[Congressional Record (Bound Edition), Volume 156 (2010), Part 1]
[Senate]
[Pages 1244-1247]
[From the U.S. Government Publishing Office, www.gpo.gov]




                     FINANCIAL AND ECONOMIC REFORM

  Mr. KAUFMAN. Mr. President, since the financial meltdown in 2008, 
America and Congress have remained stuck at a crossroads. Not since the 
Great Depression of the 1930s have we experienced a financial and 
economic crisis of such magnitude that it forces us as a society and 
lawmaking body to reconsider the legal and institutional underpinnings 
of our financial system.
  The history of our Nation shows we have been at this crossroads 
before. At times, we have made the right decision,

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but, sadly, at other times we have made the wrong one.
  Throughout the 19th century and the early part of the 20th century, 
the complacency of government and the contrivances of powerful, moneyed 
interests prevented us from achieving fundamental reform of our 
financial and monetary structures. The result was, our history was 
replete with all-too-frequent banking panics.
  Regrettably, it took well over a century before we heeded the clarion 
call for reform.
  The shared experience of the Great Depression thrust us into the 
harsh reality that the status quo was bankrupt. Out of the ashes of 
that crisis, we built a legal and regulatory edifice that has endured 
for decades.
  One of the cornerstones of that edifice was a federally guaranteed 
insurance fund to back up bank deposits. Another was the Glass-Steagall 
Act which established a firewall between commercial and investment 
banking activities. Other rules were imposed on investors to tamp down 
rampant speculation, such as margin requirements and the uptick rule on 
short selling.
  For the next 50 years, the United States experienced relative 
financial calm and economic growth, with the normal business cycle 
providing the usual ups and downs, of course.
  The edifices built in the 1930s served us well until the 1980s and 
the savings and loan crisis, which itself was brought on by the 
rollback of rules that applied to thrifts.
  Unfortunately, the passage of time, and even after the shock of the 
S&L failures, the ideology of market fundamentalism began to sweep 
across our regulatory environment, erasing the clear lessons of 
history.
  Those market fundamentalists argued that our financial actors could 
police themselves, that their own self-interest in remaining 
financially viable would create sufficient incentive to do thorough due 
diligence, far exceeding the ability of regulators to limit excessive 
risk by rulemaking.
  Systematically, these fundamentalists worked to dismantle many of the 
prudential New Deal-era banking reforms. Their crowning achievement: 
the repeal of Glass-Steagall in 1999.
  Wall Street and Washington were possessed by this laissez faire ethos 
over the past 20 years. But it was this philosophy and the fountainhead 
of decisions that sprang from it that led us blithely, and perhaps 
blindly, down the path to our current crisis.
  Even Alan Greenspan, the avatar of the deregulatory mindset, has now 
admitted this dominant concept of self-regulation was ill-conceived.
  In a speech just 1 year ago this month before the Economic Club in 
New York, the former Fed Chairman of 19 years conceded that the 
``enlightened self-interest'' he had once assumed would ensure that 
Wall Street firms maintain a ``buffer against insolvency'' had failed.
  The sheer complexity of today's trading instruments and the supposed 
risk management tools used to ensure them against collapse was, he 
said, ``too much for even the most sophisticated market players to 
handle properly and prudently.''
  Mr. Greenspan, perhaps more than anyone else, should have known 
better. But instead of playing the role of the markets' fire chief, he 
played that of head cheerleader. For example, Mr. Greenspan applauded 
the trend of financial disintermediation, proclaiming that new 
innovations would allow risks to be dispersed throughout the system.
  Unfortunately, he failed to realize that products such as credit 
default swaps sometimes perversely encouraged banks to become empty 
creditors, since banks holding these default instruments could end up 
making more money if people and companies defaulted on their debts than 
if they actually paid them.
  Of course, this was just the tip of the iceberg. Despite having the 
power to write and enforce consumer protection standards, the Federal 
Reserve did nothing to combat deteriorating origination standards in 
mortgage and consumer loans.
  Mr. Greenspan signed off on regulations that gave banks the ability 
to set their own capital standards. He allowed banking institutions to 
leverage excessively by gorging on short-term liabilities and, in some 
cases, creating off-balance-sheet entities to warehouse their risky 
assets.
  In the wake of Wall Street excess and dereliction of duty by its 
regulators, financial ruin descended upon our country. Ultimately, it 
took extraordinary actions--including a multibillion-dollar taxpayer 
bailout--to prevent us from falling into the abyss of a second Great 
Depression. We narrowly avoided that fate.
  But now, when Congress should be hardest at work rebuilding the 
edifice that served us so well for decades, we are not. Instead, we are 
being lulled into a false sense of security.
  Many of Wall Street's biggest financial institutions, just a few 
months ago saved from oblivion by U.S. taxpayers, have already 
recovered. In some cases, they are even making record profits. Once 
again, they are back to their old tricks, in particular remaining 
obsessively fixated on short-term trading profits, with the help of 
zero percent loans from the Fed window, to drive their recovery.
  In fact, much of the competition was killed off in the crisis so that 
once stronger banks are now stronger still, allowing them to charge 
customers higher transaction fees, from equities to bonds to 
derivatives.
  Many on Wall Street are engaged in high-frequency trading strategies 
which, as the Chicago Federal Reserve branch wrote just this week, pose 
a systemic risk.
  Fair and transparent markets are a cornerstone of American democracy. 
But institutions on Wall Street are riven by obvious conflicts of 
interest, as banks and nonbanks continue to profit, even by taking 
positions directly adverse to those of their clients, and too big to 
fail remains a critical problem.
  Many on Wall Street are telling us it is too late to unscramble the 
egg, that we cannot separate banking and trading entities that over the 
past 10 years have become inextricably intertwined. But the Nation is 
counting on the Congress to do what is right. We must restore and 
preserve the credibility of our financial markets. We simply cannot 
fail to undertake what should be a dramatic reformation of our 
financial regulatory system.
  Especially as a depression--which is how today's economy feels to 
millions of Americans who lost their jobs, their homes, their 
retirement savings--continues across this country, we simply cannot 
squander the time for fundamental reform. We can never let a financial 
disaster happen again.
  So what must we do? Mr. Greenspan has called for heightened Federal 
regulation of banks and other financial institutions. But that is not 
at all sufficient.
  That is why I was deeply gratified last month when the Obama 
administration took an important step in pushing Congress in a stronger 
direction. The President put forward a plan that has been suggested by 
Mr. Greenspan's predecessor at the Fed, Paul Volcker. It went well 
beyond Mr. Greenspan's call for mere heightened regulation.
  Chairman Volcker's plan would ban commercial banks from engaging in 
proprietary trading that does not benefit their clients. In other 
words, as Mr. Volcker explained, banks should stick to banking, 
providing both credit to those who need it and an efficient global 
payment system, without which, of course, our worldwide economy cannot 
work.
  It is axiomatic to say banks should exist to serve their customers, 
not as platforms on which an elite class of traders make their careers 
and their mind-boggling bonuses.
  Sound advice, Mr. Chairman.
  Remarkably, some on Wall Street and in Washington have been arguing 
that proprietary trading did not cause the crisis, even though the 
crisis began on Wall Street with the collapse of a Bear Stearns hedge 
fund, even though all of the major firms involved in the crisis built 
up major proprietary positions in collateralized debt obligations and 
other securities.
  As Professor Roy Smith of New York University, a former Goldman Sachs 
partner, said:


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       Those weren't client-driven trades. They decided to take 
     them themselves. The idea that proprietary trades were a 
     trivial part of the losses at the banks is just not 
     realistic.

  This is from a New York University professor and former Goldman Sachs 
partner.
  These same critics are now looking to poke holes in the Volcker 
proposal--to put it to death by a thousand cuts. They state that 
proprietary trading can't be distinguished from normal market-making 
activities. They add that customer money is oftentimes invested 
alongside some of the firm's capital in proprietary ventures. Before it 
is even considered in Congress, they found facile arguments to 
undermine the very spirit of the proposal. These critics would leave 
the decisionmaking to the regulators, and I could not disagree more. We 
should not leave the decisionmaking to the regulators.
  So while I applaud Chairman Volcker's direction, I believe we need to 
go even further. We cannot pass the buck to our regulatory agencies. We 
have tried that before. They punted their responsibilities to the 
credit rating agencies and to the banks themselves, and we were left 
with disastrous consequences.
  As a recent feature in the Economist stated, the big issue we face is 
``not how to make regulation cleverer, but how to protect taxpayers 
from a huge bill when all the precautions fail and a bank steps into 
the void.''
  Congress needs to draw hard lines that get directly at the structural 
problems that afflict Wall Street and our largest banks. We must draw 
lines that divide financial institutions which are ``too big to fail.'' 
And we must draw lines that end the conflicts of interest that 
literally and inevitably serve to corrupt some of our most important 
financial institutions.
  I have been around the Senate for 37 years, and I know laws are 
usually not written with hard-and-fast lines. Laws are a product of 
legislative compromise, which often means they are vague and ambiguous, 
and we often justify our vagueness by saying that the regulators to 
whom we grant statutory authority are in a better position to write the 
rules and then to apply those regulatory rules on a case-by-case basis. 
Many times, they are right, but this is not one of those times.
  If Congress fails to draw hard lines that deliver on real systemic 
reforms, regulators cannot be counted upon to do what is needed. We 
need brick and mortar, not human judgment, to cleave the banks from 
investment banking again. We need stone walls, not regulatory 
oversight, to prevent institutional conflict of interests that 
inevitably bring financial disaster to millions of Americans. We must 
create a system, as the saying goes, of laws and not of men. While 
Congress is by nature a compromiser, we must do better than our usual 
legislative ambiguity. We must provide those agencies--the Fed, the 
SEC, the FDIC, the OCC, the CFTC, and others--the statutory clarity and 
the bright lines they need to enforce the law.
  That is why Congress needs a bold and clear plan that ends taxpayer 
bailouts for Wall Street and eliminates the problem of too big to fail. 
In my view, the core part of that plan must include three critical 
features:
  First, we must reimpose the kinds of protections we had under Glass-
Steagall, completely separating traditional commercial banking 
activities from the activities of investment banks.
  Second, we must impose size and leverage constraints on the nonbank 
players to ensure they never again--never again--become too big to 
fail.
  Third, we must address the fundamental conflict of interest in modern 
investment banking that permits proprietary trading to come before 
serving customers.
  I was proud to join Senators Cantwell and McCain in sponsoring a bill 
that would reimpose Glass-Steagall. By statutorily splitting apart 
massive financial institutions that house both banking and securities 
operations, we will go a long way toward fixing too big to fail.
  As important as reimposing the protections of Glass-Steagall, we must 
also understand that the financial world has changed enormously since 
it was last in place. An investment bank is no longer an advisory 
business where small partnerships jealously guard their capital. 
Instead, it is dominated by highly leveraged behemoths that trade for 
their own account. So while Glass-Steagall firewalls protect federally 
insured deposits and eliminate the conflicts in combining commercial 
and investment banking, it wouldn't eliminate the possibility of a 
large, leveraged, and interconnected firm such as Lehman Brothers from 
creating havoc in the financial system.
  For that reason, Congress must take other prudential steps. We can 
begin with the other concept put forward by the Obama-Volcker 
proposal--placing limits on debt. Wall Street banks were able to fly 
too high on borrowed wings by leveraging their threadbare capital base 
well over 30 times--30 times--allowing a firm such as Lehman Brothers 
to finance a trillion-dollar balance sheet of illiquid trading assets 
through short-term debt. I repeat, we cannot depend upon regulators and 
their discretionary judgments to ensure this does not happen again. 
Instead, we need a strict limit on the size of investment banks' 
liabilities. There is already such a limit in place for bank deposits. 
No individual bank can hold more than 10 percent of the size of the 
total national deposits. That deposit limit can be applied to nonbank 
liabilities such that no investment bank can have liabilities equal to 
more than 10 percent of total deposits. With this limit, we can ensure 
that never again will the so-called shadow banking system eclipse the 
real banking system.
  Two other problems in the current crisis were the questionable 
quality of bank capital and the arbitrary nature of regulators' risk-
based capital assessments. Lehman Brothers, in fact, had more than 
double its required capital only days before it failed, in part due to 
a loosening of the definition of capital and in part due to unrealistic 
valuations of how risky Lehman's assets actually were.
  We can eliminate those problems with a simple statutory leverage 
requirement that is based upon banks' core capital; that is to say, 
their common stock plus retained earnings. Such a requirement would 
supplement regulators' more highly calibrated risk-based assessments. 
In short, it would provide a sorely needed gut check that ensures 
regulators don't miss the forest for the trees when assessing the 
capital adequacy of a financial institution.
  Finally, as many of my colleagues know, I have focused a lot on the 
problems associated with conflicts of interest, including those at 
banking institutions. One of the key problems is that proprietary 
trading poses an inherent conflict of interest. Instead of seeking the 
best prices for their clients' orders, brokers can trade against or 
even in front of them--a potential profit motive that could 
disadvantage their customer and put them at a conflict of interest with 
their customer.
  Given that, we need to think critically about how we can address the 
conflicts inherent in the modern investment banking model that place 
the traditional businesses of merger advice and securities underwriting 
under the same roof with proprietary trading, hedge funds, and private 
equity investments. For example, under this business model, it has 
become commonplace for a firm to underwrite securities and then short 
them--or sell them--within a week to protect themselves. This and other 
problematic practices need to be restricted. Chairman Volcker is 
absolutely right that proprietary businesses are not appropriate for 
commercial banks.
  More to the point, it is becoming clear that we need stronger 
protections against conflicts of interest at investment banks, which 
play a critical role in providing clients with advice on mergers, 
equity offerings, and debt offerings, as well as in providing liquidity 
and making markets in securities.
  Of course, there are some who will claim that all these remedies are 
too prescriptive; that they constitute too much regulation. It is too 
late to unscramble the eggs, they say, so let's move on, or let's leave 
it to the regulators to develop appropriate rules and

[[Page 1247]]

remain flexible. That is the road to another financial disaster.
  If Congress fails to impose the needed structural and institutional 
change, the same systemic risks to our financial system remain; indeed, 
they will get worse with each financial crisis because the Federal 
safety net gets bigger and bigger. And when the next crisis occurs--and 
it will--the legislative pendulum will suddenly shift direction and it 
will fall hard on Wall Street, very hard, if we and Wall Street do not 
act together in a realistic and constructive spirit first.
  Frankly, I am always astounded that I continue to hear those 
arguments about overregulation when, in fact, we have had precious 
little regulation, particularly since Glass-Steagall was eliminated a 
decade ago.
  Risk taking is a fundamental part of finance. Without risks, markets 
just do not work. But the balancing act between safety on one side and 
growth and innovation on the other cannot tilt too far in the wrong 
direction. If we don't act, as sure as I am standing here, the short-
term trading profits on Wall Street today threaten to become the losses 
borne by the rest of America down the road.
  As Chairman Volcker said at the Banking Committee hearing this week, 
if we do not heed his warning, the next disaster may not take place in 
his lifetime, but it will come, and his soul will come back to haunt us 
all. The American people already know this basic truth, even if Wall 
Street does not. They may not understand the complexities of the 
banking system, and, indeed, only a handful of math Ph.Ds can follow 
the complex algorithms that help create much of today's exorbitant 
trading profits. But people do know banks are not designed to be 
trading machines. They know banks should make their money taking 
deposits and lending money, which in turn provides capital for growth, 
creates jobs, and provides opportunities for more jobs and more growth. 
You can call it populism, but you can also call it good-old common 
sense, borne once again in the lessons of hard economic times brought 
about by Wall Street excesses. That common sense needs to be returned 
to our national financial system. We must shrink bankers' outside sense 
of entitlement and return to a more realistic vision of their role in 
society. Bankers are not traders, nor should they be. Bankers should be 
too safe to fail, not so large that we cannot permit their failure.
  We must structurally reform the conflicts of interest that threaten 
to erupt again in crisis and great financial loss. We must build again 
the edifices that will keep the American economy safe from financial 
crisis for decades to come. We must do it now. Americans deserve no 
less.
  I yield the floor, and I suggest the absence of a quorum.
  The PRESIDING OFFICER (Mr. Burris). The clerk will call the roll.
  The bill clerk proceeded to call the roll.
  Mr. BROWN of Ohio. Mr. President, I ask unanimous consent the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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