[Congressional Record (Bound Edition), Volume 154 (2008), Part 16]
[Senate]
[Pages 21684-21685]
[From the U.S. Government Publishing Office, www.gpo.gov]




                             BANKING LESSON

  Mr. DOMENICI. Madam President, I want to give a little history lesson 
on banking. It is strange that I only served on the Banking Committee 2 
years of my Senate life. That was when I filled in. I served and 
learned a lot. But when this crisis came about, I decided that somebody 
was going to teach me about what had happened since the Great 
Depression. So I am going to try to do that as quickly as I can.
  First, it is not time for partisan ideological finger-pointing.
  Second, there is no plan that can emerge from any set of honest 
deliberations that will be painless. We are undergoing a massive 
deleveraging in the finance markets.
  Third, I was chairman of the Senate Budget Committee when the 
Resolution Trust Corporation was formed in order to curb the savings 
and loan crisis of the early 1990s. That effort was also controversial. 
I hope the plan that emerges from Congress and the administration does 
the same for financial markets now. I recognize the difference between 
the two. The first was much easier because there were many physical 
assets we could look at and transfer title to, and people could feel 
assets. I would say that, as a model, that terrible situation ended 
with the Federal Government making money instead of losing money.
  From everything I know about the proposal, the principal proposal put 
forth by the executive branch through the two spokesmen who have been 
working 24 hours a day nonstop, the chairman of the Federal Reserve, an 
absolute expert in this field--it has been said over and over that he 
knows much about recessions and he knows much about depressions. He 
wrote his professorial doctorate thesis on the Great Depression. That 
is why he talks as if he knows what happens in depressions. He has been 
telling us what will happen if we go into a depression. Then we have 
the Secretary of the Treasury, whom we all have gotten to know. He 
apologizes profusely for not being a great speaker, but he has 
presented a difficult plan and come a long way.
  I, for one, hope we come to a resolution soon between Democrats and 
Republicans and the White House, speaking through their spokesmen, and 
send a signal to the American people that we know how to take care of 
the financial markets--not Wall Street, the financial markets--of 
America. The financial markets, not Wall Street, are plugged. They 
don't work right now. They don't run. They are filled with toxic 
assets. We have to get the toxic assets out or else we will have no 
liquidity in the financing system.
  Some say the basic problem goes back to 1933 and the so-called Glass-
Steagall Act that separated investment banking from commercial banking. 
Some say that, to the contrary, if Glass-Steagall were still the law of 
the land, we wouldn't have the problems we now confront. Both sides 
cite great scholars, economic theorists, and market gurus, but both 
Democrats and Republicans voted for the original Glass-Steagall. In 
1999, under the leadership of President Clinton and Treasury Secretary 
Rubin, Glass-Steagall was repealed. Now many say that repeal of Glass-
Steagall has caused the problem. I should note that Republicans 
controlled the Congress then and Democrats controlled the executive 
branch. Both parties played a role.
  Some contend that the problem goes back to 1977, when Congress passed 
the Community Reinvestment Act requiring that financial institutions 
finance home purchases to borrowers who were historically deemed 
unlikely to pay back the loans. The theorists say that when politicians 
try to determine who is a good borrower, both the borrower and the 
lender will suffer. I think we will look back on this effort to save 
the system and that conclusion will become a reality. Let me repeat. 
Some say that when we try to determine who is a good borrower and make 
a determination rather than letting the market make the determination 
as to who is a good borrower, we both suffer. Those who lend the money 
don't get paid, and those who buy don't get what they bought. That is 
sort of what has happened here. Many of those became the toxic assets 
that we are now talking about. The Reinvestment Act, which both 
Democrats and Republicans voted for, was an act that attempted to push 
loans that were questionable in terms of whether the people buying 
could ever pay them off.
  Some say we should have seen this coming. They note that the savings 
and loan crisis came not too long after the Garn-St. Germain Act of 
1982 that loosened regulation of savings and loans in America. The law 
drew the support of both Democrats and Republicans and was signed into 
law by a Republican President. This argument says that when regulation 
of Government-insured money loosens, the odds that extremely risky 
behavior will occur increases.
  During the last 10 years, as regulation of markets decreased, 
globalization of markets increased. More and more complicated and 
model-driven financial products were invented, and regulators clearly 
lost the ability to analyze risk and to step in when necessary. Many 
believe the Long-Term Capital Management debacle was an early warning 
that financial mathematicians in the marketplace had gotten ahead of 
the financial regulators. Warnings about the size and complexity of 
derivatives of all sorts proliferated. Many policymakers asked aboutthe 
size and complexity of these derivatives of all sorts and could not get 
answers and could not understand some of that which they were being 
told. Many policymakers and regulators assumed that the financial 
companies themselves would realize that proper risk analysis was in 
their self-interest and self-regulation would naturally occur. That 
assumption has proved wrong. Many purchasers of these convoluted 
products were reassured because rating agencies continued to give so 
many of them AAA ratings. Instead of going through the extremely 
difficult process of analyzing each and every component of each and 
every product, purchasers depended upon the ratings agencies. So some 
analysts now say it was the rating agencies that failed.
  Finally, we all recognize that turmoil plagues all markets worldwide. 
Many nations and institutions in many countries now own what are called 
``toxic assets.'' I have just tried to describe them a minute ago.
  Literally trillions of dollars of various complex financial products 
are held by many banks, investment houses, pension funds, and insurance 
companies in almost every developed nation. China has had to step in by 
increasing Government shares of some banks. Russia closed down its 
markets for 2 days and may spend as much as $120 billion to stabilize 
its markets. Germany and the United Kingdom have had to devote billions 
within the last 18 months to try to stem financial contagion. Serious 
erosion of confidence in financial institutions threatens to freeze 
credit, with all the disastrous consequences that holds for a financial 
world built on easy, safe, transparent

[[Page 21685]]

credit. Now credit is hard, insecure, and opaque.
  So, I will not pretend to know if the plan proposed by the 
administration and some in Congress will solve the problem. Since no 
one seems to know what shape this plan will take in the end, any 
predictions seem foolish at this point. I do know that the size of the 
potential market injury, and the consequences that the working man and 
woman in this and other nations will suffer, compel serious, strategic 
sovereign government action. Thus, I believe the warnings of a Federal 
Reserve Chairman who probably knows as much about the financial 
consequences of the Great Depression as anyone else in town, and the 
warnings of a Treasury Secretary who used to head a Wall Street firm 
that invented many of the instruments that now seem ``toxic.'' If they 
don't know the severity of this problem, and if they cannot at least 
give us a plan that will stabilize market behavior until a clearing 
price for these assets emerges, then I suspect that no one can.
  We will pass legislation that I guarantee you will be imperfect. All 
sorts of objections from various industries and groups have already 
filled cyberspace, and newspaper space, and air time. Ideological and 
theoretical objections already fill the atmosphere. It seems to me that 
the time for such almost theological discussions is long past. As a 
Senator who has been here a long time, and seen many recessions and 
market crises come and go, I only know two things: we are all to blame 
in some form or other; and we need to act now, with a very large, 
Government-led program, and with all prudent speed.
  Madam President, I believe my time is about to expire.
  I certainly hope we will pass something like what has been asked of 
us by the executive branch, with five or six things that clearly are 
necessary, that we find necessary as representatives of the people, but 
that we get it done because we must save our own ability to lend 
money--that is, our system of borrowing and lending--and the rest of 
the world kind of waits on us also.
  So this is truly a big one. As I said to my hometown paper, after 36 
years in the Senate, on the last day or next to the last day of my time 
here, I will vote on the most important issue I have ever voted on, the 
most complex, and that costs the most--all in one shot. As I leave and 
walk out, here will be behind me the most difficult issue we have faced 
as a Nation. It is very hard for our people to understand it, but it is 
a terrible one.

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