[Congressional Record (Bound Edition), Volume 156 (2010), Part 10]
[Senate]
[Pages 13915-13918]
[From the U.S. Government Publishing Office, www.gpo.gov]




             WALL STREET REFORM AND CONSUMER PROTECTION ACT

  Mr. BROWN of Massachusetts. Madam President, I come to the floor of 
the Senate to talk today about the recently passed Wall Street reform 
bill.
  I believe elected officials should come to Washington to solve 
problems not ignore them. The American people know that we need to 
enact major changes to our financial regulatory system. With the bill 
that passed into law earlier this month, Congress has begun the process 
of repairing a regulatory system that did not work as it should have 
and contributed to the financial meltdown that shook our economy in 
2008. This action, long overdue, will help our regulatory structure 
catch up with the realities of the market so as to provide a more 
secure economy. Although no bill will ever be perfect, and I remain 
seriously concerned that we must take further actions if we are going 
to prevent another financial crisis, this bill takes important steps 
towards greater market transparency and consumer protection. It will 
help make sure that taxpayers are never again put on the hook for 
bailing out the financial sector. It strengthens the regulatory safety 
net in key respects. For these reasons, I supported cloture motions and 
final passage of the Wall Street Reform and Consumer Protection Act.
  I did my utmost to work in a bipartisan manner on this bill, filing 
or cosponsoring 27 amendments, working across the aisle on almost all 
of them. For example, we amended the bill to remove unnecessary 
provisions that would have severely constricted small startup 
businesses around the country as they worked to raise capital from 
angel investors. Massachusetts is one of America's hotbeds for 
innovation and business startups, and I was proud to stand up for small 
startup businesses and the investors who help give life to their ideas. 
Another amendment I proposed with Senator Jack Reed of Rhode Island, 
which was adopted 99-1, created a dedicated liaison office for military 
families within the Consumer Financial Protection Bureau, so that 
members of our Armed Forces and their families can fight back when they 
are targeted by unscrupulous lenders or sold fraudulent life insurance 
policies. As a 30-year member of the National Guard, I have seen the 
pain caused when members of the Guard are hit by financial predators. I 
was also proud to join my colleagues in supporting assessment and 
regulatory relief for small community banks and a safer role for the 
credit rating agencies in our financial system.
  Since the Senate Committee on Banking, Housing, and Urban Affairs did 
not hold a full markup of the bill before it came to the Senate floor, 
I spent a lot of time exploring how certain provisions were drafted and 
how

[[Page 13916]]

they might work if enacted into law. One of those areas was the so-
called Volcker rule. I believe that the principles behind the Volcker 
rule, which was proposed in earnest only after the House had passed its 
own Wall Street Reform bill, are very well-intentioned and in many 
respects will be quite effective. The Volcker rule was conceived as a 
way to limit certain risky proprietary trading activities so that Wall 
Street firms start to look more like the safe banks, mutual funds, and 
insurance companies we have in Massachusetts. After the collapse the 
country suffered, no one can argue with a straight face anymore that 
all banks should be able to take huge risks on anything they want, 
whenever they want, without any regard to the consequences. This was an 
important issue for financial institutions and regulators across the 
country. Senator Kay Hagan of North Carolina also worked hard to find 
the right balance within the Volcker rule for bank asset management, 
and I would like to associate my views with her statements in the 
Senate Record on this topic.
  Without changes, the original Senate bill would have unreasonably 
regulated limited purpose trusts--institutions throughout our Nation 
that never should have been captured in the regulatory ``net'' of 
Volcker rule bank regulation. Since the drafting did not match the 
intent, this problem was addressed by clarifying that these companies 
should not be subject to bank holding company oversight or the Volcker 
rule restrictions by virtue of operating a limited purpose trust 
regardless of charter. In other words, bank regulation should only 
apply to the trust itself, not its parent and affiliates. Without this 
clarification, the Volcker rule restrictions, as well as the capital 
requirements under the adopted Collins amendment, would have led to 
widespread disruption in providing products and services to customers 
and investors, job losses, and uncertainty around the nation. The final 
version of the legislation appropriately does not regulate institutions 
with limited trusts--including mutual funds and insurance companies--
because these institutions do not take customer deposits, make loans, 
or access the Fed discount window.
  The original Volcker rule also would have gone too far in preventing 
banks from offering appropriate investment services to their clients as 
a limited and safe part of their business model. At a time of deep 
economic uncertainty, when millions of Americans are looking for work, 
this could have a devastating impact on jobs in Massachusetts and 
across the country while unfairly targeting safe institutions and 
driving their business to riskier ventures. Even the Glass-Steagall law 
clearly permitted banks to serve as investment advisers, and yet the 
original Volcker rule language threatened the ability of banks to offer 
these services, including seeding new investment funds that they then 
offer to clients.
  Bank-affiliated investment funds are sponsored for clients and 
comprised almost entirely of client money. Most are not excessively 
speculative or risky investment vehicles--they include simple cash 
funds, stock index funds, and other nonleveraged strategies. Preventing 
banks from offering such services, which provide banks with a steady 
source of fee income, will make the banks more reliant on other more 
volatile revenue streams--a danger the bill was supposed to head off. 
Furthermore, in order to remain in the asset management business, these 
banks must be allowed to invest a very small amount alongside their 
clients in these funds so that all interests are aligned. Many large 
state pension plans, as well as large endowments and foundations, value 
such ``skin in the game'' investments as a key factor in deciding with 
whom they will place their money.
  If banks can't offer these services or invest a small amount to seed 
funds and keep skin in the game, institutional investors will be forced 
to take their money elsewhere, and in many cases, that will be to less 
regulated hedge and private equity funds. In negotiations during Senate 
consideration of the legislation, I advocated for limiting the maximum 
aggregate investment level in all bank affiliated funds to somewhere in 
the vicinity of 5 percent of a bank's tier 1 capital. In the end, the 
final compromise landed on 3 percent. Although it could be higher, this 
is an appropriate role for alternative asset management within the 
banking industry.
  To put this number in perspective, even if all of these investments 
collapsed, the bank losses would equal only half of the typical losses 
charged off from bank retail lending operations last year. To address 
concerns that fresh bank capital could be put at risk in the event of a 
fund failure, the final language makes it explicit that these 
investment funds are segregated and that it is against the law for the 
banks to bail them out. It is also important to remember that new 
systemic risk authorities have been created to identify and halt 
activities at key firms that threaten financial stability.
  One other area of remaining uncertainty that has been left to the 
regulators is the treatment of bank investments in venture capital 
funds. Regulators should carefully consider whether banks that focus 
overwhelmingly on lending to and investing in start-up technology 
companies should be captured by one-size-fits-all restrictions under 
the Volcker rule. I believe they should not be. Venture capital 
investments help entrepreneurs get the financing they need to create 
new jobs. Unfairly restricting this type of capital formation is the 
last thing we should be doing in this economy.
  Another area of potential confusion is in the language governing 
``fund of funds.'' These are funds that invest in a wide range of other 
investment partnerships, hedge funds or private equity funds, so that 
investors can benefit from the good investment ideas of a variety of 
funds. Banks' investments in the fund of funds that they sponsor for 
clients are to be limited under this bill to only 3 percent of the 
fund. But that fund, which will be comprised of, at a minimum, 97 
percent client money, under Dodd-Frank, is not restricted as a 
percentage of any of those investment partnerships, hedge funds, or 
private equity funds that it might be invested in, because the bank's 
exposure is still limited to 3 percent in the original fund, mitigating 
any chance of a concentration risk or bailout incentive.
  Finally--and this should go without saying--I want to make it clear 
that throughout all the negotiations to write the legislative language 
of the conference report, it was always clear to me that the Volcker 
rule was never intended to prohibit banks from offering alternative 
investment options as a part of a company-wide retirement plan, or as 
an offering to ERISA customers. Any other regulatory treatment would be 
arbitrarily punitive and would have no public policy impact. The 
legislation is clear on this, but I would also like to point out that 
the FDIC-sanctioned traditional bond and equity market investments made 
by small community banks for the purpose of diversification are not the 
intended target of Volcker rule restrictions.
  I want to spend a moment or two discussing consumer protection--one 
of the most controversial elements of this bill. During the crisis, 
more than half of the people who ended up in subprime mortgages with 
ballooning rates would have qualified for more conventional fixed rate 
loans. Some of that was caused by consumer greed, but it was also 
because of bad incentives and deceptive practices where the true costs 
of loans were hidden in the fine print. The new CFPB has the power to 
use its broad authority to simplify and dramatically improve the 
quality of information going to the consumer, and I expect that's how 
they will use their authority. I also expect that unifying financial 
consumer protection under one roof at the Federal Reserve will help to 
simplify and consolidate some of the compliance burdens on our 
financial institutions. Talking to local bankers, it is clear that 
banks are being forced to spend a lot more money and time on 
compliance. I worry about community banks' ability to compete in this 
area with the bigger banks. I am hopeful that the CFPB will improve the 
current state of affairs on both of these fronts.

[[Page 13917]]

  There are a number of other provisions in the bill that bear review. 
Section 113 of the conference report details multiple criteria that 
must be considered by the Financial Stability Oversight Council to 
determine that an institution is a ``nonbank financial company 
supervised by the Board of Governors.'' These criteria should not be 
given equal weighting. In fact, the Council should place most of the 
weight on one important measure--the leverage of the financial 
institution. If the recent financial crisis has proven anything, it has 
demonstrated the systemic de-stabilization that can be caused when too 
many firms are overleveraged, with only a slim cushion available to 
absorb losses. Excessive leverage is by far the most dangerous 
characteristic for any business. A poorly run company that faces 
numerous problems can feel relatively safe if it has limited leverage; 
conversely, a thriving, profitable company that has excessive leverage 
can be wiped out after a single stumble. As a result, leverage should 
be the primary consideration when deciding whether to put a financial 
institution into the special category of ``nonbank financial company 
supervised by the Board of Governors.''
  I also believe that the size of an institution should be de-
emphasized as a consideration for making determinations as to which 
companies are ``nonbank financial companies supervised by the Board of 
Governors.'' There is nothing inherently destabilizing or risky about 
the size of a large company. If anything, size usually coincides with 
significant benefits, including economies of scale and a diverse 
portfolio of assets. The Council and regulators should be very careful 
not to use size as a proxy for risk or it will capture some very 
healthy companies in the Fed supervisory web while simultaneously 
discouraging the growth of up-and-coming firms. Size is not as 
important a factor when it comes to the safety and soundness of an 
institution and it should be given less weight as a consideration.
  Furthermore, considering the burdens that come with being categorized 
a ``nonbank financial company supervised by the Board of Governors,'' 
it is critical that the Council make its determinations on a company-
by-company basis and not attempt to make determinations by grouping 
multiple institutions together based solely on a set of similar 
characteristics. For instance, the Council should never make a 
determination that all firms in a financial subsector that are above a 
predefined size should be ``nonbank financial companies supervised by 
the Board of Governors.'' This would inevitably subject otherwise 
healthy firms to a long list of unnecessary regulations and will 
distract regulators from focusing on the most potentially problematic 
financial firms and activities.
  In title II of the bill, the orderly liquidation authority includes 
provisions that allow the FDIC to unwind firms that threaten stability. 
While I repeatedly supported amendments that would have relied more 
heavily on the bankruptcy code rather than this approach, I also 
believe that if used appropriately, resolution authorities can be an 
important and useful tool in unwinding financial institutions that 
threaten market stability. I will be watching closely as these 
provisions are implemented by the FDIC. Under this section, the FDIC 
has the power to ``take any action'' to provide disparate treatment to 
similarly situated creditors if the FDIC ``determines that such action 
is necessary to maximize the value of assets of the covered financial 
company; to initiate and continue operations essential to the 
receivership of the financial company; to maximize the present value 
return from the sale or other disposition of the assets of the covered 
financial company; or to minimize the amount of any loss realized upon 
the sale or other disposition of the assets of the covered financial 
company.''
  Without clear rule writing, this language could be wrongly 
interpreted to include a range of unnecessary, arbitrary actions to 
favor certain creditors. Instead, the FDIC should only provide 
disparate treatment to similarly situated creditors if the sole purpose 
of the action is to cover the cost of indispensable services required 
to keep the physical operations of the financial institution or bridge 
financial company functioning during the early stages of liquidation. 
Examples of such services include the delivery of electricity, computer 
maintenance and janitorial services. The flexibility in these 
provisions should not be used by the FDIC to provide disparate 
treatment to holders of financial instruments, especially financial 
instruments that are widely distributed and held by multiple parties. 
For instance, issuances of loans, notes and bonds are normally held by 
various parties. The FDIC should not use its authority to discriminate 
among holders of the same instrument or holders that own different 
instruments that hold the same unsecured priority. In other words, it 
would be a clear abuse of these provisions if the FDIC makes a 
determination to provide disparate treatment to similarly situated 
creditors based on ``who'' owns the claim. The FDIC should take all 
necessary precautions to avoid even the impression of playing political 
favorites.
  The expectation of receiving a financial return consistent with 
similarly situated creditors is a bedrock principal of American 
capitalism. It is my hope and expectation that the FDIC will fulfill 
its obligations and report to Congress any actions that involve any 
different treatment of similarly situated creditors under resolution 
authority. The FDIC should disclose the details of any parties given 
disparate treatment and the categories and names of similarly situated 
parties that did not receive the benefits of this treatment; how much, 
in absolute dollars, and as a percentage of its claim, a favored 
recipient of the disparate treatment received, and how that compares to 
the returns realized--or may be realized--by similarly situated 
creditors who did not receive the favorable treatment; and a thorough 
explanation as to why the treatment was necessary to maintain the 
physical operations of the financial institution or relevant entity, 
including an analysis of any conflicts of interest that the FDIC, or 
related government authorities, may have had when providing the 
disparate treatment.
  I also want to be clear about my views on derivatives regulation. The 
derivatives title of the law is extremely important, and if implemented 
appropriately, will bring much needed transparency and accountability 
to a market that played a central role in the near collapse of our 
financial services sector in the fall of 2008. This bill appropriately 
regulates large Wall Street swap dealers for the first time by 
subjecting them to new clearing, capital and margin requirements. But 
these provisions also could significantly impact thousands of end-user 
firms that use derivatives to reduce their exposure to risk rather than 
merely to speculate. It is very important that we manage how this bill 
impacts these Main Street businesses. If the regulations imposed on 
swap dealers are inappropriately extended to Main Street businesses 
that are only trying to hedge risks, we could unwittingly exacerbate 
the economic challenges we still face. Many experts think that greater 
transparency will drive risk-management costs down for businesses in 
the long run, but the government clearly needs to go about the 
implementation of these provisions very carefully.
  While the conference report has many good features, it also suffers 
from a glaring omission: any attempt to regulate government-sponsored 
enterprises--Fannie Mae and Freddie Mac. These institutions played a 
key role in triggering the financial crisis we suffered. To date, over 
$140 billion of taxpayer funds have been spent bailing out Fannie and 
Freddie, and estimates of additional risk to taxpayers runs into the 
hundreds of billions of dollars. We clearly need to address these 
institutions, which risk burdening future generations of Americans with 
mountains of debt. I look forward to working on this issue as soon as 
Congress and the administration move forward on legislative proposals.
  I believe we had a choice: do nothing or try to address a real 
problem that

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shook the very financial foundation of our country. While the bill was 
far from perfect, the final version was vastly improved from the 
version we started with at the beginning of the process. I believe it 
includes important measures that will help prevent another financial 
meltdown like the one in 2008 that left millions of Americans out of 
work and saw our economy take its worst dip since the Great Depression. 
Equally important, the bill is not funded through higher taxes, which 
is something I could not support at a time when nearly one in ten 
Americans is unemployed and our economy is still struggling.

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