[Congressional Record (Bound Edition), Volume 155 (2009), Part 12]
[House]
[Pages 15766-15768]
[From the U.S. Government Publishing Office, www.gpo.gov]




                     ENSURING A SOUND CREDIT SYSTEM

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentlewoman from Ohio (Ms. Kaptur) is recognized for 5 minutes.
  Ms. KAPTUR. Madam Speaker, last Sunday, Treasury Secretary Geithner 
and the President's economic adviser, Larry Summers, both Wall Street 
men, wrote an editorial laying out their case for financial regulatory 
reform, or at least that is what they called it. It fell far short of 
the mark.
  They stated the basis of their proposal is the theory ``the financial 
system failed to perform its function as a

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reducer and redistributor of risk.'' Let me repeat that. Their 
fundamental principle is ``the financial system failed to perform its 
function as a reducer and redistributor of risk.'' They then advised 
the President to use that idea as the basis of what he proposes.
  I beg to disagree. The purpose our financial system should be to 
assure sound credit. A financial system should be structured to promote 
responsible lending and responsible savings practices. We have seen the 
result of a financial system that lost its way and traveled down the 
road of high risk-taking with other people's money, a system with no 
boundaries, no accountability and inherently unstable.
  Securitization and risk were at the heart of that failed system. Have 
we learned nothing? Securitization may spread out risk, but it does not 
spread out damage when it fails. We see that clearly enough today.
  Who on Wall Street who led the charge on high risk-taking is 
suffering today? They are getting bonuses. I cannot say that for those 
Americans who are losing their jobs, their homes and their businesses.
  Enshrining securitization and risk at the heart of their proposal is 
absolutely the wrong end of the road to be starting at. Securitization 
has nothing to do with sound credit. Securitization removes the 
connection between the lender and the borrower. It does nothing to 
assure sound credit, nor encourage savings and prudent lending. The 
lender sells the loan, and they are done. What does the lender care if 
the profit has been made? They don't.
  We don't need more securitization, more credit default swaps, more 
derivatives and more obligations that are hedged so many times that no 
one can even find them.
  The financial regulatory reforms the administration released this 
week do not restore prudent financial behavior. That is what is 
necessary to lead us out of this economic darkness. America needs a 
credit system that is safe and sound, not risky and not overleveraged.
  Yesterday in The New York Times, and I will place this article in the 
Record, Joe Nocera said that if President Obama wants to create 
regulatory reform that will last for decades, he needs to do what 
Roosevelt did. ``He is going to have to make some bankers,'' and I 
would add security dealers, ``mad.''
  But why are Mr. Geithner and Mr. Summers protecting Wall Street? To 
date, the executive branch has been barking about the too-big-to-fail 
institutions. But the best they have done is nip at the edges of real 
reform and fixing what is wrong. Did AIG teach us nothing? An 
institution that is too big to fail is too big to exist.
  Wall Street's bailout taught banks exactly the wrong lesson. It 
taught them, be reckless. The U.S. Government will make sure you do not 
take a hit. Just keep your campaign contributions rolling our way.
  Take a look at derivatives in their proposal. Why only regulate 
normal boring derivatives when the derivatives that got us here are the 
exotic ones that are being protected from regulation? Do we need yet 
another credit default swap debacle to teach us that every derivative 
needs to be regulated in a transparent way and over the counter? Didn't 
the President campaign on transparency? Isn't the best disinfectant 
sunshine? Let the sun shine too on the Federal Reserve.
  Do you know that the Federal Reserve is responsible for regulating 
mortgage lending? But did the Federal Reserve act when the FBI warned 
in 2004 that the subprime mortgage fraud could become an epidemic? No. 
So if the FBI warned an epidemic was ahead on something that the 
Federal Reserve regulated and the Federal Reserve failed to act, what 
makes us think that they can actually regulate anything, and why should 
we give them more power, which the administration proposal does?
  Many more questions need to be asked about financial regulatory 
reform. We should not rubber-stamp the administration's first idea. Our 
people want a sound credit system. We should ask for no less.
  The first goal of our banking system, as opposed to a securities 
system, should be to create a safe and sound credit system, one that 
promotes responsible savings and lending practices. Prudent financial 
behavior by individuals and institutions should be its primary purpose. 
The administration's priorities tell me they plan a much larger role 
for higher-risk securities in whatever system they are envisioning, 
which to me threatens higher-risk behavior.
  Banks traditionally have served as intermediaries between people who 
have money--depositors--and those who need money--borrowers. The banks' 
value-added was their ability to loan money sensibly and manage and 
collect the loans. Securitization broke down that system. The banks 
didn't much care about making sensible loans as long as they could sell 
them. The regulators didn't stay on top of it because they foolishly 
thought the banks had gotten the loans off their balance sheets and the 
chickens would not come home to roost.

               [From The Washington Post, June 15, 2009]

                       A New Financial Foundation

               (By Timothy Geithner and Lawrence Summers)

       Over the past two years, we have faced the most severe 
     financial crisis since the Great Depression. The financial 
     system failed to perform its function as a reducer and 
     distributor of risk. Instead, it magnified risks, 
     precipitating an economic contraction that has hurt families 
     and businesses around the world.
       We have taken extraordinary measures to help put America on 
     a path to recovery. But it is not enough to simply repair the 
     damage. The economic pain felt by ordinary Americans is a 
     daily reminder that, even as we labor toward recovery, we 
     must begin today to build the foundation for a stronger and 
     safer system.
       This current financial crisis had many causes. It had its 
     roots in the global imbalance in saving and consumption, in 
     the widespread use of poorly understood financial 
     instruments, in shortsightedness and excessive leverage at 
     financial institutions. But it was also the product of basic 
     failures in financial supervision and regulation.
       Our framework for financial regulation is riddled with 
     gaps, weaknesses and jurisdictional overlaps, and suffers 
     from an outdated conception of financial risk. In recent 
     years, the pace of innovation in the financial sector has 
     outstripped the pace of regulatory modernization, leaving 
     entire markets and market participants largely unregulated.
       That is why, this week--at the president's direction, and 
     after months of consultation with Congress, regulators, 
     business and consumer groups, academics and experts--the 
     administration will put forward a plan to modernize financial 
     regulation and supervision. The goal is to create a more 
     stable regulatory regime that is flexible and effective; that 
     is able to secure the benefits of financial innovation while 
     guarding the system against its own excess.
       In developing its proposals, the administration has focused 
     on five key problems in our existing regulatory regime--
     problems that, we believe, played a direct role in producing 
     or magnifying the current crisis.
       First, existing regulation focuses on the safety and 
     soundness of individual institutions but not the stability of 
     the system as a whole. As a result, institutions were not 
     required to maintain sufficient capital or liquidity to keep 
     them safe in times of system-wide stress. In a world in which 
     the troubles of a few large firms can put the entire system 
     at risk, that approach is insufficient.
       The administration's proposal will address that problem by 
     raising capital and liquidity requirements for all 
     institutions, with more stringent requirements for the 
     largest and most interconnected firms. In addition, all 
     large, interconnected firms whose failure could threaten the 
     stability of the system will be subject to consolidated 
     supervision by the Federal Reserve, and we will establish a 
     council of regulators with broader coordinating 
     responsibility across the financial system.
       Second, the structure of the financial system has shifted, 
     with dramatic growth in financial activity outside the 
     traditional banking system, such as in the market for asset-
     backed securities. In theory, securitization should serve to 
     reduce credit risk by spreading it more widely. But by 
     breaking the direct link between borrowers and lenders, 
     securitization led to an erosion of lending standards, 
     resulting in a market failure that fed the housing boom and 
     deepened the housing bust.
       The administration's plan will impose robust reporting 
     requirements on the issuers of asset-backed securities; 
     reduce investors' and regulators' reliance on credit-rating 
     agencies; and, perhaps most significant, require the 
     originator, sponsor or broker of a securitization to retain a 
     financial interest in its performance.
       The plan also calls for harmonizing the regulation of 
     futures and securities, and for

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     more robust safeguards of payment and settlement systems and 
     strong oversight of ``over the counter'' derivatives. All 
     derivatives contracts will be subject to regulation, all 
     derivatives dealers subject to supervision, and regulators 
     will be empowered to enforce rules against manipulation and 
     abuse.
       Third, our current regulatory regime does not offer 
     adequate protections to consumers and investors. Weak 
     consumer protections against subprime mortgage lending bear 
     significant responsibility for the financial crisis. The 
     crisis, in turn, revealed the inadequacy of consumer 
     protections across a wide range of financial products--from 
     credit cards to annuities.
       Building on the recent measures taken to fight predatory 
     lending and unfair practices in the credit card industry, the 
     administration will offer a stronger framework for consumer 
     and investor protection across the board.
       Fourth, the federal government does not have the tools it 
     needs to contain and manage financial crises. Relying on the 
     Federal Reserve's lending authority to avert the disorderly 
     failure of nonbank financial firms, while essential in this 
     crisis, is not an appropriate or effective solution in the 
     long term.
       To address this problem, we will establish a resolution 
     mechanism that allows for the orderly resolution of any 
     financial holding company whose failure might threaten the 
     stability of the financial system. This authority will be 
     available only in extraordinary circumstances, but it will 
     help ensure that the government is no longer forced to choose 
     between bailouts and financial collapse.
       Fifth, and finally, we live in a globalized world, and the 
     actions we take here at home--no matter how smart and sound--
     will have little effect if we fail to raise international 
     standards along with our own. We will lead the effort to 
     improve regulation and supervision around the world.
       The discussion here presents only a brief preview of the 
     administration's forthcoming proposals. Some people will say 
     that this is not the time to debate the future of financial 
     regulation, that this debate should wait until the crisis is 
     fully behind us. Such critics misunderstand the nature of the 
     challenges we face. Like all financial crises, the current 
     crisis is a crisis of confidence and trust. Reassuring the 
     American people that our financial system will be better 
     controlled is critical to our economic recovery.
       By restoring the public's trust in our financial system, 
     the administration's reforms will allow the financial system 
     to play its most important function: transforming the 
     earnings and savings of workers into the loans that help 
     families buy homes and cars, help parents send kids to 
     college, and help entrepreneurs build their businesses. Now 
     is the time to act.

     
                                  ____
                [From the New York Times, June 18, 2009]

    Talking Business--Only a Hint of Roosevelt in Financial Overhaul

                            (By Joe Nocera)

       Three quarters of a century ago, President Franklin 
     Roosevelt earned the undying enmity of Wall Street when he 
     used his enormous popularity to push through a series of 
     radical regulatory reforms that completely changed the norms 
     of the financial industry.
       Wall Street hated the reforms, of course, but Roosevelt 
     didn't care. Wall Street and the financial industry had 
     engaged in practices they shouldn't have, and had helped lead 
     the country into the Great Depression. Those practices had to 
     be stopped. To the president, that's all that mattered.
       On Wednesday, President Obama unveiled what he described as 
     ``a sweeping overhaul of the financial regulatory system, a 
     transformation on a scale not seen since the reforms that 
     followed the Great Depression.''
       In terms of the sheer number of proposals, outlined in an 
     88-page document the administration released on Tuesday, that 
     is undoubtedly true. But in terms of the scope and breadth of 
     the Obama plan--and more important, in terms of its overall 
     effect on Wall Street's modus operandi--it's not even close 
     to what Roosevelt accomplished during the Great Depression.
       Rather, the Obama plan is little more than an attempt to 
     stick some new regulatory fingers into a very leaky financial 
     rather than rebuild the dam itself. Without question, the 
     latter would be more difficult, more contentious and probably 
     more expensive. But it would also have more lasting value.
       On the surface, there was no area of the financial industry 
     the plan didn't touch. ``I was impressed by the real estate 
     it covered,'' said Daniel Alpert, the managing partner of 
     Westwood Capital. The president's proposal addresses 
     derivatives, mortgages, capital, and even, in the wake of the 
     American International Group fiasco, insurance companies. 
     Among other things, it would give new regulatory powers to 
     the Federal Reserve, create a new agency to help protect 
     consumers of financial products, and make derivative-trading 
     more transparent. It would give the government the power to 
     take over large bank holding companies or troubled investment 
     banks--powers it doesn't have now--and would force banks to 
     hold onto some of the mortgage-backed securities they create 
     and sell to investors.
       But it's what the plan doesn't do that is most notable.
       Take, for instance, the handful of banks that are ``too big 
     to fail''--and which, in some cases, the government has had 
     to spend tens of billions of dollars propping up. In a recent 
     speech in China, the former Federal Reserve chairman--and 
     current Obama adviser--Paul Volcker called on the government 
     to limit the functions of any financial institution, like the 
     big banks, that will always be reliant on the taxpayer should 
     they get into trouble. Why, for instance, should they be 
     allowed to trade for their own account--reaping huge profits 
     and bonuses if they succeed--if the government has to bail 
     them out if they make big mistakes, Mr. Volcker asked.
       Many experts, even at the Federal Reserve, think that the 
     country should not allow banks to become too big to fail. 
     Some of them suggest specific economic disincentives to 
     prevent growing too big and requirements that would break 
     them up before reaching that point.
       Yet the Obama plan accepts the notion of ``too big to 
     fail''--in the plan those institutions are labeled ``Tier 1 
     Financial Holding Companies''--and proposes to regulate them 
     more ``robustly.'' The idea of creating either market 
     incentives or regulation that would effectively make banking 
     safe and boring--and push risk-taking to institutions that 
     are not too big to fail--isn't even broached.
       Or take derivatives. The Obama plan calls for plain vanilla 
     derivatives to be traded on an exchange. But standard, plain 
     vanilla derivatives are not what caused so much trouble for 
     the world's financial system. Rather it was the so-called 
     bespoke derivatives--customized, one-of-a-kind products that 
     generated enormous profits for institutions like A.I.G. that 
     created them, and, in the end, generated enormous damage to 
     the financial system. For these derivatives, the Treasury 
     Department merely wants to set up a clearinghouse so that 
     their price and trading activity can be more readily seen. 
     But it doesn't attempt to diminish the use of these bespoke 
     derivatives.
       ``Derivatives should have to trade on an exchange in order 
     to have lower capital requirements,'' said Ari Bergmann, a 
     managing principal with Penso Capital Markets. Mr. Bergmann 
     also thought that another way to restrict the bespoke 
     derivatives would be to strip them of their exemption from 
     the antigambling statutes. In a recent article in The 
     Financial Times, George Soros, the financier, wrote that 
     ``regulators ought to insist that derivatives be homogeneous, 
     standardized and transparent.'' Under the Obama plan, 
     however, customized derivatives will remain an important part 
     of the financial system.
       Everywhere you look in the plan, you see the same thing: 
     additional regulation on the margin, but nothing that amounts 
     to a true overhaul. The new bank supervisor, for instance, is 
     really nothing more than two smaller agencies combined into 
     one. The plans calls for new regulations aimed at the ratings 
     agencies, but offers nothing that would suggest radical 
     revamping.
       The plan places enormous trust in the judgment of the 
     Federal Reserve--trust that critics say has not really been 
     borne out by its actions during the Internet and housing 
     bubbles. Firms will have to put up a little more capital, and 
     deal with a little more oversight, but once the financial 
     crisis is over, it will, in all likelihood, be back to 
     business as usual.
       The regulatory structure erected by Roosevelt during the 
     Great Depression--including the creation of the Securities 
     and Exchange Commission, the establishment of serious banking 
     oversight, the guaranteeing of bank deposits and the passage 
     of the Glass-Steagall Act, which separated banking from 
     investment banking--lasted six decades before they started to 
     crumble in the 1990s. In retrospect, it would be hard to 
     envision even the best-constructed regulation lasting more 
     than that. If Mr. Obama hopes to create a regulatory 
     environment that stands for another six decades, he is going 
     to have to do what Roosevelt did once upon a time. He is 
     going to have make some bankers mad.

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