[Congressional Record (Bound Edition), Volume 155 (2009), Part 9]
[House]
[Pages 12401-12403]
[From the U.S. Government Publishing Office, www.gpo.gov]




               RECOGNIZING BRADY PLAN'S 20TH ANNIVERSARY

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentlewoman from Wyoming (Mrs. Lummis) is recognized for 5 minutes.
  Mrs. LUMMIS. Mr. Speaker, I rise today to recognize the 20th 
anniversary of the Brady Plan and in honor of former Treasury Secretary 
Nicholas Brady. The Brady Plan launched a new era of growth, 
development, and capital market access for emerging market economies.
  While Brady Bonds themselves have been largely superseded by newer 
instruments, the Brady Plan encouraged many emerging market countries 
to adopt and pursue ambitious economic reform programs which have been 
instrumental in the progress achieved during the last 20 years.
  On April 25, I attended a commemorative dinner in honor of Nicholas 
Brady and his many accomplishments. As Secretary of the Treasury under 
President George H.W. Bush, Mr. Brady was instrumental in resolving 
Latin American debt problems.
  I was honored to hear Mr. Brady speak on the current economic crisis 
and credit crunch, as well as present his proposal for reform. As he 
stated, we must have boldness, clarity, and determination today, just 
as they did in 1989 in order to build prosperity out of this crisis.
  International economic experts who attended the dinner praised Mr. 
Brady's work, while also noting how important trust, integrity, and 
personal relationships are in formulating global policy. The same is 
true today.
  Our actions today to solve the economic crisis cannot and should not 
be done in haste. The politically charged environment of Congress makes 
the creation of effective long-term policy extremely difficult. 
Consequently, Mr. Brady's remarks supported the creation of an 
independent commission, to find the root cause of our economic 
situation and to propose reforms to our financial system.
  I support such a bipartisan commission. As Mr. Brady stated, ``It is 
vital not just that far-reaching, complex reform of the financial 
system be pursued prudently but in a bipartisan manner in order to gain 
national support. After all, the purpose is to revive public confidence 
in the system itself.''
  I was disappointed to see the Financial Markets Commission in S. 386, 
the Fraud Enforcement and Recovery Act, pass the House with a makeup of 
six Democrats and four Republicans. That is why last week I opposed 
this commission while at the same time agreeing to cosponsor H.R. 2111, 
the Congressional Commission on Financial Accountability and 
Preparedness Act of 2009. H.R. 2111's commission will have two members 
appointed from each side of the aisle and a mutually agreed upon fifth 
member to chair. This is true bipartisanship and is what is needed to 
find the real root causes and solutions to our financial crisis.
  I hope that submitting Mr. Brady's speech for the Record will spark a 
debate in Congress over the necessity for a bipartisan commission and 
how we, as a Nation, will move forward.
                                                   April 25, 2009.

                   20th Anniversary of the Brady Plan

                         (By Nicholas F. Brady)

       Washington, DC.--Good evening. I'd like to thank Charles 
     Dallara and the IIF for organizing this gathering of old and 
     new friends to celebrate the 20th anniversary of the Brady 
     Plan. Although I've been given the honor of speaking, I'd 
     like to note that a great many of you here tonight share the 
     credit for making the Brady Plan a success. And I want to 
     thank you all of you who have spoken so generously.
       Let's start with why the Brady Plan was called the Brady 
     Plan. We had been negotiating with Mexico since March 1989 
     under the rubric of what we called ``the new debt strategy.'' 
     In July, while we were in Paris for the Group of Seven 
     Summit, we had a major breakthrough with Mexico. When 
     President Bush, No. 41, held the traditional end-of-summit 
     press conference before 1,000 reporters, one journalist asked 
     the president if he was going to call the new strategy the 
     Bush Plan. He didn't miss a beat before answering, ``No, 
     we're going to call it the Brady Plan. Then if it works, 
     we'll call it the Bush Plan.'' The audience erupted into 
     laughter, and the president, with his marvelous sense of 
     humor, repeated the line so many times in the following days 
     that the name stuck.
       There are uncanny parallels between the situation we find 
     ourselves in today and the one the Bush administration 
     confronted a generation ago. We faced a three-pronged crisis, 
     including the credit markets, the real-estate market, and the 
     budget just as the Obama administration does now. So it may 
     be useful to recall the issues and challenges of the late 
     '80s and early '90s as we try to resolve current problems and 
     move into the future.
       First of all there was a serious LDC debt crisis. It's easy 
     to forget that in 1988 our banking system was in dire straits 
     because the commercial banks held billions of dollars of 
     loans in countries whose economic prospects had ground to a 
     halt. Three weeks into my job as Treasury secretary, the late 
     Gustavo Petricioli, then Mexico's ambassador to the United 
     States, called for an urgent meeting at the Treasury 
     department to tell me that Mexico was threatening to default 
     on its international bank loans. Talk about reality. It 
     didn't take much imagination to grasp that if Mexico took 
     that route then a string of Latin American economies likely 
     would follow and that a volatile region would move from chaos 
     to danger.
       Clearly a new approach was needed. For several years before 
     I got to the Treasury, people had come in with various papers 
     and solutions, all aimed at alleviating the debt overhang, 
     but none really accomplished that. In a huge stroke of good 
     fortune, I inherited two brilliant people at Treasury--David 
     Mulford and Charles Dallara--and the first thing we did was 
     to write a paper that came to be known as the ``Truth Serum 
     Paper.'' We worked days, nights, and weekends to establish a 
     detailed description of the problems we faced, of what the 
     fundamental realities were. No troublesome obstacle was 
     passed over. Among the indisputable points we laid out were 
     that new money commitments had dried up in the past 12 months 
     and that many banks were negotiating private sales of LDC 
     paper at steep discounts while maintaining their claim on the 
     countries that the loans were still worth 100 cents on the 
     dollar. There were more, and they were equally sobering.
       We used these irrefutable facts as a starting point in all 
     subsequent meetings. Our rule was that no suggestions were 
     permitted to be discussed if they didn't accept the Truth 
     Serum. They were off the table. Goodbye. Don't waste time.
       I felt that the solution to too much debt was not more debt 
     but less. From there, you know the rest: we persuaded the 
     international commercial banks--at first with great 
     difficulty--to write down the stated value of the loans on 
     their books to something close to market value in exchange 
     for that lesser amount of host-country bonds backed by U.S. 
     zero-coupon Treasuries. The Brady Plan was achieved at a 
     negligible cost to the U.S. government. Yet it led to the 
     restructuring, for example, of more than $100 billion of 
     foreign bank debt for Mexico, Brazil, and Argentina alone. 
     The plan broke the debt gridlock and opened the door for 
     economic growth and social development in Latin America after 
     the lost decade of the 1980s. And it created a new asset 
     class: publicly traded sovereign debt--Brady Bonds--that grew 
     to exceed half a trillion dollars. The process bought time, 
     and the bonds helped to provide funds to developing nations 
     in exchange for long-lasting reforms by the participating 
     countries.
       A second initiative the Bush 41 administration had to 
     undertake was to reconstitute the savings and loan industry 
     and the real-estate market it financed--a problem not of 
     President Bush's making. We created the

[[Page 12402]]

     Resolution Trust Corporation to take over some 750 insolvent 
     savings banks, which reintroduced vibrancy into the real-
     estate market. In order to do this, we had no choice but to 
     seek funding from Congress and undergo the intense political 
     criticism that came with it. So we took the heat and moved on 
     to solve the problem. Leadership can be painful. The final 
     tab for cleaning up the S&L mess was $165 billion, including 
     what was spent before we arrived. While this is not trivial, 
     it didn't come close to estimates by businesses, politicians, 
     and the media, which estimated that it would cost us $500 
     billion. I've been asked a number of times what reversed that 
     era's negative thinking--and when. My firm conclusion is that 
     it subsided in direct proportion to the weekly successful 
     results recorded by the RTC to close the bankrupt S&Ls, 
     gather up the real estate they held, and sell it promptly 
     into the market.
       Third, in a major contrast to today, we set about to reign 
     in escalating spending by the U.S. government, which was, for 
     that day and age, clearly out of control. The Budget Act of 
     1990 established binding caps on the amount that Congress 
     could spend on discretionary items. It was easy to see--and 
     it was easy for me to recommend--that that's what the country 
     needed. But President Bush, who had uttered the famous words, 
     ``No new taxes,'' in his 1988 election campaign, said to me 
     more than once, ``The trouble with you, Brady, is that you 
     never ran for sheriff.'' The record should be clear that 
     George Bush fully grasped the political ramifications of 
     designing this legislation, but he decided it was the right 
     thing to do for the country. And while the Budget Act 
     probably contributed to his reelection defeat in 1992, it was 
     an essential building block for the decade of economic growth 
     that followed.
       People constantly tell me that the problems we're dealing 
     with today are much more complex than those we faced 20 years 
     ago. Maybe. Maybe not. The issues didn't feel simple to us 
     back then, just as I'm sure they don't feel simple to 
     Secretary Tim Geithner and his associates at the Treasury 
     now.
       I won't spend a lot of time tonight trying to assign blame 
     for the current crisis; I've been gone from Wall Street too 
     long. In broad strokes I would say that when I came to Wall 
     Street in 1954, it was a profession, one that financed the 
     building of this country's industrial capacity and 
     infrastructure. Year by year, however, the industry's 
     emphasis has moved away from that purpose and toward 
     financial innovation for financial profit's sake. Of course, 
     many banks have served their clients well and their hard work 
     has been a positive factor. Nevertheless, the U.S. Department 
     of Commerce figures show that from 1980 to 1982, the 
     financial sector accounted for an average of 9.1 percent of 
     U.S. total corporate profits. By 2005 to 2007 that three-year 
     average had more than tripled, to 28.6 percent.
       The particulars of today's collapse in judgment and common 
     sense have been laid out in chapter and verse, so just I'll 
     say briefly, first, that the whole notion that risk can be 
     measured by a mathematical formula is based on the illusion 
     of reality. Second, the desire for the improved returns 
     generated by high leverage led the purveyors of this risk to 
     push it beyond any reasonable boundaries.
       But while assigning villainy to CEOs of banks and other 
     institutions may be high theater, playing to our country's 
     justifiable anger is counterproductive. There are many good 
     people in the industry, people who inevitably will--and 
     should--be called on to work through the malfunctions in the 
     system. The political process should concentrate now on how 
     to fix the financial system and let the country's legal arm 
     ferret out and deal with the wrong doers.
       A core issue today is that the government has yet to 
     adequately describe the roots of the financial crisis to its 
     citizens and therefore to fully pinpoint its size. It's been 
     my experience that you can't fix what you can't explain. This 
     leads one to think that the solution lies in providing 
     ringing clarity on how the housing market burst, how the 
     market excesses spread beyond housing, how these forces were 
     fueled and then accelerated by our outsized external 
     imbalances, and, with this knowledge, decide how markets can 
     now be stabilized.
       At the same time, it's hard to see how our national leaders 
     have helped the country dig out of its very real problems 
     when they devalue each public pronouncement with the caveat: 
     ``Remember, it's not over yet.''
       Their caution reminds me of a story that was told to me by 
     a friend, Bob Kleberg, who was the head of the King Ranch, 
     the largest ranch in the United States, about a college 
     commencement ceremony in his hometown of Kingsville, Texas, 
     during the worst of the Great Depression. Bob had invited two 
     speakers. One was an earnest Ivy League economist and the 
     other was this country's most famous cowboy-philosopher, Will 
     Rogers. The economist, who spoke first, read a long and 
     languorous speech about how bad things were, leaving the 
     roomful of 21-year-olds wondering if there was any hope to be 
     had about their prospects. The conclusion of his speech was 
     met with nervous and polite applause, after which Will 
     Rogers, who was sitting in the front row, literally vaulted 
     up onto the stage. Facing the audience squarely he looked out 
     and said just six words: ``Live through it if you can.'' Then 
     he jumped off the stage and returned to his seat. Terse, 
     maybe. But they did live through it.
       And we will, too. So what should we do as the crisis 
     abates? Here, there is real work to be done. First we should 
     just come out and say it: the financial system that led us to 
     the brink of disaster is broken.
       How do we proceed?
       The first step would be to reduce the number of and 
     simplify the U.S. regulatory authorities, which include the 
     Federal Reserve, the OCC, the FDIC, the OTS, the CFTC, the 
     SEC, and state regulators too numerous to list. The easiest 
     part of this process is naming them! Nowhere else in the 
     world is the implementation of banking authority so diffuse, 
     and the choices they present to the governed result in 
     regulatory shopping for the softest touch. Be forewarned: 
     each one of these organizations has a protector in Congress, 
     and it will take a thunderbolt from the White House and 
     Congress to reorganize and streamline them. Tough as it will 
     be, the necessity is apparent to all, both here and abroad.
       The next step after marshaling the regulatory authorities 
     is to move on to the banking institutions themselves. Of 
     course we must be attendant to the fact that markets are 
     international and by definition interrelated and 
     interdependent. Yet a sense of order would dictate that we 
     tend to our own backyard before trying to gain consensus with 
     19 other countries.
       As I see it, we have two choices. The first is to repair 
     the current system, which is made of deposit-taking 
     institutions on the one hand and what's known as the shadow 
     banking system, or non-bank financial institutions, on the 
     other. Under this approach, we would subject the entire group 
     to one large, all-seeing regulatory system. Doing so would be 
     enormously complicated, and the more complicated the 
     regulatory system the less effective the regulation. In my 
     opinion it is a bridge too far.
       We need a stronger identity of purpose between the 
     regulators and the businesses subject to regulation beyond 
     mere adherence to the law. My own view is that in addition to 
     too many regulators, there is the further problem that the 
     regulators did not use their existing powers. They could have 
     halted the growth of the excessive leverage but did little. A 
     culture of systemic risk awareness has to be developed, with 
     clear guidelines to be followed regularly.
       Equally important, we need a financial system that has 
     untouchable safety and survivability as its main stem. This 
     would remove debate over whether any of its parts is too big 
     to fail. After all, we're talking about the people's money. 
     Is it operationally possible to combine the mechanics of the 
     shadow banking system, which has emphasized gigantic leverage 
     under-girded by stratospherically complex mathematical 
     formulae, with the principle of securing the people's money? 
     And as tempting as it is to tinker with the present system 
     instead of building a new one, is it the best we can do to 
     prevent another crisis?
       I believe that we need a simpler system centered on 
     deposit-based banks. Under this approach, individual accounts 
     in the depository banks would continue to be protected up to 
     $250,000 and these banks would have access to the country's 
     central bank. These institutions would not be allowed to 
     participate in markets involving inordinate leverage or 
     equity transactions that would risk their deposit-protecting 
     charter. In contrast to the current mode, when asked what 
     their primary purpose is, the banks' chief executives 
     wouldn't talk first about shareholder return. Instead they 
     would stand up and say: ``Our institution's primary purpose 
     is to repay the depositors' money. Of course this is not the 
     institutions' only purpose, and innovation within them as it 
     relates to the asset side of the balance sheet should be 
     encouraged as long as they keep a weather eye on leverage and 
     equity risks.
       The highly innovative shadow banking system with its mantra 
     of lower transaction costs, which would continue to introduce 
     new concepts, would fund itself from the money markets and 
     other sources but without federal guarantees and access to 
     America's central bank. Institutions that currently straddle 
     the two funding markets would have to choose which type of 
     business to pursue. I know this would provoke the immediate 
     cry that the financial system would be further pinched and 
     credit would further shrink. My answer is that any deposit-
     gathering system with a $250,000 guarantee from the U.S. 
     government and access to the central monetary authorities 
     would get all the deposits it needed to provide a vibrant 
     credit system.
       Admittedly, ironing out the details of such a vastly 
     complicated system is a task of the highest order, but I 
     believe it is attainable. You may have noticed that the 
     Senate voted this week to create an independent commission to 
     examine the root causes of the economic collapse and provide 
     a blueprint for the future, and the Speaker of the House 
     called for an inquiry similar to the Pecora Commission held 
     in the early 1930s that gave rise to that generation's new 
     securities laws. It takes me back. My first assignment as a

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     new hire at Dillon Read in 1954, where I stayed for the next 
     35 years, was to read the volume on securities from the 
     Pecora findings as an explanation for why we did things the 
     way we did.
       This country has had a long and important history of 
     independent commissions aimed at laying the groundwork for 
     solutions to national problems of huge moment. Independent is 
     the key word. Such commissions, which call on people with 
     deep knowledge of the underlying problem, have had as their 
     precept exposing fundamental realities. It's unfathomable why 
     such a suggestion has been so long in coming, except to note 
     that commissions terrify the powers that be, both inside and 
     outside the government. If properly constituted, however, 
     they bring together the best of the country's thinkers and 
     thinking, and they're often the only force that unifies the 
     nation. I've been dismayed to read that a number of lawmakers 
     who say they're for a commission nonetheless don't want it to 
     get in the way of acting now. That's exactly backwards. In my 
     view what we need is a rigorous debate and that takes time. 
     As the American writer and philosopher Ralph Waldo Emerson 
     once said, ``Counsel to which time hath not been called, time 
     will not ratify.''
       The composition of the commission is critically important: 
     it can shape the whole outcome. It should have the word 
     ``independent'' in its title. I believe its chair or chairs 
     should be appointed by the president and that its expert 
     membership should be appointed in equal numbers by the 
     Democratic and Republican leadership of both houses of 
     Congress. It is vital not just that far-reaching, complex 
     reform of the financial system be pursued prudently but in a 
     bipartisan manner in order to gain national support. After 
     all, the purpose is to revive public confidence in the system 
     itself.
       In conclusion, let me thank all of you for the great warmth 
     of your reception. We can all agree that thanks to so many of 
     you in this room tonight, including Charles and David, Bill 
     and Pedro and Angel, that the Brady Plan worked and that it 
     indeed set the base for significant prosperity over the past 
     20 years. I believe that if we can muster similar boldness, 
     clarity, and determination today, we can build prosperity 
     from this crisis and I look forward to working with you in 
     this endeavor.

                          ____________________