[Congressional Record (Bound Edition), Volume 156 (2010), Part 4]
[Senate]
[Pages 5761-5765]
[From the U.S. Government Publishing Office, www.gpo.gov]




                            MORTGAGE LENDING

  Mr. ISAKSON. Madam President, I rise at a propitious time because the 
majority and minority leaders addressed the pending bill that is coming 
out of the Banking Committee and their desire for the bill to be one 
that is amendable and debatable.
  I am here to talk specifically about one facet of the financial 
crisis and one improvement that is to be made by this bill that needs 
to be carefully addressed to make sure we don't repeat a mistake made 
in the 1990s with the failure of the S&L industry.
  I have a chart with me. We have heard a lot about mortgages. We all 
know if it weren't for FHA, if it weren't for VA insurance, if it 
weren't for the Fed doing Freddie and Fannie a favor, there would not 
be much mortgage money available right now. It has all run away from 
the United States because of the subprime crisis and, in fact, because 
people are nervous about what happened in the financial markets with 
subprime securities. During this crisis we have been in, beginning in 
2005 and going on until now, in my State of Georgia--these numbers are 
specific to Georgia, but Georgia is the tenth largest State--we see 
here that of the mortgages in default, totally in default or in 
foreclosure, it got as high as 8.2 percent on what I refer to as 
qualified mortgages. Those are mortgages that were made to creditworthy 
people who had good underwriting standards. Those were good mortgages. 
Up to 8.2 percent or 1 in 10 of those, at its apex, were either 
delinquent or pending foreclosure. But 24.7 percent were what is known 
as subprime or nonqualified loans and were either in mortgage 
delinquency or in default, 3 to 1.
  The reason I show this chart is it demonstrates where the problem 
happened, not just on Wall Street but on Main Street; that is, in 
chasing higher yields, in pushing toward a desire for greater home 
ownership, credit standards got lax, and loans became nonqualified 
loans that carried a higher interest rate but a much higher risk. It is 
acknowledged by me and by most, in terms of the housing crisis we have 
been in, that the largest precipitating factor was shoddy underwriting, 
loose credit, and subprime mortgages. The legislation coming out of the 
Banking Committee is going to create something known as shared risk or 
lender liability in terms of the making of mortgage loans. I will be 
the first to tell my colleagues, I am not on the Banking Committee. I 
haven't seen the final draft. What I will address is what I hope will 
happen, not what I know will happen.
  What I hope the committee will understand is, in its requirement for 
shared risk, being that the maker of a mortgage retain 25 percent of 
that mortgage for its lifetime or until it is paid, is the significant 
amount of capital that is asked for an institution to reserve and a 
possible amount for a mortgage broker or a mortgage banker but not for 
an institutional lender. The problem is, there are no institutional 
lenders like savings and loans anymore. One should revisit what 
happened with the savings and loan crisis, the Resolution Trust 
Corporation, and the failure that took place in the late 1980s and late 
1990s. In America in the 1970s and 1980s, most of the mortgages made 
were made by lenders who didn't share the risk. They had 100 percent of 
the risk. They were savings and loan associations that took deposits, 
paid a preferential rate of interest over banks by regulatory design to 
attract the capital, and they held the mortgage in portfolio until it 
was paid. That is not shared risk. That is total risk.
  What were our foreclosure rates in the 1970s and 1980s up until the 
end of the 1990s? Very marginal, 1 to 2 percent, certainly not 8.2 
percent, certainly not 24.7. What happened, though, in the savings and 
loan industry is, No. 1, the Federal Government took away the interest 
preference to pay between banks and S&Ls so capital flowed out of the 
S&Ls. No. 2, because S&Ls then needed to make more money on the 
internal portfolio, the government allowed savings and loans to create 
service corporations, which were subsidiaries, to deviate from their 
original charter and, instead of just making home loans, allowed them 
to make commercial loans and, in fact, become developers.
  What happened? What happened is history. We got off our mission, 
because we got off the risk. Because we took our eye off the ball, the 
savings and loan industry across America failed. Congress had to create 
the Resolution Trust Corporation to dispose of the bad assets around 
the country and we went through, up until now, the most severe 
recession we have ever been through. But this one is worse. This one is 
more pervasive. This one was caused by a lot of financial 
irregularities and poor oversight on our part, as well as greed on the 
part of many lenders. My hope is, when we start fixing things with 
regard to mortgages, we will recognize that shared risk is not going to 
solve any problem, if 100 percent risk didn't solve it in the late 
1980s. What is going to solve the problem is for us to have reasonable 
standards of required underwriting that are an insulator from 
institutions making bad loans unless they take the risk.
  I am suggesting that we define what is a qualified loan that would 
not be subject to shared risk and what is a loan that would be subject 
to it. For example, what would a qualified mortgage be? I was in this 
business for a long time. When I started in the business in the 1960s 
through mid-1980s, you could not borrow twice your annual income. You 
couldn't have a monthly payment higher than 25 percent of your take-
home pay, and your total debts a year or longer could not exceed 33 
percent of your gross income. That was reasonable underwriting. What 
were our foreclosure rates then: 2, 1.5, a high of 2.8 percent in the 
mid-1980s, but certainly not anything such as what we have in the 24.7 
and the 8.2 percent.
  What is a qualified loan is one that requires full documentation so 
you do have to have a job, so your boss verifies your job, so the 
credit agency actually verifies your credit so you actually have a 
downpayment, you don't have downpayment assistance or some ``now

[[Page 5762]]

you see it, now you don't'' program--no interest-only loans. Everybody 
knows, you are not making an investment if you are not paying the debt 
service and only paying the principal. Interest-only loans were a bad 
idea whose time came and it went. It may be good for certain forms of 
commercial investment but not for residential.
  No balloon payments. One of the biggest problems with these 
foreclosures was good people were loaned money with shoddy underwriting 
that had balloon payments in 3, 5, or 7 years. People didn't know what 
a balloon payment was. They thought it was something that flew in the 
air. A balloon payment is when the whole principle comes due all at 
once and you are subject to the ability to refinance. That is not a 
qualified loan; that is a high-risk game.
  No negative amortization. That was a bad idea whose times came and 
went. Negative amortization meant you borrowed $100,000, but you made 
payments so at the end of the year you owed more, not less. That is a 
bad idea. That was predicated on rapid inflation or rapid appreciation 
which isn't always going to happen. And then requiring people to carry 
private mortgage insurance on their loans if they exceed 80 percent of 
the loan to value of the house, a normal underwriting standard until we 
got into the loosy-goosy time of the late 1990s and the decade of 2000 
to 2010.
  If we adopted in this legislation those parameters, to exempt lenders 
from shared participation, we would attract all the money like the good 
old days, then put the shared risk retention on those loans that are 
not well underwritten; make the mortgage broker or the investment 
banker hold 5 percent of an investment they sell because it didn't meet 
these qualifications, what would happen? They wouldn't do it, because 
they wouldn't hold the money. It would have prevented what has been 
alleged one of the brokerage houses did already. They would never short 
something and bet on it failing if they had a piece of it. They would 
only do it if you had a piece of it and they didn't.
  It is important, when we get into this regulation or reregulation of 
the financial industry, that we also recognize we have some obligation 
to correct some of the mistakes the government made itself in the past 
that caused the problem in the S&Ls in the 1980s and with nonqualified 
mortgages in the 1990s.
  What I am suggesting simply is, let's take those things that are 
tried and true, not things we think will work but things we know will 
work. Let's make them the gold standard. Let's make them the 
qualification for the attraction of money in mortgages to fund the 
homes of the American people. Then let's say to those who want to take 
a risky loan, let's say to those who want to have shoddy underwriting, 
let's say to those who want to make a quick return and get out before 
the dollar comes due, they will have to take the risk. Shared 
responsibility or shared risk is precisely right as an insurance policy 
to protect against that. But the unintended consequence of shared risk 
on a qualified, well underwritten loan is a higher interest rate for 
the consumer and less attraction of capital for individuals who form 
those loans to fund the housing purchases, which ultimately leads the 
government to do with Freddie and Fannie what it did before--force them 
to make loans they should not, force the government and taxpayers to be 
at risk in part on those loans and bring us back to another period like 
the S&L collapse or, later, like the financial market collapse of the 
last couple years. There will be another one in the future if we don't 
recognize the need to make qualified loans, well underwritten, do it as 
we did in the good old days when America flourished, foreclosure rates 
were low, and home ownership was within reach of 70 percent of the 
American people.
  I yield the floor.
  The ACTING PRESIDENT pro tempore. The Senator from New Hampshire.
  Mr. GREGG. Madam President, I rise to talk about the same issue the 
Senator from Georgia has discussed. First, I congratulate him. This is 
a point we have been making on our side of the aisle. He has come up 
with a thoughtful and appropriate way to address what was one of the 
core drivers of our fiscal meltdown. If we look at what caused the 
financial crisis of late 2008, which has caused this significant 
recession, which has caused us to go through all these expenditures as 
a government and which has caused so many American people to suffer the 
consequences of the recession, there were three or four major events 
that generated this. One was money was too cheap for too long. That was 
a Federal Reserve decision. But right at the essence of it was the 
issue of underwriting, the fact that there was a decoupling of the 
people making the loan from the people who were responsible for the 
loan.
  We had this whole service industry built up that was making money off 
of the fees for originating the loan and wasn't that concerned about 
the ability of the person to repay the loan or the underlying asset. 
What the Senator from Georgia pointed out--and the proposal he has 
brought forward is a very responsible way to address this fundamental 
problem, which is the failure of underwriting--is a point we have been 
making on our side of the aisle. We have a whole series of what we 
think are pretty good ideas as to how we can make financial reform work 
better. Certainly one of them is the idea of the Senator from Georgia.
  I was impressed today to hear both leaders say they want to have a 
bill that is bipartisan, that is comprehensive, that is thoughtful, and 
that addresses the issues we confront in this regulatory arena.
  Unfortunately, that is not the atmosphere around here that has been 
created. Regrettably, there has been a huge amount of hyperbole, 
especially in the last couple weeks. Most of it has not been directed 
at moving down the path of a thoughtful and mature and substantive 
approach to this issue. Most of it has been addressed at raising 
anecdotal events which then have been hyperbolized into single one-
liners as to how you address them.
  This issue of financial reform is far too complicated for one-liners. 
That is a fact. It is an extremely complex undertaking to make sure we 
accomplish what we need to accomplish in regulatory reform. Our goals 
should be two. First, we should do whatever we can to restructure the 
regulatory arena so we reduce, to the greatest extent possible, the 
potential of another systemic risk event. I will talk about what we 
need to do in that area in a second.
  Second, while we are doing that, we have to make sure the regulatory 
environment we put in place keeps America as the best place in the 
world to create capital and get a loan for people who are willing to go 
out and take a risk, be entrepreneurs, and create jobs.
  One of the great uniquenesses of our culture, what makes us different 
from so many other places in this world, what gives us such vibrance 
and energy as an economic engine, is that we have people who are 
willing to go out and take risks. We have people who are willing to be 
entrepreneurs. And we have a system of capital formation and credit 
which makes capital and credit readily available to those individuals 
at reasonable prices. So as we go down the road of regulatory 
reorganization, we have to make sure we do not suffocate that great 
strength of our Nation.
  There are four basic issues before us today in regulatory reform, and 
none of them are partisan. Yet in the atmosphere around here, you would 
think they are all partisan, especially the President's recent speech, 
which was over the top in its partisan dialog.
  First is how you end too big to fail. We cannot allow a system to 
exist where there is a belief out there in the markets that the 
taxpayers are going to back up a company that has taken too many risks 
and has gotten itself in trouble. Why is that? Because if that happens, 
if there is a belief in the market that the taxpayers will step in and 
back up companies that are very large and systemic when they have taken 
too much risk and put themselves in dire economic straits--if there is 
a belief that the taxpayer is going to step up and back up that 
company--capital will get perverted. Capital will not be efficiently 
used. Capital will flow in an

[[Page 5763]]

inefficient way to companies which have proved themselves not to be 
fiscally responsible. That is not a good way for an economy to 
function--certainly a market economy to function. So we have to end too 
big to fail.
  This is not a partisan debate. Senator Dodd has brought forward a 
bill which he thinks ends too big to fail. In my view, it has some 
serious flaws. It is a good attempt, but it does not get there. Senator 
Corker and Senator Warner, from two different parties, have actually 
put together a concept--we call it resolution authority around here--
which actually does end too big to fail and does it the right way. It 
essentially says if a company, if an entity--which is a huge entity--
gets out of whack, overextends itself, gets too much risk, is no longer 
viable, well, then, we are going to resolve that company. The 
stockholders will be wiped out, unsecured bondholders will be wiped 
out, and the company will basically flow into bankruptcy and will not 
be conserved. That is a good approach, and it is a bipartisan approach.
  Another big issue: how you address regulatory oversight to try to 
anticipate a systemic event. Again, the Dodd bill makes an attempt in 
this area, but there are ways we can improve it. We need to have all 
the different regulators who have an important role in this sitting at 
a table, most likely led by the Fed, who take a look at the broad 
horizon of what is happening in the marketplace and saying: OK, in this 
area we have a problem arising. We have too many people doing too many 
things which are at the margin of responsibility here. We are going to 
empower the agency which is responsible for that--the FDIC or the OCC 
or one of the other regulatory agencies--to go out and make sure that 
activity ceases or is abated, and they are going to come back and 
report to us so you have some oversight here.
  That is the concept. It can be fleshed out in better terms. It goes 
to this issue which is raised by the Senator from Georgia--we should 
have better underwriting standards as part of this exercise so in the 
marketplace, real estate especially--residential real estate--we get 
back to the approach we should have taken to begin with, which is that 
we know the asset value that is being lent to exists and that the 
person can pay the loan back as the loan is adjusted over the years.
  Thirdly, we have the issue of derivatives. Derivatives are a huge 
part of the market--massive. The number is $600 trillion of notional 
value--something like that; massive numbers. What do they do? They 
basically make it possible for American companies especially to sell 
their products around the world or to take and put their products into 
the market in a way that they are able to address issues which they do 
not have control over.
  For example, if you are Caterpillar equipment and you are selling 
something in China, you do not know if the currency value is going to 
change--well, you do with China; that is a bad example--if you are 
selling something in Brazil, you do not know if the currency value is 
going to change, you do not know if there is going to be a change in 
the cost of your materials you are building that tractor with, you do 
not know a lot of different factors you do not have control over. So 
derivatives allow you to ensure over that.
  That is a simple statement of what derivatives do. But that goes to 
all sorts of different activities--from financial entities, all the way 
across the board to producers of goods. So there needs to be a regime 
put in place that makes these derivatives sounder, where we do not get 
an AIG type of situation where basically we are backing up what amounts 
to an insurance policy for a company with a name but actually no 
assets.
  Senator Jack Reed from Rhode Island and I have been working for 
months--literally months--on a daily basis to try to work out such a 
regime. We think we are pretty close. We think it is going to be a good 
proposal. Nobody is going to like it, which we know means it is going 
to be a good proposal. But it is going to accomplish what we need to 
do, which is to get more transparency and liquidity and margin in the 
market. There will be the opportunity to have end users who are exempt, 
but there will also be a primary incentive to put people on a 
clearinghouse. To the extent you can move from a clearinghouse to an 
exchange, that will happen also, without undermining the market.
  But the key here is to put in place a regime which does not force 
companies to go overseas to do their derivative activity. This is a 
very fluid event. If we come forward with an overly regressive approach 
and an overly bureaucratic approach--one which basically responds to a 
hyperbole of the moment, which is that all derivatives are bad and not 
transparent and therefore must be put on exchanges, something like 
that--we are basically going to push offshore the vast amount of 
derivative activity that is critical to our industry in America being 
competitive. As a very practical matter, if we can develop a sound 
market--and we can develop a sound market--we want to be the nation 
where most people go to develop their derivatives because it is a big 
industry and it is something we should keep onshore.
  The fourth issue: consumer protection.
  My time is up?
  The ACTING PRESIDENT pro tempore. The Senator has used 10 minutes.
  Mr. GREGG. Madam President, I see the Senator from Louisiana wants to 
speak. But the point here is pretty obvious. This is not a partisan 
issue. We can resolve the issue of financial regulatory reform if we 
sit down and do it in a constructive, thoughtful way, step back, be 
mature, and take an approach that is thoughtful versus wrapped in 
hyperbole and popularism of the moment. I certainly hope we will take 
that process and go forward.
  I yield the floor.
  The ACTING PRESIDENT pro tempore. The Senator from Louisiana.
  Mr. VITTER. Madam President, I join my colleagues in urging the 
Senate to come together--Republicans and Democrats--around a strong 
bipartisan approach to financial regulatory reform. We need to address 
the critical causes behind the financial crisis of the last several 
years, and we need to do it right and in a bipartisan way.
  Unfortunately, we are not on that path yet. The Dodd bill, which the 
President and Chairman Dodd and others are trying to push to the floor, 
is a purely partisan approach and, unfortunately, it gets a lot of the 
bigger issues wrong.
  First, and perhaps most importantly, the Dodd bill expands too big to 
fail. It does not end it. The Dodd bill ensures more future bailouts. 
It does not get rid of the need for bailouts. It is not just me saying 
that. As conservative an authority as Time magazine wrote a few weeks 
ago:

       Policy experts and economists from both ends of the 
     political spectrum say the bill does little to end the 
     problem of banks' becoming so big that the government is 
     forced to bail them out when they stumble. Some say the 
     proposed financial reform may even make the problem worse.

  Another significant authority is Jeffrey Lacker. He is president of 
the Richmond Federal Reserve. He was interviewed by CNBC. The CNBC 
reporter said: Well, doesn't this bill allow all sorts of resolution? 
Isn't that ending too big to fail? He said, very clearly:

       It allows those things, but it does not require them.

  That is the heart of the problem here: It allows those things, but it 
does not require them.

       Moreover, it provides tremendous discretion for the 
     Treasury and FDIC to use that fund to buy assets from the 
     failed firm, to guarantee liabilities of the failed firm, to 
     buy liabilities of the failed firm. They can support 
     creditors in the failed firm. They have a tremendous amount 
     of discretion. And if they have the discretion, they are 
     likely to be forced to use it in a crisis.

  Exactly, precisely, what we saw in the last few years.
  William Isaac, former FDIC Chairman, has echoed exactly the same 
concern:

       Nearly all of our political leaders agree that we must 
     banish the ``too big to fail'' doctrine in banking, but 
     neither the financial reform bill approved in the House nor 
     the bill promoted by Senate Banking Committee Chairman Chris 
     Dodd will eliminate it.


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  Finally, Simon Johnson, a respected MIT professor:

       Too big to fail is opposed by the right and the left, 
     though not apparently by the people drafting legislation. The 
     current financial reform bills are effectively a wash on the 
     issue.

  There are multiple sections in the Dodd bill that expand too big to 
fail: sections 113 and 114 essentially creating a ``too big to fail'' 
club; other sections creating a new permanent bailout slush fund; other 
sections allowing the bailout of creditors and codifying backdoor 
bailouts. That is a significant flaw in the bill--and not the only one.
  My second big concern is that the Dodd bill creates a new all-
powerful superbureaucracy with powers well beyond what is necessary to 
fix the problems that led to the last crisis. Again, there are several 
sections creating that new all-powerful bureaucracy. Perhaps the most 
significant one in my mind is one that subjects anybody who accepts 
four installment payments to the authority of this huge new 
bureaucracy.
  I have four kids. Three are teenagers with braces. That is their 
orthodontist. That is the electronic store down the street. None of 
these folks were part of the problem that led to the financial crisis, 
but they sure accept four installment payments. We cannot pay for three 
sets of braces otherwise. This is a huge new superbureaucracy with 
enormous authority.
  Finally, another big problem with the Dodd bill is it does nothing to 
fix other key causes of the crisis. For instance, it does nothing about 
Fannie Mae and Freddie Mac. We have a so-called comprehensive bill, 
with multiple titles, thousands--tens of thousands--of words, hundreds 
of pages, and the words ``Fannie Mae'' and ``Freddie Mac'' are never 
included, nowhere to be found. As Lawrence White, an economics 
professor, said:

       The silence on Fannie and Freddie is deafening. How can 
     they look at themselves in the mirror every morning thinking 
     that they have a regulatory reform bill and they are totally 
     silent on Fannie and Freddie? It just boggles my mind.

  And it boggles my mind as well.
  Finally, nothing on lending standards, underwriting standards--
exactly what Senator Isakson was talking about. The core fundamental 
problem behind the last financial crisis was that all sorts of loans 
were written that any reasonable person would know from the outset had 
no chance of making--the person getting the loan had no realistic 
chance of keeping up on that loan because there were no lending 
standards, no underwriting standards. An institution wanted to start 
the loan and sell it off and get it off its books and get quick profit 
for initiating the loan. The Dodd bill doesn't address that and doesn't 
create those lending standards we need to create.
  So where is the change? We need change. We need real reform, but 
where is the change?
  These are the top firms that got bailout funds from the taxpayers, 
hundreds of billions of dollars all told. This is the old regulator of 
those firms. This is the new regulator of those firms--exactly the 
same. The regulation of these entities doesn't change, doesn't move--
exactly the same. Again, we need regulatory reform, but we need it 
zeroed in on the real problems, and we need a strong bipartisan 
approach, not a highly partisan approach.
  Many of us think these are the basic principles of true regulatory 
reform: permanently ending bailouts and too big to fail, which the Dodd 
bill clearly does not do; ending all of the bailout authorities of the 
Federal Reserve and FDIC because if they still have those authorities, 
they will use them in the future; enhancing consumer protection without 
creating this huge new superbureaucracy that goes well beyond what is 
needed to address the causes of the crisis; creating greater 
transparency for derivatives while allowing businesses to manage risk, 
as Senator Judd Gregg explained.
  Begin to address Fannie Mae and Freddie Mac. Those were key causes of 
the crisis. There is no excuse for those four words to be completely 
left out of a so-called comprehensive reform bill.
  Establish minimum lending standards for mortgages. That was a key 
cause of the crisis. It is ridiculous for that to not be addressed in a 
so-called comprehensive reform bill.
  Increase competition for credit rating agencies. We saw significant 
problems there.
  And dramatically improve coordination and communication among the 
regulators. This would be an approach targeted on the real problems, 
not a bill using the last financial crisis as an excuse to reach 
another preexisting agenda. This would be a bipartisan approach which 
the American people can support, and I hope this will become the 
outline of the approach the Senate adopts as we move forward.
  Thank you, Madam President. I yield the floor.
  The ACTING PRESIDENT pro tempore. The Senator from Oregon.
  Mr. MERKLEY. Madam President, this morning I met a friend who is 
visiting, and he told me he was planning to go out and visit the FDR 
Memorial. I thought maybe the entire membership of the Senate should go 
out and visit the FDR Memorial.
  Essentially, FDR did three things in response to the Great 
Depression: one was to create jobs, a second was to fix housing, and a 
third was to repair the banking system. All three were essential. We 
have been immersed in all three components now, responding to the great 
recession we experienced and the great explosion of the economy in 2008 
that we are dealing with every day.
  What did Roosevelt do in response to the banking challenge? Two main 
things: First, he made sure American families could safely put their 
money back into banks. That is the origination of the deposit 
insurance. Second, President Roosevelt made sure banks didn't engage in 
high-risk speculation that would put the banks and the American economy 
at risk because he understood the critical role of banks in lending to 
families and lending to small businesses, and the last thing one wants 
in a recession is to have investment houses making speculative 
investments go down and then take the banks down with them. So you 
compromise the lending to small businesses and to families at the same 
time that the investments go awry. That is why he separated those 
activities--highly risky investments separate from the lending that 
would continue to fuel our economy.
  Well, because of these regulations in the Roosevelt administration, 
the wages of American families grew steadily right alongside the 
productivity of our economy. Our economy was thriving and our middle 
class was thriving. Indeed, we should judge the success of our economy 
not by the gross domestic product, not by the size of the bonuses in 
boardrooms on Wall Street; we should judge the success of our economy 
by the living wages paid to working families and whether those wages 
are keeping pace with productivity our workers are bringing to the 
economy. By that standard, we are not doing well.
  By the 1980s and 1990s, Wall Street convinced Washington that we 
don't need those Roosevelt-era regulations anymore, we don't need those 
walls that protect lending from high-risk investing. Instead of having 
oversight and accountability, we should just let Wall Street make their 
own rules. This is a little bit like a traffic system in which we say 
we are kind of tired of those traffic lights. We don't really like 
those stop signs and lane markers. It is a waste of paint. We can do 
without them. For a short time, everybody can just kind of speed down 
the road and not worry about any rules to abide by until shortly 
thereafter when everyone crashes.
  That is exactly what happened in our financial system over this last 
decade. The SEC took down the leverage limits. The five largest 
investment banks were told to set their leverage wherever they wanted. 
We had Bear Stearns in a single year going from leverage of 21 to 41. 
So for every dollar they were investing, they were betting $20 by the 
start of the year, but by the end of the year, as the SEC granted them 
permission, for every dollar they held, they were betting $40. They 
make a tremendous amount of money on the way up

[[Page 5765]]

 when they can bet $40 for every dollar they hold, but they crash in a 
spectacular fashion when the market goes down in that situation.
  Then, again, we had the Fed. The Fed puts monetary policy in the 
penthouse and safety and soundness on the upper floors. But what do 
they do with their responsibility for consumer protection? They put it 
down in the basement and they seal the doors. They let no daylight in 
and they let little communication occur between the consumer protection 
side and the safety and soundness and the monetary side.
  They did absolutely nothing when a new product was invented in 2003, 
a new form of subprime that had a 2-year teaser rate, a prepayment 
penalty that locked the family into that loan and prevented the family 
from escaping from that loan, and that had exploding interest rates 
that would destroy the family. The Fed did absolutely nothing. Then 
Wall Street said: You know what. These loans are worth so much because 
we can pull so much money out of families with these loans, so we are 
going to pay a bonus to a broker if the broker ties a family into one 
of these loans. And those steering payments resulted in tons of 
families who qualified for prime mortgages being steered into subprime 
mortgages. By a Wall Street Journal study, 60 percent of families who 
were in subprime mortgages qualified for prime mortgages, but their 
broker persuaded them that the best mortgage was one that was not in 
their best interests.
  Then we had the rating agencies. The rating agencies had magic all 
their own. They didn't develop their own models to evaluate BBB bonds 
that were mixed and sliced and diced into new packages of bonds. No. 
They took their models from Wall Street, and based on those models they 
said: If you take BBB bonds from over here and BBB bonds from over here 
and you mix them together, we will rate 80 percent of the resulting 
bonds as AAA. Well, that is a money-making machine, but it also 
undermined one of the key instruments the financial world depends on; 
that is, accurate credit ratings.
  Then we had lots of tricks and traps buried in the small print, 
stripping families of their capital. Things were happening in the 
credit card industry such as sitting on a person's payment for 10 days 
even though it had arrived on time, sitting on it for 10 days and then 
posting it as late and charging a late fee. As a constituent from Salem 
said to me, where is the fairness in that? American citizens are saying 
time and time again, when clauses written in the fine print defy 
fundamental fairness, where is the fairness in this?
  So at every level we had a breakdown in our financial system. We know 
what happened. The deck was stacked against the ordinary citizen. It 
turned a banking system that is designed to help families, strengthen 
families, strengthen small businesses into a casino for Wall Street's 
big bets. When those bets went bad, the taxpayers--you and I--were left 
holding the bag.
  Now, as the effort to restore fair rules of the road to Wall Street 
heats up here on the floor of the Senate, there are those on Wall 
Street and those on this floor who want to block reform. They don't 
want to fix any of these things I have been describing. Indeed, 
recently the minority leader met with more than two dozen Wall Street 
executives and hedge fund managers and urged them to elect members of 
his party who would stop these reforms that serve the American people. 
Then he came back down here and he whipped out his talking points from 
Frank Luntz and he said: This bill won't work. Why did he say that? 
Because he doesn't want a bill to reform Wall Street and fix these 
rules and restore prosperity to our economy. He wants to take this 
election year instead and serve a powerful constituency that doesn't 
want any rules restored to the road.
  Folks, that is just wrong. We have a responsibility. Just as our 
ancestors not so long ago fixed the problems of the Great Depression, 
fixed the banking system, and restored a banking system that would take 
us forward in an orderly fashion and allow business to thrive in 
America, to be the envy of the world in America, we have the 
responsibility to do that today.
  There are some who have said: Well, we want a free market. Let me 
tell my colleagues, a free market thrives with rules that allow orderly 
conduct because those rules create the integrity that gives people the 
faith to utilize those markets. We saw with the stock market reforms 
that people believe stocks are traded fairly in America, and therefore 
they are willing to invest and, by investing, power up the companies 
that are issuing public stock. It works when there is integrity in the 
market. Foreign investors will come and put their dollars in America if 
they believe there is integrity in our system.
  That is what these rules are about--rules that create a free market 
with integrity so that it can power up the economy of America. That is 
what this is about. We are not talking about what some of my colleagues 
across the aisle are talking about: preserving the status quo, which 
means freedom from oversight, freedom from accountability, freedom to 
translate BBB bonds and AAA bonds with a magic evaluation system; free 
to blow up the economy, which destroyed families' savings, families' 
retirements, families' jobs, often families' health care, and pretty 
much tore the foundation out from under the American working family.
  This bill creates a consumer financial agency that will say: No more 
trips and traps on basic financial products. We need to have that 
mission no longer locked in the basement. We need to have that mission 
in an agency that says we will not allow those tricks and traps and 
scams that have been perpetuated over the last decade, so that 
Americans will not say: Where is the fairness in that? Instead, they 
will say: Thank goodness these contracts are fair and serving our 
families and our economy.
  The PRESIDING OFFICER (Mr. Udall of New Mexico). The Senator has 
spoken for 10 minutes.
  Mr. MERKLEY. Is that my full allocation of time?
  The PRESIDING OFFICER. Yes.
  Mr. MERKLEY. Thank you. I will close by saying this bill must get 
done because we have a responsibility to restore the foundations for 
our Nation.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Rhode Island is recognized.
  Mr. WHITEHOUSE. Mr. President, let me first thank the Senator from 
Oregon for his remarks. He has brought great passion for this issue to 
the Senate. He serves with distinction on the Banking Committee. I 
couldn't agree with him more that the spectacle of colleagues 
scampering up to Wall Street to offer their services, and interfering 
with, obstructing, watering down, and impeding, of all things financial 
regulatory reform, after all we have been through, is not a spectacle 
that is salutary.
  I appreciate his remarks.

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