[Congressional Record (Bound Edition), Volume 155 (2009), Part 12]
[House]
[Pages 15927-15928]
[From the U.S. Government Publishing Office, www.gpo.gov]




                 CREATE A SAFE AND 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, 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. In this system, the availability of credit is crucial, and 
that's what's missing today across our country. Earlier today, Vice 
President Joe Biden held a town hall meeting in the Toledo, Ohio, area. 
He heard from Governor Ted Strickland and others that one of the 
biggest economic challenges facing Ohio remains an inability of 
businesses to obtain the credit they need. The reason is because our 
banking system suffered a heart attack last year and still hasn't fully 
recovered.
  Safe and sound credit and prudent financial behavior by individuals 
and institutions should be our Nation's financial system's primary 
purpose. The administration's priorities tell me it plans a much larger 
role for higher-risk securities in whatever system they are 
envisioning, which to me threatens more 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 
within parameters of $10 of loans with every dollar on deposit and thus 
sensibly and responsibly managing their deposits and collecting on the 
loans that they were to oversee.
  Wall Street's high-risk securitization destroyed that system. The 
banks didn't much care about making sensible loans as long as they 
could sell them off somewhere. The regulators were not on top of this 
because the loans were off the banks' books. So why would the 
regulators care? These loans were now somebody else's problem, not 
theirs.
  Where has the epidemic of securitization taken us?
  Well, if you look at the government-backed Freddie Mac and Fannie Mae 
secondary markets, they became the larger purchaser of securitized 
mortgages. In case you forgot, its we, the taxpayers, who own both 
Fannie Mae and Freddie Mac.
  But these securitized mortgage bodies bought too many bad loans, 
which contributed to those institutions' downfall. Who is profiting 
from this? Because, yes, there are certain organizations that are 
profiting royally from the downfall of Freddie Mac and Fannie Mae. It 
is not our constituents, it's not our Treasury, which collects our tax 
dollars.
  There are four entities at least that are profiting, and I would like 
to target on one tonight, BlackRock. That's a company that isn't a 
bank. And why on that one in particular? Because its current CEO 
Lawrence Fink coincidentally, some might say, sold Freddie Mac its 
first $1 billion in collateralized mortgage obligations. Euromoney.com 
states, ``Larry Fink is one of the pioneers of the mortgage-backed 
securities market. As a trader at [then] First Boston a quarter of a 
century ago, he pitched the first collateralized mortgage obligation 
that Freddie Mac ever did.''
  So Larry Fink had a hand in making financial instruments that have 
brought Freddie Mac and our financial system to its knees, yet the 
company he leads now profits from his mistake.
  Now BlackRock just won a big contract with the Federal Reserve Bank 
of New York to manage the toxic assets of Freddie Mac and Fannie Mae in 
their collateralized mortgage obligations.
  It's a mess that he help to create, but now we have hired the same 
man to clean it up? One question I have to ask is how can we be sure he 
isn't self-dealing or covering up what he did in the last quarter 
century? Some might say that relationship is a bit incestuous.
  The administration's financial regulatory reform proposal includes 
some consideration for dealing with too-big-to-fail institutions but, 
rather than create an architecture that keeps risk in hand, what they 
are doing is they are allowing institutions like BlackRock to become 
too big to fail.
  In fact, BlackRock's assets are now larger with the purchase of 
Barclays than the entire Federal Reserve system itself. So BlackRock, 
although not a bank, is getting too big to fail, perhaps? Is BlackRock 
favoritism an example of how we should be rebuilding our financial 
system?
  Paul Krugman thinks not. He states, ``In short, Mr. Obama has a clear 
vision of what went wrong, but aside from regulating shadow banking, no 
small thing, to be sure, his plan basically punts on the question of 
how to keep it from happening all over again, pushing the hard 
decisions off to future regulators.''
  Now is not the time to punt. It's the time for reform. The time the 
has been not as ripe since Roosevelt. We really need a President who 
will lead and a Congress as well, not following the guidance of Wall 
Street, but going back to prudent lending and recreating a safe and 
sound banking system across this country.

                [From the New York Times, June 19, 2009]

                           Out of the Shadows

                           (By Paul Krugman)

       Would the Obama administration's plan for financial reform 
     do what has to be done? Yes and no.
       Yes, the plan would plug some big holes in regulation. But 
     as described, it wouldn't end the skewed incentives that made 
     the current crisis inevitable.
       Let's start with the good news.
       Our current system of financial regulation dates back to a 
     time when everything that functioned as a bank looked like a 
     bank. As long as you regulated big marble buildings with rows 
     of tellers, you pretty much had things nailed down.
       But today you don't have to look like a bank to be a bank. 
     As Tim Geithner, the Treasury secretary, put it in a widely 
     cited speech last summer, banking is anything that involves 
     financing ``long-term risky and relatively illiquid assets'' 
     with ``very short-term liabilities.'' Cases in point: Bear 
     Stearns and Lehman, both of which financed large investments 
     in risky securities primarily with short-term borrowing.
       And as Mr. Geithner pointed out, by 2007 more than half of 
     America's banking, in this sense, was being handled by a 
     ``parallel financial system''--others call it ``shadow 
     banking''--of largely unregulated institutions. These non-
     bank banks, he ruefully noted, were ``vulnerable to a classic 
     type of run, but without the protections such as deposit 
     insurance that the banking system has in place to reduce such 
     risks.''
       When Lehman fell, we learned just how vulnerable shadow 
     banking was: a global run on the system brought the world 
     economy to its knees.
       One thing financial reform must do, then, is bring non-bank 
     banking out of the shadows.
       The Obama plan does this by giving the Federal Reserve the 
     power to regulate any large financial institution it deems 
     ``systemically important''--that is, able to create havoc if 
     it fails--whether or not that institution is a traditional 
     bank. Such institutions would be required to hold relatively 
     large amounts of capital to cover possible losses, relatively 
     large amounts of cash to cover possible demands from 
     creditors, and so on.
       And the government would have the authority to seize such 
     institutions if they appear insolvent--the kind of power that 
     the Federal Deposit Insurance Corporation already has with 
     regard to traditional banks, but that has been lacking with 
     regard to institutions like Lehman or A.I.G.
       Good stuff. But what about the broader problem of financial 
     excess?
       President Obama's speech outlining the financial plan 
     described the underlying problem very well. Wall Street 
     developed a ``culture of irresponsibility,'' the president 
     said. Lenders didn't hold on to their loans, but instead sold 
     them off to be repackaged into securities, which in turn were 
     sold to investors who didn't understand what they were 
     buying. ``Meanwhile,'' he said, ``executive compensation--
     unmoored from long-term performance or even reality--rewarded 
     recklessness rather than responsibility.''
       Unfortunately, the plan as released doesn't live up to the 
     diagnosis.
       True, the proposed new Consumer Financial Protection Agency 
     would help control abusive lending. And the proposal that 
     lenders be required to hold on to 5 percent of their loans, 
     rather than selling everything off to be repackaged, would 
     provide some incentive to lend responsibly.
       But 5 percent isn't enough to deter much risky lending, 
     given the huge rewards to financial executives who book 
     short-term profits. So what should be done about those 
     rewards?
       Tellingly, the administration's executive summary of its 
     proposals highlights ``compensation practices'' as a key 
     cause of the crisis, but then fails to say anything about 
     addressing those practices. The long-form

[[Page 15928]]

     version says more, but what it says--``Federal regulators 
     should issue standards and guidelines to better align 
     executive compensation practices of financial firms with 
     long-term shareholder value''--is a description of what 
     should happen, rather than a plan to make it happen.
       Furthermore, the plan says very little of substance about 
     reforming the rating agencies, whose willingness to give a 
     seal of approval to dubious securities played an important 
     role in creating the mess we're in.
       In short, Mr. Obama has a clear vision of what went wrong, 
     but aside from regulating shadow banking--no small thing, to 
     be sure--his plan basically punts on the question of how to 
     keep it from happening all over again, pushing the hard 
     decisions off to future regulators.
       I'm aware of the political realities: getting financial 
     reform through Congress won't be easy. And even as it stands 
     the Obama plan would be a lot better than nothing.
       But to live up to its own analysis, the Obama 
     administration needs to come down harder on the rating 
     agencies and, even more important, get much more specific 
     about reforming the way bankers are paid.

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