here is the latest reality game. Let's play 
Wall Street Bailout.
  Rule one: Rush the decision. Time the game to fall in the week before 
Congress is set to adjourn and just 6 weeks before an historic election 
so your opponents will be preoccupied, pressured, distracted, and in a 
hurry.
  Rule two: Disarm the public through fear. Warn that the entire global 
financial system will collapse and the world will fall into another 
Great Depression. Control the media enough to ensure that the public 
will not notice this.
  Bailout will indebt them for generations, taking from them trillions 
of dollars they earned and deserve to keep.
  Rule three: Control the playing field and set the rules. Hide from 
the public and most of the Congress just who is arranging this deal. 
Communicate with the public through leaks to media insiders. Limit any 
open congressional hearings. Communicate with Congress via private 
teleconferencing calls. Heighten political anxiety by contacting each 
political party separately. Treat Members of Congress condescendingly, 
telling them that the matter is so complex that they must rely on those 
few insiders who really do know what's going on.
  Rule four: Divert attention and keep people confused. Manage the news 
cycle so Congress and the public have no time to examine who destroyed 
the prudent banking system that served America so well for 60 years 
after the financial meltdown of the 1920s.
  Rule five: Always keep in mind the goal is to privatize gains to a 
few and socialize loss to the many. For 30 years in one financial 
scandal after another, Wall Street game masters have kept billions of 
dollars of their gain and shifted their losses to American taxpayers. 
Once this bailout is in place, the greed game will begin again.
  But I have a counter-game. It's called Wall Street Reckoning. 
Congress shouldn't go home to campaign. It should put America's 
accounts in order.

                              {time}  1930

  To Wall Street insiders, it says ``no'' on behalf of the American 
people. You have perpetrated the greatest financial crimes ever on this 
American republic. You think you can get by with it because you are 
extraordinarily wealthy and the largest contributors to both 
Presidential and congressional campaigns in both major parties, but you 
are about to be brought under firm control.
  First, America doesn't need to bail you out, it needs to secure the 
real assets and property, not your paper, that means the homes and 
properties of hardworking Americans who are about to lose their homes 
because of your mortgage greed. There should be a new job for regional 
Federal Reserve Banks. We want no home foreclosed if a serious work-out 
agreement can be put into place. And if you don't do it, we want a 
notarized statement by a Federal Reserve official that they tried and 
failed.
  Second, taxpayers should directly gain any equity benefits that may 
flow from this historic bailout. We want the American people to get 
first priority in taking ownership of the institutions that want to 
pass their toxic paper onto the taxpayers.
  Third, before any bailouts for Wall Street, America needs major job 
creation to rebuild our major infrastructure. America needs assets, not 
paper. We need working assets.
  Fourth, the time for real financial regulatory change is now, not 
next year. A modernized Glass Eagle Act must be put in place. We need 
to reestablish locally-owned community savings banks across this 
country and create within the Justice Department a fully funded unit to 
prosecute every single high-flying thief whose fraud and criminal acts 
created this debacle and then forced their disgorgement of assets going 
back 15 years.
  Fifth, any refinancing must return a major share of profits to a new 
Social Security and Medicare lockbox, where the monies can go to pay 
for a dignified and assured retirement for every American. This Member 
isn't voting for a penny of it. Those who created and profited from 
this game of games must be brought to justice. The assets they stole 
must be returned to the American taxpayers, right down to the tires on 
their Mercedes.
  Mr. Speaker, I ask my colleagues to join me in cosponsoring my bill 
to create an independent commission to investigate these well-heeled 
wrongdoers. Real reform now, or nothing.

     Seven Deadly Sins of Deregulation--and Three Necessary Reforms

                          (By Robert Kuttner)

       The current carnage on Wall Street, with dire spillover 
     effects on Main Street, is the result of a failed ideology--
     the idea that financial markets could regulate themselves. 
     Serial deregulation fed on itself. Deliberate repeal of 
     regulations became entangled with failure to carry out laws 
     still on the books. Corruption mingled with simple 
     incompetence. And though the ideology was largely Republican, 
     it was abetted by Wall Street Democrats.
       Why regulate? As we have seen ever since the sub-prime 
     market blew up in the summer of 2007, government cannot stand 
     by when a financial crash threatens to turn into a general 
     depression--even a government like the Bush administration 
     that fervently believes in free markets. But if government 
     must act to contain wider damage when large banks fail, then 
     it is obliged to act to prevent damage from occurring in the 
     first place. Otherwise, the result is what economists term

[[Page 20008]]

     ``moral hazard''--an invitation to take excessive risks.
       Government, under Franklin Roosevelt, got serious about 
     regulating financial markets after the first cycle of 
     financial bubble and economic ruin in the 1920s. Then, as 
     now, the abuses were complex in their detail but very simple 
     in their essence. They included the sale of complex 
     securities packaged in deceptive and misleading ways; far too 
     much borrowing to finance speculative investments; and gross 
     conflicts of interest on the part of insiders who stood to 
     profit from flim-flams. When the speculative bubble burst in 
     1929, sellers overwhelmed buyers, many investors were wiped 
     out, and the system of credit contracted, choking the rest of 
     the economy.
       In the 1930s, the Roosevelt administration acted to prevent 
     a repetition of the ruinous 1920s. Commercial banks were 
     separated from investment banks, so that bankers could not 
     prosper by underwriting bogus securities and foisting them on 
     retail customers. Leverage was limited in order to rein in 
     speculation with borrowed money. Investment banks, stock 
     exchanges, and companies that publicly traded stocks were 
     required to disclose more information to investors. Pyramid 
     schemes and conflicts of interest were limited. The system 
     worked very nicely until the 1970s--when financial innovators 
     devised end-runs around the regulated system, and regulators 
     stopped keeping up with them.


                           Seven Deadly Sins

       Sin One: Allowing Mortgage Lending to Become a Casino. 
     Until 1969, Fannie Mae was part of the government. Mortgage 
     lenders were tightly regulated. Homeownership rates soared 
     throughout the postwar era, from about 44 percent on the eve 
     of World War II to 64 percent by the mid-1960s. Nobody in the 
     mortgage business got filthy rich, and hardly anyone lost 
     money. Fannie's job was to buy mortgages from banks and 
     thrift institutions, to replenish their money to make 
     mortgages, and along the way to set standards. Fannie 
     financed its operations by selling bonds. In the late 1970s, 
     private Wall Street firms started emulating Fannie. They 
     packaged mortgages, and converted them into bonds. Over time, 
     their standards deteriorated, because they could make more 
     money creating riskier products. In order to avoid losing 
     market share, Fannie emulated some of the same abuses. 
     Government did not step in to regulate the affair--which was 
     a time bomb waiting for the creation of the sub-prime 
     mortgage business.
       Sin Two: Allowing Unregulated Bond Rating Agencies to 
     Decide What was Safe. Sub-prime is only the best known of a 
     widespread fad known as ``securitization.'' The idea is to 
     turn loans into bonds. Bonds are given ratings by private 
     companies that have official government recognition, such as 
     Moody's and Standard and Poors, but no government regulation. 
     These rating agencies have become thoroughly corrupted by 
     conflicts of interest. If you want to package and sell bonds 
     backed by risky loans, you go to a bond-rating agency and pay 
     it a hefty fee. In return, the agency helps you manipulate 
     the bond so that it qualifies for a triple-A rating, even if 
     the underlying loans include many that are high-risk. Without 
     the collusion of the bond-rating agencies, sub-prime lending 
     never would have gotten off the ground, because it would not 
     have found a mass market. Had regulators looked inside this 
     black box, they would have shut it down. They might have 
     needed new legislation, but they never asked for it. And 
     public-minded regulators might have done a lot under existing 
     law, since banks (which are regulated) were heavily 
     implicated in the financing of sub-prime.
       Sin Three: Failing to Police Sub-prime. The core idea of 
     bank regulation is that government inspectors periodically 
     examine the quality of bank assets. If too large a portion of 
     a bank's loan portfolio is behind in its interest payments, 
     the bank is made to raise more capital as a cushion against 
     losses. Problems are nipped in the bud. But complex 
     securities require more sophisticated regulation than simple 
     loans. Regulators basically waived the rule on adequate 
     capital for the new wave of mortgage lenders who created sub-
     prime. Many mortgage companies were not banks. They made 
     loans only to sell them off to the Wall Street sinners of 
     Deadly Sin No. 1 (see above). So there was no loan portfolio 
     to examine, and no real capital. The Democratic Congress 
     anticipated this problem in 1994, when it passed the 
     Homeownership Opportunity and Equity Protection Act. This 
     prescient law required the Federal Reserve to regulate the 
     loan-origination standards of mortgage companies that were 
     not otherwise government-regulated. But Alan Greenspan, a 
     free-market zealot, never implemented the law. And when 
     Republicans took over Congress in 1995, they never called him 
     on the carpet.
       Sin Four: Failure to Stop Excess Leverage. The financial 
     economy is crashing today because so much speculation was 
     done with borrowed money. A typical leverage ratio of a hedge 
     fund or private equity company is 30 to one. That means $30 
     of debt for $1 of actual capital. If you make one serious 
     miscalculation, you are out of business. And in the case of 
     sub-prime mortgage companies, the leverage ratio was 
     infinite, because they had no capital. The game was entirely 
     based on creating debt. As long as times were good, financial 
     firms could keep borrowing to finance their deals. But once 
     investors looked down, they panicked. Some parts of the 
     system are unregulated, such as hedge funds and private-
     equity companies. But they all ultimately get a lot of their 
     funding from banks. And regulators do retain the power to 
     look closely at banks' books (see Sin No. 3 above). Had they 
     used that power to police the kind of highly risky stuff 
     banks were underwriting they could have shut it down.
       Sin Five: Failure to Police Conflicts of Interest. Remember 
     the accounting scandals of the 1990s? In those scandals, 
     accounting firms were paid once to audit corporate books and 
     then again to help clients cook the books and still pass 
     muster with the audit. That was a sheer conflict of interest. 
     Though accountants were (loosely) regulated, Congress did not 
     crack down until cooked books caused the stock market to 
     crash. A second conflict of interest was the corruption of 
     stock analysts, who were telling customers to buy dubious 
     stocks because their bosses were profiting from underwriting 
     the same stocks. In the aftermath of the dot-com bust, 
     Congress narrowly cracked down on these two abuses with the 
     Sarbanes-Oxley Act but simply ignored others--such as the 
     role of bond-rating agencies and the habit of basing 
     executive bonuses on stock prices that could easily be 
     manipulated by the same executives.
       Sin Six: Failing to Regulate Hedge Funds and Private 
     Equity. When Roosevelt's New Deal acted to rein in the abuses 
     in financial markets, it regulated the major players--
     commercial banks, investment banks, stock brokers, holding 
     companies, and stock exchanges. But two of the biggest 
     purveyors of risk today--hedge funds and private-equity 
     firms--simply did not exist. Today, private-equity firms and 
     hedge funds do most of the things banks and investment banks 
     do. They basically create credit by making markets in exotic 
     securities. They buy and sell firms. They speculate in 
     financial markets with borrowed money, taking much bigger 
     risks than regulated banks. According to House Banking 
     Committee Chair Barney Frank, more than half the credit 
     created in recent years has been created by essentially 
     unregulated institutions. The people in charge of the 
     government--conservative Republicans--took the view that 
     these new-wave financial players offered transactions between 
     consenting adults who needed no special consumer protection. 
     But they were oblivious to the risks to the larger system.
       Sin Seven: Repeal of the Glass-Steagall Act. This action, 
     in 1999, was one of two major cases when a cornerstone of New 
     Deal regulation was explicitly repealed. (The other was the 
     repeal of the Public Utility Holding Company Act, and if your 
     utility rates are sky-high, you can thank Congress for that, 
     too.) Glass-Steagall provided that if you wanted to speculate 
     as an investment bank, good luck to you. But commercial banks 
     were part of the banking system. They created credit. They 
     were regulated, supervised, usually enjoyed FDIC insurance, 
     and had access to advances from the Fed in emergencies. So 
     commercial banks and investment banks were two different 
     creatures that should stay out of each other's knitting.
       But beginning in the 1980s, regulators who didn't believe 
     in regulation either allowed explicit waivers of some aspects 
     of Glass-Steagall or looked the other way as commercial banks 
     and investment banks became more alike. By 1999, when 
     Citigroup had jumped the gun and assembled a supermarket that 
     included a commercial bank, investment bank, stock brokerage, 
     and insurance company, Glass Steagall was so hollowed out 
     that it was effectively dead. The coup de grace was its 
     official repeal, in the Gramm-Leach-Bliley Act. That's Gramm 
     as in former Sen. Phil Gramm, a deregulation zealot and top 
     adviser to John McCain.


                          Three Basic Reforms

       What all of these sins had in common was that they led 
     financial markets to misprice assets. In plain English, that 
     means buyers were purchasing securities based on bad 
     information, often with borrowed money. When firms started 
     losing money on sub-prime in mid-2007 and other owners 
     decided it was time to get their money out, the whole miracle 
     of leverage went into reverse. And it spilled over into other 
     securities that had been mispriced thanks to all the 
     conflicts of interest tolerated by regulators.
       That's why, no matter how much taxpayer money the Federal 
     Reserve and the Treasury keep pumping in, they can't turn 
     dross back into gold. The next administration and the 
     Congress need to return the financial economy to its historic 
     task of supplying capital to the real economy--of connecting 
     investors to entrepreneurs--and shut down the purely casino 
     aspects of the system that have only enriched middlemen and 
     passed along huge risks to everyone else.
       Reform One: If it Quacks Like a Bank, Regulate it Like a 
     Bank. Barack Obama said it well in his historic speech on the 
     financial emergency last March 27 in New York. ``We need to 
     regulate financial institutions for what they do, not what 
     they are.'' Increasingly, different kinds of financial firms 
     do the same kinds of things, and they are all capable of 
     infusing toxic products into the nation's financial 
     bloodstream. That's why

[[Page 20009]]

     Treasury Secretary Hank Paulson has had to extend the 
     government's financial safety net to all kinds of large 
     financial firms like A.I.G. that have no technical right to 
     the aid and no regulation to keep them from taking outlandish 
     risks. Going forward, all financial firms that buy and sell 
     products in money markets need the same regulation and 
     examination. That will be the essence of the 2009 version of 
     the Glass-Steagall Act.
       Reform Two: Limit Leverage. At the very heart of the 
     financial meltdown was extreme speculation with esoteric 
     financial securities, using astronomical rates of leverage. 
     Commercial banks are limited to something like 10 to one, or 
     less, depending on their conditions. These leverage limits 
     need to be extended to all financial players, as part of the 
     same 2009 banking reform.
       Reform Three: Police Conflicts of Interest. The conflicts 
     of interest at the core of bond-raising agencies are only one 
     of the conflicts that have been permitted to pervade 
     financial markets. Bond-rating agencies should probably 
     become public institutions. Other conflicts of interest 
     should be made explicitly illegal. Yes, financial markets 
     keep ``innovating.'' But some innovations are good, and some 
     are abusive subterfuges. And if regulators who actually 
     believe in regulation are empowered to examine all financial 
     institutions, they can issue cease-and-desist orders when 
     they encounter dangerous conflicts.
       We're talking about a Roosevelt-scale counterrevolution 
     here. But nothing less will prevent the financial collapse 
     from cascading into Great Depression II. And the public 
     should never again forget that this needless collapse was 
     brought to us by free-market extremists.
                                  ____


               [From Robert Reich's Blog, Sept. 21, 2008]

 What Wall Street Should Be Required To Do, To Get a Blank Check From 
                               Taxpayers

                            (By Robert Reich)

       The frame has been set, the dye cast. Treasury Secretary 
     Hank Paulson, presumably representing the Bush administration 
     but indirectly representing Wall Street, and Fed Chief Ben 
     Bernanke, want a blank check from Congress for $700 billion 
     or possibly a trillion dollars or more to take bad debt off 
     Wall Street's balance sheets. Never before in the history of 
     American capitalism has so much been asked of so many for (at 
     least in the first instance) so few.
       Put yourself in the shoes of a member of Congress, 
     including our two presidential candidates. The Treasury 
     Secretary and Fed Chair have told you this is necessary to 
     save the economy. If you don't agree, you risk a meltdown of 
     the entire global financial system. Your own constituents' 
     savings could go down with it. An election is six weeks away. 
     Besides, in the last two days of trading, since rumors spread 
     that the Treasury and the Fed were planning something of this 
     sort, stock prices revived.
       Now--quick--what do you do? You have no choice but to say 
     yes.
       But you might also set some conditions on Wall Street.
       The public doesn't like a blank check. They think this 
     whole bailout idea is nuts. They see fat cats on Wall Street 
     who have raked in zillions for years, now extorting in effect 
     $2,000 to $5,000 from every American family to make up for 
     their own nonfeasance, malfeasance, greed, and just plain 
     stupidity. Wall Street's request for a blank check comes at 
     the same time most of the public is worried about their jobs 
     and declining wages, and having enough money to pay for gas 
     and food and health insurance, meet their car payments and 
     mortgage payments, and save for their retirement and 
     childrens' college education. And so the public is asking: 
     Why should Wall Street get bailed out by me when I'm getting 
     screwed?
       So if you are a member of Congress, you just might be in a 
     position to demand from Wall Street certain conditions in 
     return for the blank check.
       My five nominees:
       1. The government (i.e. taxpayers) gets an equity stake in 
     every Wall Street financial company proportional to the 
     amount of bad debt that company shoves onto the public. So 
     when and if Wall Street shares rise, taxpayers are rewarded 
     for accepting so much risk.
       2. Wall Street executives and directors of Wall Street 
     firms relinquish their current stock options and this year's 
     other forms of compensation, and agree to future compensation 
     linked to a rolling five-year average of firm profitability. 
     Why should taxpayers feather their already amply-feathered 
     nests?
       3. All Wall Street executives immediately cease making 
     campaign contributions to any candidate for public office in 
     this election cycle or next, all Wall Street PACs be closed, 
     and Wall Street lobbyists curtail their activities unless 
     specifically asked for information by policymakers. Why 
     should taxpayers finance Wall Street's outsized political 
     power--especially when that power is being exercised to get 
     favorable terms from taxpayers?
       4. Wall Street firms agree to comply with new regulations 
     over disclosure, capital requirements, conflicts of interest, 
     and market manipulation. The regulations will emerge in 
     ninety days from a bi-partisan working group, to be convened 
     immediately. After all, inadequate regulation and lack of 
     oversight got us into this mess.
       5. Wall Street agrees to give bankruptcy judges the 
     authority to modify the terms of primary mortgages, so 
     homeowners have a fighting chance to keep their homes. Why 
     should distressed homeowners lose their homes when Wall 
     Streeters receive taxpayer money that helps them keep their 
     fancy ones?
       Wall Streeters may not like these conditions. Well, you 
     should tell them that the public doesn't like the idea of 
     bailing out Wall Street. So if Wall Street doesn't accept 
     these conditions, it doesn't get the blank check.
                                  ____


                  [From Bloomberg.com, Sept 19, 2008]

      Sue Them, Jail Them, Make Them Pay for Meltdown: Ann Woolner

                      (Commentary by Ann Woolner)

       As it stands, the rest of us will be paying much money over 
     a long time for the greed and bad judgment of those who 
     melted down the economy.
       Hundreds of billions of taxpayer dollars are propping up 
     firms that a relative few money lenders and Wall Street 
     wizards ruined.
       If that weren't enough, the crisis is shrinking the money 
     that Americans diligently socked away for retirement, down 
     payments on first homes, college for the kids or this 
     winter's heating bill. We might as well have opened our 
     windows and tossed out cash.
       Beyond crimping living standards around the globe, the 
     crumbling of the U.S. financial system has prompted action 
     radical for a nation devoted to free enterprise. However 
     necessary, it's nothing short of astounding that the U.S. 
     government essentially nationalized the largest insurance 
     company in the country.
       The real kick in the teeth is that the executives who 
     inflicted all this financial pain, who forced unprecedented 
     government takeovers, walk away with hundreds of millions of 
     dollars. It's up to us--innocent little us--to dig into our 
     pockets, into our futures and into our children's futures to 
     fix their spectacular errors.
       Stanley O'Neal took a $161 million package last year when 
     he left Merrill Lynch & Co. (remember Merrill Lynch?), even 
     without a severance package in the mix. Angelo Mozilo, 
     founder and top executive at Countrywide Financial Corp., 
     reaped almost $122 million during 2007 in stock options 
     alone.
       For a mere three months at the helm of American 
     International Group Inc., Chief Executive Officer Robert 
     Willumstad gets a $7 million package.


                         Selling Stock Options

       And while the value of Richard Fuld's shares in Lehman 
     Brothers Holdings Inc. plunged roughly $1 billion, he still 
     pulled in almost $490 million by selling options and share 
     grants in the 14 years that the company's been public, 
     according to Fortune magazine.
       We now know those shares were grossly overpriced, resting 
     as they did on subprime mortgages. Shouldn't he give back 
     most of it? All of it?
       At least the government is blocking the $24 million given 
     to the fired top guns at Fannie Mae and Freddie Mac, both 
     taken over earlier this month.
       As a rule, it isn't easy to take back money or benefits 
     awarded as part of an employment contract, unless you can 
     figure out some way the executive violated the contract's 
     terms.
       But it's worth a try. Consider these options.
       Toss the rascals in jail. Criminal prosecution allows the 
     government to seize ill-gotten gains. Snip the straps off 
     those golden parachutes and grab them. Take over bank 
     accounts, investment accounts, mansions, private planes and 
     yachts.


                              Bear Stearns

       The feds did bring charges against a couple of Bear Stearns 
     Cos. hedge fund managers in June, and Federal Bureau of 
     Investigation Director Robert Mueller told Congress this week 
     his agency is pursuing possible suspects ``as far up the 
     corporate chain as necessary.''
       The hitch is that proving executives lied in criminal ways 
     is easier said than done, Enron and WorldCom convictions 
     notwithstanding.
       ``Criminal prosecutions need to be specific, detail-
     oriented fact patterns where clear-cut criminality can be 
     established,'' says Robert Mintz, a white-collar criminal 
     defense lawyer and former prosecutor.
       ``These are broad, sweeping market failures that have swept 
     up so many individuals and so many institutions that 
     prosecutors will have a hard time singling out any entity, 
     much less any institution, and hold them responsible,'' says 
     Mintz, a partner in McCarter and English in Newark, New 
     Jersey.
       OK, so file civil suits.


                           Sue the Directors

       WorldCom shareholders sued and wrangled $18 million from 
     the pockets of directors, who agreed to pay more than 20 
     percent of their combined net worth. Another $36 million came 
     from the directors' insurance carriers.
       These days, collecting from an insurer might not be the 
     best idea. If AIG is doing

[[Page 20010]]

     the insuring, it would be the taxpayers paying out.
       William McGuire, former CEO of UnitedHealth Group Inc., 
     agreed this month to personally cough up $30 million to 
     resolve a lawsuit over stock-option backdating. That's on top 
     of the $600 million in benefits--mostly in stock options--he 
     said he will turn in to resolve another shareholder suit.
       The problem is that it normally takes something akin to 
     criminal conduct, such as options backdating or accounting 
     fraud, for civil suits to take money out of the hands of the 
     accused. And, as previously noted, it isn't clear we will 
     have that here.


                          Stricter Regulation

       Well, what about government regulators? The U.S. Securities 
     and Exchange Commission didn't do anything to prevent this 
     meltdown. But at least, with New York Attorney General Andrew 
     Cuomo leading the charge, federal and state regulators have 
     forced investment banks to buy back billions of dollars worth 
     of auction-rate securities said to have been sold under 
     dubious claims of reliability.
       The bankruptcy law may give Lehman Brothers creditors a 
     chance to grab some of the bonuses the firm paid out last 
     year.
       If they can show bonuses were based on bogus claims of 
     solvency, they can go after them, according to compensation 
     expert Paul Hodgson of the Corporate Library, which analyzes 
     corporate governance issues.
       Some plaintiffs' lawyers apply the same principle when 
     pushing for tougher corporate governance rules as part of 
     settling a case.
       The idea is that CEOs and CFOs who drew bonuses based on 
     earnings that had to later be restated, for whatever reason, 
     must automatically return the excess amount, according to 
     Darren Robbins, a partner in Coughlin Stoia Geller Rudman & 
     Robbins.
       Frankly, it's only fair.

                          ____________________