[Congressional Record (Bound Edition), Volume 155 (2009), Part 11]
[Senate]
[Pages 15350-15351]
[From the U.S. Government Publishing Office, www.gpo.gov]




                      FINANCIAL REGULATORY REFORM

  Ms. COLLINS. Madam President, moments from now, President Obama will 
unveil his administration's long-awaited proposal to restructure and 
reform our Nation's financial regulatory system. I wish to take a few 
minutes to share my initial reactions to some of the most important 
features in the President's plan.
  At the outset, let me say the President and his financial team 
deserve considerable credit for tackling this critical issue. It is 
important that all of us recognize how critical Federal financial 
regulatory reform is and that we not put this issue off until some 
distant future. When the present crisis is behind us--something we all 
hope will be sooner rather than later--other issues will demand our 
attention and calls for reform, I fear, will begin to fade. If that 
happens, our financial system would remain flawed, and these flaws must 
be corrected or they will emerge, once again, in the future to threaten 
our prosperity and to imperil financial markets.
  In several aspects, the President's financial reform proposal 
parallels legislation I introduced in March to fundamentally transform 
our Nation's financial regulatory system. The bill I introduced would 
create a council of financial regulators to act as a systemic risk 
monitor. The bill would also require stronger safety and soundness 
standards and would close the loophole on the regulation of credit 
default swaps. It would eliminate the Office of Thrift Supervision, 
among other provisions.
  There is widespread consensus that we do need a system, a measure for 
reviewing systemic risk. We need to have one entity that is responsible 
for looking across the financial markets and financial institutions and 
identifying regulatory black holes and high-risk practices or products 
that could put our financial markets at risk. For this reason, I am 
pleased the administration is proposing the creation of a council of 
regulators to ensure that many perspectives and areas of expertise are 
brought to the table.
  As we know now from bitter experience, we do not have, currently, any 
entity charged with evaluating risk across the financial spectrum. As a 
result, we saw institutions take on far more leverage than was 
appropriate. We saw exotic new derivatives that were poorly disclosed, 
not well understood, and lightly regulated, if at all, develop over the 
last few years and imperil our financial markets. So it is critical 
that we have an entity--and I believe a council of regulators is the 
best entity--to look across the financial markets rather than having 
each regulator view its regulatory responsibilities and regulated 
entities through a narrow prism.
  To my mind, the President's decision to rely on a council model makes 
his proposal far more practical and effective than alternatives which 
would have required the restructuring of most or all of the financial 
agencies that currently oversee the financial system. The effort to 
achieve that kind of massive change and consolidation would take many 
years to implement. As the experience in the United Kingdom 
demonstrates, it would be no guarantee that our Nation's economy would 
be shielded from systemic risk, even after such a consolidation were 
implemented.
  Under the legislation I have introduced, a financial stability 
council would be the primary entity responsible for detecting systemic 
risk and taking action to protect against that risk. While I am pleased 
the President has chosen the council of regulators model as well, I 
differ with his proposal to have the Secretary of the Treasury serve as 
the head of the council. Instead, I believe the council's chairman 
should be independent of any of the regulatory agencies serving on the 
council and that it is important that that chairman devote his or her 
full energies to that role and not have other important 
responsibilities.
  It is also important that individual be subject to congressional 
oversight, be presidentially appointed, and Senate confirmed.
  I do believe, however, that the President made the right choice in 
not assigning this role to the Federal Reserve. That is a model that 
has been discussed, that perhaps the Federal Reserve should take on the 
responsibility of the systemic risk monitor. The Chairman of the Fed 
would be a member of the council, I have advocated, and, of course, the 
Nation's top banker would play a critical role in how the council 
discharges its responsibilities.

[[Page 15351]]

But, in my view, the Federal Reserve already has plenty on its plate--
including, after all, the conduct of monetary policy--and should not be 
distracted from those primary responsibilities by being asked to lead 
the new council.
  There are several other important provisions in the President's plan 
on which I would like to comment. First, with respect to the too-big-
to-fail problem, my bill would give the council the authority to make 
sure large financial institutions do not imperil the system by imposing 
higher capital requirements on them as they grow in size or raising 
their risk premiums or requiring them to hold a larger percentage of 
their debt as long-term debt. The President also proposes that the 
council play a role in setting these requirements. We have to get away 
from the problem we have now where we create a moral hazard. A firm 
knows if it becomes big enough and engages in sufficiently risky 
processes or practices, Uncle Sam is going to step in and bail that 
institution out. That is exactly the wrong message for us to be 
sending.
  It is astonishing to me that our regulatory system was so lax and had 
so many gaps in it that we could have this huge market in credit 
default swaps arise where they were regulated neither as a security or 
as insurance; that we can have a situation where a large firm such as 
Bear Sterns has a leverage ratio that exceeds 30 to 1 and no regulator 
is stepping in; that we can have all of those kinds of problems. That 
is what we have to act to prevent.
  The approach to too big to fail is one we have to undertake 
carefully, however. I don't think it makes sense to put some arbitrary 
limit on how big a firm can get, but I do believe that with increased 
size should come increased scrutiny by the regulators and higher 
capital requirements.
  The TARP congressional oversight panel has adopted a similar 
position. As the panel has explained:

       We should not identify specific institutions in advance as 
     too big to fail, but rather have a regulatory framework in 
     which institutions have higher capital requirements and pay 
     more on insurance funds on a percentage basis than smaller 
     institutions which are less likely to be rescued as being too 
     systemic to fail.

  Second, I support the idea of requiring that lenders keep some ``skin 
in the game'' when dealing in asset-backed securities. One of the big 
problems with the current system is risk has become divorced from 
responsibility. The mortgage broker gets paid for finding the client, 
placing the loan with a financial institution, and then has no further 
obligation. The financial institution that is underwriting the loan 
ends up selling it on the secondary market so, again, it has no further 
obligation. This system goes on and on and on. So I think the President 
is right about requiring everyone along the chain to have a financial 
interest in the ultimate health of the mortgage.
  Since last spring, the Homeland Security and Governmental Affairs 
Committee, of which I am the ranking member and Senator Lieberman is 
the chairman, has held a series of hearings on the roots of the present 
financial crisis. One problem consistently raised by the experts is the 
fact that asset-backed securities allowed lenders to sell their loans 
to investors and thereby avoid the risk that borrowers might default on 
these loans. That encouraged looser lending standards, and led to the 
boom and ultimately the bust in the housing market.
  I understand the ability to sell those loans gives more liquidity and 
allows for additional mortgages to be made. But I think if you required 
the lenders to retain an interest in the loan, they are going to have 
more at stake when it comes to the financial security of the loan and, 
indeed, whether the loan should have been made in the first place.
  Third, I am intrigued by the President's proposal to reform the role 
played by credit rating agencies. I am deeply concerned by the failure 
of these agencies to provide meaningful warning of the riskiness of 
investments backed by subprime loans, even after the market's downturn. 
I am very troubled by the way the system works now, where essentially 
there is an auction, there is ``ratings shopping,'' and there are 
conflicts of interest inherent in the system.
  Fourth, I support the President's proposal to regulate and bring 
transparency to the derivatives market, including the over-the-counter 
market. This is a large, complex market where some companies are trying 
to enter into legitimate hedging contracts, but other financial 
institutions have been engaged in a tangled web of interlocking 
contracts that are extremely difficult to properly evaluate.
  The lack of regulation and transparency in this area led to the near 
failure of AIG, which had engaged in hundreds of these contracts in the 
form of credit default swaps. As the financial crisis deepened, the 
American taxpayer was forced to bail out AIG with at least $70 billion 
due to the uncertainty of the impact of these credit default swaps on 
the economy as a whole. But AIG's experience should not be used as an 
excuse to alter the traditional authority of States to regulate 
insurance.
  It was a noninsurance financial subsidiary of AIG that led to the 
debacle. AIG's insurance business remained pretty healthy. The problems 
were in the financial services unit, and I do not think it is a 
coincidence that unit was regulated by the Office of Thrift 
Supervision, primarily, which has been long recognized as the weak 
sister when it comes to bank regulators. That is why both my bill and 
the effect of the President's proposal is to do away with that 
regulator and to have a consolidated regulator.
  Fifth, I need to learn more about the President's proposal to 
consolidate consumer protection for financial products into one agency. 
The current financial regulatory agencies--whether the bank regulators 
or the Securities and Exchange Commission or the CFTC--all have an 
important role to play in consumer protection, a role that has not 
always been played adequately in the last few years. Is the answer, 
however, to the problems we have seen simply to remove consumer 
protection from the bank regulators' responsibilities? I am not sure 
that is the right response. I think we need to look very closely at 
this issue.
  Finally, I welcome the President's proposal to provide Federal 
regulators with resolution authority over holding companies and other 
nonbank financial institutions similar to the kind the FDIC has over 
banks. This lack of authority presented Federal regulators with a 
Hobson's choice with respect to nonbank financial institutions such as 
AIG: bail them out or allow them to fail, notwithstanding the damage to 
the economy as a whole.
  Madam President, let me conclude my comments.
  As a former Maine financial regulator, I am convinced that financial 
regulatory reform is absolutely essential to restoring confidence in 
our financial markets and to preventing a recurrence of a crisis such 
as the one we now face.
  I applaud the administration for making this reform a priority.
  America's Main Street small businesses, homeowners, employees, 
savers, and investors deserve the protection of an effective, new 
regulatory system that modernizes regulatory agencies, sets safety and 
soundness requirements for financial institutions to prevent excessive 
leverage, and improves oversight, accountability, and transparency. I 
look forward to working closely with the administration to achieve 
these goals.

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