[Congressional Record (Bound Edition), Volume 156 (2010), Part 4]
[Senate]
[Pages 5397-5400]
[From the U.S. Government Publishing Office, www.gpo.gov]




                         ENDING TOO BIG TO FAIL

  Mr. KAUFMAN. Mr. President, I have come to the floor several times 
now to discuss the problem of too big to fail, which I believe is the 
most critical issue to be addressed in any financial reform bill.
  Financial institutions that are too big to fail are so large, so 
complex, and so interconnected that they cannot be allowed to fail nor 
follow the normal corporate bankruptcy process because of the dire 
threat that would pose to the entire financial system.
  The largest six bank holding companies--Bank of America, JPMorgan 
Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley--are 
certainly too big to fail. The term may also cover a larger set of 
institutions.
  After all, last year's most vaunted stress tests of the largest bank 
holding companies covered 19 institutions, and even that exercise did 
not include many other systemically significant nonbank financial 
institutions, including Fannie Mae and Freddie Mac, insurance 
companies, derivatives clearinghouses, and hedge funds.
  While many in government and industry want to eliminate the term 
``too big to fail,'' the fact is these too-big-to-fail financial 
institutions are bigger, more powerful, and more interconnected now 
than ever before.
  Only 15 years ago, the six largest U.S. banks had assets equal to 17 
percent of overall gross domestic product. The six largest U.S. banks 
now have total assets estimated in excess of 63 percent of gross 
domestic product. That goes from 17 percent of GDP just 15 years ago to 
63 percent of GDP now.
  While some still argue there are benefits to having very large 
financial conglomerates--and I am sure there are--virtually everyone 
agrees the problem of too big to fail needs to be address. The 
disagreement is how this be done.
  I was interested to hear Senator McConnell on the Senate floor 
yesterday say we must never use taxpayer money again to bail out too-
big-to-fail institutions. But no one wants to do that. No one is 
thinking about that. No one is planning to do that.
  The question is, What is the solution to prevent these institutions 
from failing in the first place? The other party has put forward no 
solution, and doing nothing is by far the worst solution of all.
  The minority leader came to the floor today and said the bill before 
the Senate is good for Wall Street and bad for Main Street. That is 
simply an astounding statement to make. Main Street wants Congress to 
act. Main Street wants Congress to ensure that Wall Street never 
engages in reckless behavior again. Yet what does the minority leader 
offer?
  Despite the experience of Lehman Brothers, the minority leader 
apparently believes we should do nothing and simply stand back in the 
future and let these megabanks fail when they take risks that go wrong.
  The minority leader said yesterday:

       The way to solve this problem is to let the people who made 
     the mistakes pay for them. We won't solve this problem until 
     the biggest banks are allowed to fail.

  Astounding. His answer is, the resolution of too-big-to-fail banks 
needs to be dealt with through the bankruptcy process. In my view, that 
approach is dangerous and irresponsible.
  If we do nothing and wait for another crisis, future Presidents--
whether Republican or Democratic--will face the same choices as 
President Bush: Whether to let spiraling, interconnected, too-big-to-
fail institutions, such as AIG, Citigroup, and others, collapse in a 
contagion, sending the economy into a depression or step in ahead of 
bankruptcy and save them with taxpayer money.
  If that happens, the choice of allowing bankruptcy will mean 
tremendous economic pain on Main Street America. So some Congress in 
the future will similarly be faced with another TARP-like decision, 
which in the fall of 2008 many in both parties believed they had no 
choice but to support, including the minority leader.
  Relying on bankruptcy law is not the answer. The approach by many 
conservatives and those on the other side of the aisle is to simply let 
them fail and let U.S. bankruptcy law--where shareholders get wiped out 
and creditors take a haircut--reimpose the discipline in the financial 
system that was lacking in the runup to the crisis.
  For example, Peter Wallison and David Skeel have argued in the Wall 
Street Journal:

       The real choice before the Senate is between the FDIC and 
     the bankruptcy courts.

[[Page 5398]]

     It should be no contest, because bankruptcy courts do have 
     the experience and expertise to handle a large-scale 
     financial failure. This was demonstrated most recently by the 
     Lehman Brothers bankruptcy.

  If bankruptcy was a cure in Lehman Brothers, it was one that almost 
killed the patient. When former Treasury Secretary Hank Paulson decided 
to let Lehman Brothers go into bankruptcy, our global credit markets 
froze and creditors and counterparties panicked and headed for the 
hills. Instead of imposing market discipline, it only prompted more 
bailouts and almost brought down the entire financial system. It 
ultimately took 18 months to close out the case on Lehman Brothers, an 
eternity for financial institutions that mark to market and fund their 
balance sheets on an interday basis.
  Bankruptcy is an even more unattractive option when one considers 
that Lehman was an investment bank, while today's megabanks operate 
under the bank holding company umbrella. It is virtually impossible to 
have an integrated resolution of a large and complex bank holding 
company. The bank subsidiary would go into FDIC resolution, the 
insurance affiliates would go into State liquidation procedures, the 
securities affiliate would go into chapter 7, while other affiliates 
and overall holding companies would go into chapter 11.
  A plan this unwieldy is no plan at all. In fact, the only way to 
truly eliminate the problem with too-big-to-fail banks is for Congress 
to act. It is true that I believe we should go further than the current 
bill. I would break these big banks apart, thus limiting their size and 
leverage. Given the consequences of failing to do enough to prevent 
another financial crisis, the safest thing to do today is for Congress 
to put an end to too big to fail. If you believe these megabanks are 
too big, if you reject the choice of bankruptcy that will lead to a 
recession or depression, then breaking them up is the logical answer. 
That is the only way that greatly diminishes the future probability of 
another financial disaster. The Great Depression of the 1930s must be 
avoided at all cost.
  Two years ago, permitting Lehman Brothers to enter bankruptcy brought 
about the Great Recession, the most painful economic downturn this 
country has seen since the Great Depression. If we were to let other 
institutions fall into bankruptcy, adopting the minority leader's 
approach, the horrors our economy would have faced would make the 
realities of the past 2 years pale in comparison.
  I certainly don't want to rely on bankruptcy to break the boom-bust-
bailout cycle. I believe Congress should break the cycle today. We 
should not follow an abdication of regulatory responsibility with an 
abdication of democratic government. As representatives of the people 
most hurt by the financial crisis, Congress should act decisively to 
ensure that we benefit again from decades of financial stability, not 
do nothing, which most assuredly would leave us to live on the 
precipice of financial disaster, as the minority leader would have us 
do.
  We need a full and straightforward debate in the Senate about what 
Congress must do. In my view, the mere existence of too-big-to-fail 
institutions perpetuates a long cycle of boom, bust, bailout. Instead 
of hopelessly trying to impose order and discipline in a chaotic 
crisis, we need to clearly, decisively, and preemptively deal with the 
problem of too big to fail now.
  As Senator Levin pointed out this week, when he kicked off the 
Permanent Subcommittee's hearings on its investigation of the financial 
crisis, there are many eerie parallels between this crisis and the one 
in the late 1920s and early 1930s. In both cases, bankers were derelict 
in their duties, while drawn to disruptive and excessive speculation, 
fueled in part by their compensation arrangements. Does that sound 
familiar? Bankers were derelict in their duties, while drawn to 
disruptive and excessive speculation, fueled in part by their 
compensation arrangements.
  In the 1930s, in response to these problems, we built an enduring 
regulatory framework that put our entire financial system on stable 
footing for decades. We simply cannot afford another financial 
meltdown. The choice is clear. But it is also clear that the worst 
thing we can do is to take the dangerous risk of doing nothing. To me, 
the choice that is best for the American people is clear.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Virginia is recognized.
  Mr. WARNER. Mr. President, I also rise to discuss financial reform 
and, to be blunt, to try to set the record straight about some 
misleading statements that have been made on this floor about both the 
process and the substance of the bill that the Banking Committee 
reported out recently.
  Under Chairman Dodd's leadership and working with ranking minority 
member Senator Shelby, I have worked hard, since coming to the Senate, 
to understand the root causes of the crisis we are only now beginning 
to emerge from economically but to recognize that we have to have a 
robust solution in place to make sure we are never again confronted 
with the type of crisis and the lack of preparation this Nation faced 
back in the fall of 2008.
  I also come to this body, as you know, as someone who spent an awful 
lot of time around the capital markets. Quite candidly, I will put my 
free market, procapitalist credentials up against anybody's in this 
body. But I come to the floor as well as someone who has tried to 
recognize that the financial crisis--perhaps more than any other issue 
we have addressed--doesn't have a Democratic or a Republican root of 
origin, nor does it have a partisan solution set. We have to recognize 
that, perhaps on this piece of legislation more than ever, we have to 
have a bipartisan basis to establish a long-term financial framework 
for the next hundred years.
  I am very proud of the fact that we have worked so far in a 
bipartisan way. I have particularly appreciated, over the last year, 
the partnership I have built with Senator Corker of Tennessee, where we 
both recognize that while we both have backgrounds in business and both 
have experience and exposure to the capital markets, there is a great 
deal of complexity in trying to rewrite the financial rules in the 
sense that it will be not only for this country but because the rest of 
the world will follow what America does, for the whole world. So it 
will require a great deal of humility and a recognition that we have 
more to learn.
  Because of that, Senator Corker and I, starting early in 2009, began 
holding a series of seminars, in fact, where we brought in established 
financial leaders and invited members of both parties to come and learn 
with us as we tried to put in place rules and regulations governing the 
financial system. While I have been disappointed, particularly by the 
Republican leader's comments yesterday, I am not naive. I still believe 
there is a path to a bipartisan bill. What we need to do is to simply 
lower the rhetoric and do what is needed for the American people.
  Let's put in place a robust set of rules and a robust regime of 
reform that will ensure that never again will the American taxpayer 
have to bail out firms that are too big to fail. While there were 
differences that we had on how we approached health care reform, this 
is one area where--whether it is a liberal blogger group or a tea party 
convention--there is a unanimity of opinion that never again should the 
taxpayers be put at risk because of the financial interconnectedness of 
large firms.
  Soon, the Senate will consider the bill Chairman Dodd has put 
together. While there are bits and pieces that different folks will 
disagree with, this is a strong bill that vastly improves regulation 
and the structure of our financial markets. Let me repeat that Senator 
Dodd has put together a strong bill. One part of the bill Senator 
Corker and I have been particularly engaged in deals with systemic risk 
in ending the notion of too big to fail. That was the subject yesterday 
of some wildly inaccurate statements on this floor, which I am here to 
address.
  I have to admit I am deeply invested in this section, and that 
investment comes in no small part because of the

[[Page 5399]]

months of work Senator Corker and I put into this area. Let me 
acknowledge at the front end that there are parts of this section that 
both Senator Corker and I will want to change and amend. Those changes 
and amendments we would probably reach agreement on in perhaps 5 or 10 
minutes, but the basic structure we set up is one I believe will lead 
to meaningful financial reform.
  Now, let's go to what we are talking about. We recognized at the 
outset that never again could we allow the financial system and the 
interconnectedness of this financial system to come to the brink of 
crisis and, in effect, the regulatory system and the legal system have 
no recourse and rules on how we deal with an impending crisis.
  One of the things we recognized at the outset was that in the past 
there was very little collaboration and coordination between different 
regulators. You might have a Prudential supervisor who is looking at 
the depository institution and having one view of an institution; and 
you might have the regulator looking at the bank holding structure and 
having another view. Because these complex institutions may also have 
security aspects, the SEC is over here. But there was no coordinated 
place where this collaborative view, beyond the stovepipes and beyond 
the silos, could all come together and recognize that while the 
institution's single actions in a single sector might not pose a 
systemic risk, that in toto these risks, when aggregated together, put 
our financial system in jeopardy.
  So what do we propose? Along with Senator Corker and experts from the 
industry, we propose creating a Systemic Risk Council that would, in 
effect, be the early warning system for our overall financial system to 
spot these large, systematically important institutions and, in effect, 
put some speed bumps in their path.
  I may not even agree with some of the Members of my own side of the 
aisle that we ought to go out proactively and break up these 
institutions just because they are too large. Size, in and of itself, 
was not the problem. It was the interconnectedness of their activities 
and the fact that if you started to pull on the string of some of these 
activities, the effect that had basically collapsed the whole house of 
cards. It was not size alone, it was interconnectedness and recognizing 
how to spot that interconnectedness at the front end, and putting some 
speed bumps on these systemically large institutions that is important.
  One of the things we found was that oftentimes the regulators did not 
have current, real-time data on the extent of these transactions and 
this interconnectedness. So a part of the bill that has received very 
little attention is the creation of the Office of Financial Research, 
which will aggregate, on a daily basis, all the status of transactions 
of all these institutions and allow us to have at least the 
transparency at the regulator level to know what is going on and allow 
the regulators never again to say: Well, the last piece of data we had 
was the last quarterly report. This information will flow up to the 
Systemic Risk Council, and the Systemic Risk Council will then be able 
to put in place what I call speed bumps on these systematically large 
institutions.
  Increase capital. One of the questions that comes back time and again 
from financial experts, we need to increase the capital reserve levels 
of many of these large institutions. We have to look at their liquidity 
ability. In many cases the institutions that failed during the crisis 
were not insolvent but there was a rush because of fear in the system 
and the liquidity crisis this caused, so how do we be sure we use 
liquidity in a better way?
  Leverage, traditional additional financial institutions--I look at 
our neighbors in Canada, about a 20-to-1 leverage ratio. We saw on some 
of the off-balance sheet operations not 10- or 20-to-1 traditional 
ratios, but 50- or 100-to-1 leverage ratios.
  We put in place as well something that has been advocated by folks at 
New York Fed--it originally comes out of the University of Chicago--a 
whole new set of financial structure in these large institutions that 
will convert to equity in the precursor, before a crisis takes place. 
In effect, shareholders will be diluted by this contingent capital 
requirement, putting again more pressure on management not to make 
undue risks.
  We believe these speed bumps, while they may not prevent any future 
crisis, will be huge impediments to these large systemically risky 
institutions taking undue risks and outrageous actions.
  We have also put a new requirement in place, one that again has not 
gotten a lot of review. We will literally require the management of 
these large institutions to put in place their own funeral plans, their 
own plans on how they will unwind their institutions through an orderly 
bankruptcy process.
  I believe there were large systemically important institutions in the 
fall of 2008 that in effect came to the regulators and in effect said 
we are so big and interconnected that we do not know how to unwind 
ourselves.
  Never again should we allow that to happen. We allow the regulators 
to work, and in effect bless the funeral plans these systemically large 
institutions will put in place.
  We think we have put in place these appropriate barriers that will 
restrict some of the unduly risky activities from these large 
institutions, but you cannot predict and cannot foresee every crisis. 
So what we need to do is set a framework on how we would address the 
crisis if these speed bumps and this early warning system does not 
fully function. I do not, actually, candidly, completely agree with my 
colleague from Delaware. I do believe we need a strong, robust 
bankruptcy process that gives predictability to investors so they know 
what will happen through the normal dissolution of a firm that has made 
mistakes in the marketplace. We need to ensure that bankruptcy becomes 
the normal default process. Again, as I mentioned, having these large 
firms write their own funeral plans, write their own bankruptcy plans 
that have to be approved by the regulators, will give us guidance on 
that path.
  But we also have to realize when there may be a management team that 
does not see the handwriting on the wall or when a firm is, even with 
all of these checks, falling into the potential of its failure causing 
systemic risk, we still have to have the ability to act.
  Let me state very clearly, the resolution process that was put in the 
Dodd bill, no rational management team would ever elect to choose 
because resolution will not lead to conservatorship, resolution will 
lead to receivership and extermination of the firm. The firm's common 
share equity will be wiped out, the firm's management will be wiped 
out--resolution will never be chosen as a preferred route. Bankruptcy 
will be the preferred route.
  Even in that case, we still put additional protections in place so 
that no future administration, having seen the blowback from the public 
on using resolution in 2008--I cannot imagine any future administration 
actually wanting to use this mechanism, but to ensure, again--Senator 
Corker and I spent a great deal of time on this--that we have, again, 
protections so resolution is not misused, we put very strict criteria 
in before it can be implemented. We require three keys, in effect, to 
be turned simultaneously--in effect the nuclear option analogy of 
different keys being turned before this tool could be used.
  We require the Chair of the Federal Reserve, the FDIC, and the 
Treasury Secretary in consultation with the President to all agree that 
we have to act, to move a firm into resolution rather than going 
through bankruptcy.
  But that, again, is not all. Senator Corker, I think rightfully, 
pointed out that we need, in case there were an overly aggressive 
administration, a judicial check as well. So we put an additional 
judicial check in place before resolution could be implemented--
resolution only as the last resort, only as a path that makes sure that 
the parts of this systemically important firm can be transferred to 
some other existing entity, not preserved. The firm will be wiped out, 
but the functions that are

[[Page 5400]]

important do not bring down the overall financial system.
  One of the most curious comments of the Republican leader yesterday 
was the critique that, if you invoke resolution, the question becomes 
where is the money going to come from and who is going to pay for it? 
What I found very curious in the Republican leader's comments yesterday 
was that we--and this was by no means set in stone--put in place a $50 
billion fund that would be prefunded by the industry; not the $150 
billion that was in the House bill that could rightfully create moral 
hazard, but in effect a dollar amount up front. It could go down lower. 
That would basically keep the lights on at these institutions until the 
FDIC could go out and, in effect, borrow against the unencumbered 
assets of this firm to get the real dollars in place to keep the 
resolution process going in an appropriately functioning way.
  Is $50 billion the right number? It may not be. Reasonable people can 
disagree; $25 billion might be the right number. There might be other 
paths. Senator Corker and I worked on the notion of a trust that could 
be created. But what I find curious is no one in the financial sector 
that we have spoken to thinks this dollar amount is a bailout. No one 
in the financial sector has said this will be an adequate amount of 
capital to resolve a whole crisis. The funding to resolve the whole 
crisis will come from the ability we give the FDIC to borrow against 
the unencumbered assets.
  If there is a better way to get there, we are all for it. At least I 
can say for my side, I am willing to look at any other option. But what 
I find curious is, I believe if we had not put up this industry 
prefunded amount, in effect a bridge until we can actually get the FDIC 
process in place, we would hear criticisms, at least from some, saying 
not putting up any industry prefunding would allow taxpayer exposure. 
One of the things we want to make sure is that taxpayers, again, are 
never, ever exposed to the kind of risk that took place in 2008.
  I would also add that whatever these prefunds, trust instruments, or 
even the funding that would come from borrowing against the 
unencumbered assets, we need to buy a little time so it is not done in 
a haphazard way so any of these funds will be ultimately recouped after 
the crisis from the industry based on those institutions that 
benefited, those institutions that also were part of the causation.
  Again, let me stress all of these funds, whatever will be repaid--and 
again whatever funds that are invested in these institutions in the 
interim will not go in, as what happened in 2008, as common equity as 
an effort to, in effect, prop up the systemically important firms. But 
it will go in as, in effect, top in the creditor process, debtor-in-
possession financing.
  Did we get this perfect? No, perhaps not. There are ways, again, that 
we can improve. But the framework we put in place, the almost uniform 
response we have received, has been we have taken a gigantic step 
toward ending too big to fail in a rational, thoughtful approach.
  I see my colleague, the Senator from Tennessee, has arrived on the 
floor. I again compliment him for his work, for the fact both of us 
said at the outset for neither of us was this religion. We just need to 
get it right. If we have to ruffle a few feathers on both sides of the 
aisle so that never again are the American taxpayers put in the 
position they were in 2008, then so be it.
  I appreciate the good work of the Senator from Tennessee on this 
effort. I appreciate our working together on the preference toward 
bankruptcy, on the recognition that we have to have that judicial 
check, that we cannot go out and grab firms willy-nilly that are not 
depository, that are systemically important. I think we have taken 
giant steps forward.
  I ask my colleagues from both sides of the aisle to lower the 
rhetoric a bit, to recognize this can and still should be a place where 
this Senate can work in a bipartisan fashion to put in place a set of 
rules so we can, with the appropriate speed bumps in our financial 
system for those firms that are systemically important--that we do put 
in financial rules of the road for the 21st century, that we do allow 
America to continue to be the financial capital of the world and the 
innovation in financial products capital of the world. I think we can 
still get there.
  I look forward to work not only with my friend from Tennessee but 
colleagues from both sides of the aisle to get it right.
  I yield the floor.

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