[Congressional Record (Bound Edition), Volume 156 (2010), Part 5]
[House]
[Pages 6582-6584]
[From the U.S. Government Publishing Office, www.gpo.gov]




                       ECONOMIC CRISIS IN AMERICA

  The SPEAKER pro tempore (Mr. Boccieri). Under the Speaker's announced 
policy of January 6, 2009, the gentleman from Iowa (Mr. King) is 
recognized for 60 minutes.
  Mr. KING of Iowa. Mr. Speaker, I listened with interest to the 
presentations made here in the previous hour, and there were a couple 
of visuals that I want to look at and commit some of that to memory.
  I heard from Ms. Kaptur that this is not a partisan issue, it is an 
economic issue and an American issue, and I agree. I have been troubled 
for some time not just the influence that comes out of Goldman Sachs, 
but the influence that comes out of Wall Street. Here is my concern and 
here how it was internalized.
  I lived much of my life watching from a distance what was going on on 
Wall Street, and I believed that as those investors and those bankers 
sat down there and began to trade on the streets of Wall Street and 
began to build the edifices that exist there today so very close to 
Ground Zero, that they were keepers of the free enterprise flame in 
America.

                              {time}  1815

  I had great trust that they were the ones that understood from the 
top down, from the multiple billions of dollars in investments down, 
how to hold together free enterprise, how to plan for the long term, 
how to put provisions in place so that each generation could have that 
opportunity to do free enterprise capitalism and free market 
capitalism.
  I got my first wide open eyes when I first went to Wall Street when I 
was elected to Congress; it would be fairly early in 2003 for me. It's 
a long story, but the short version of it was after I went around Wall 
Street and met with a lot of the CEOs and the players that were there, 
on the way back I turned to my wife and I said, Marilyn, they don't 
have a vision for the long term. They don't have a plan in place to 
protect our investments and see to it that this doesn't collapse. 
They're looking at the short term. They're looking at taking their 
margins out and they're looking at their quarterly reports, but they're 
not looking at where we are in 10 years or a generation or 50 years or 
100. That was well before we saw anything except a dot-com bubble that 
was, at the time, being filled by an unnatural housing market that was 
partially fueled by unnaturally low interest rates. But that was my 
vision then.
  As I watch this unfold, I reflect upon an individual we brought in as 
an expert, and since I'm going to quote him on the floor, I don't want 
to attribute it to the name, but it's 30 years in investment banking. 
This was in the beginning of the subprime mortgage crisis as the 
dialogue was beginning in the country before we actually saw this 
starting to tail off. He explained it this way: when you're in this 
investment banking business, what you do is--and these would be the 
experts--what you do is pretty much what everybody does. That way if 
they're making money, you're making money, and if things fall apart and 
they get bailed out, you'll be bailed out with them.
  That was more than 3 years ago. That's another incident that was 
branded into my memory because it was a seminal moment in my 
understanding that the economy that most of us deal with as 
individuals, balancing our checkbook, paying our credit card bills, 
looking at the income that comes in weekly or monthly and budgeting our 
expenses and knowing that there are checks and balances in everything 
that we do, if we fail to make our house payment, somebody comes and 
sells our house. If we fail to make our car payment, somebody 
repossesses our car. They don't come along and say, oh, sorry, you 
didn't buy a nice enough car, we're going to tax somebody and fund 
that. We have to be responsible for our finances.
  If we start a business, we have to guarantee those payments. We have 
to get a line of credit at the bank so we can make our monthly bills 
and we can meet the payroll and the utilities and all of the things 
that come along with the free enterprise side of this.
  I looked at Wall Street and I found out that they had a different set 
of rules, a different way of looking at this, that their checks and 
balances were not built in so that there was an assurance that--the 
built-in component that is a check and balance that would require that 
the people who would make the over-investments and take the excessive 
risks would pay the price for that.
  So as we get to this point now where we have seen the downward spiral 
in our economy, this ``Great Recession'' as some will call it and the 
massive government bailouts that we have had and the tremendous burden 
on the taxpayers, born and unborn, that we will have this obligation to 
try to service the interest and the principal on this debt, still the 
guarantee is there, more than implicit, it's now nearly explicit with 
this legislation. And we may or may not agree on how we go forward, but 
I think we can agree that the things that we've done in the past 
haven't had enough checks and balances internally.
  As I listened to this dialogue--I didn't come to the floor to speak 
about this subject, but I wanted to express this right in the aftermath 
of this previous Special Order, Mr. Speaker, to let you know and 
everyone know that we do have a common cause to put responsibility and 
government responsibility in the market system. I just watched the 
gentlelady pay attention here. I would yield to whatever remarks she 
might choose to make.
  Ms. KAPTUR. I want to thank Congressman King very much for coming to 
the floor because we share a concern that goes beyond party. This is so 
serious for our country, it's serious for our generation, it's serious 
for the next generation.
  If we look at the abuses of the financial system over the last 30 
years, let's say, every time something bad happened, the government 
bailed them out. And then the next crisis was worse than the one before 
it. I came here during the 1980s. I saw what happened, and I saw a huge 
debt put on the American people, $140 billion at that point. And rather 
than strengthening the laws to prevent moral hazard, we loosen them. 
And then we got a worse crisis.
  If you look back to Enron, if you look back to everything that 
happened during the 1990s, rather than repairing it, what we did was we 
gave them more latitude--it's inexplicable what occurred--and the moral 
hazard got greater. And now with this, this is so much larger than the 
last two crises, and it's a real question as to whether the so-called 
``reform'' coming out of the Congress will actually work.
  I would like to place in the Record an interview with Professor 
William Black, an attorney who was recently on television, that I think 
is very, very probing about the enormous potential here for financial 
fraud, control fraud, the lack of investigators inside the FBI, and as 
Congresswoman Speier mentioned, inside of the SEC. And then also an 
interview with Dr. Simon Johnson of MIT and Mr. James Kwak about what 
is actually happening in this crisis and how we are not addressing it 
fully in the reform bills proceeding through this Congress.
  So I just appreciate you giving me the opportunity to say that and to 
say we are in common cause here. I appreciate your comments very much. 
I am very worried about where we're headed as a country. I see 
community banks being destroyed in my region. I see these big money 
center institutions that have been prone to moral hazard having greater 
and greater authority in our country. And the amount of money they give 
to political campaigns, and with the recent decision by the Supreme 
Court to allow endless funding by any group in our political campaigns. 
Any one of them could wipe us out.
  That's not what this country was set up for. We were set up for 
opportunity. We were set up for the individual to matter, for our 
communities to matter, for the equity that our people, when they create 
it in their homes, that they just don't lose it because these people

[[Page 6583]]

think of some scheme to raid them. And yet that's what we're facing 
now.
  So we have an enormous obligation to educate the American people and 
learn from them and hear their best advice on how we can dig ourselves 
out of this hole.
  I thank you for allowing me a few moments of your time.

 Interview: Excerpts From Bill Moyers Journal, April 23, 2010, Guest: 
                               Bill Black

       Bill Moyers: Bill Black is with me now. One of the 
     country's leading experts on crimes in high places he teaches 
     economics and law at the University of Missouri-Kansas City, 
     and wrote this book, ``The Best Way To Rob a Bank Is To Own 
     One.''
       Welcome back to the Journal.
       William K. Black: Thank you.
       Bill Moyers: What did you think of the President's speech 
     late this week?
       William K. Black: It's a good speech. He's a very good 
     spokesman for his causes. I don't think substantively the 
     measures are going to prevent a future crisis. And I was 
     disappointed that he wasn't willing to be blunt. He used a 
     number of euphemisms, but he was unwilling to use the F word.
       Bill Moyers: The F word?
       William K. Black: The F word's fraud in this. And it's the 
     word that explains why we have these recurrent, intensifying 
     crisis.
       Bill Moyers: How is that? What do you mean when you say 
     fraud is at the center of it?
       William K. Black: Well, first, when you deregulate or never 
     regulate, mortgage bankers were never regulated, you 
     effectively have decriminalized that industry, because only 
     the regulators can serve as the sherpas, that the FBI and the 
     prosecutors need to be able to understand and prosecute these 
     kind of complex frauds. They can do one or two or maybe three 
     on their own, but when an entire industry is beset by wide 
     scale fraud, you have to have the regulators. And the 
     regulators were the problem. They became a self-fulfilling 
     prophecy of failure, because they, President Bush appointed 
     people who hated regulation. I call them the anti-regulators. 
     And that's what they were.
       Bill Moyers: This hearing that, where you testified this 
     week, looking into the bankruptcy at Lehman Brothers, had 
     something on this.
       Timothy Geithner: And tragically, when we saw firms manage 
     themselves to the edge of failure, the government had 
     exceptionally limited authority to step in and to protect the 
     economy from those failures.
       Ben Bernanke: In September 2008, no government agency had 
     sufficient authority to compel Lehman to operate in a safe 
     and sound manner and in a way that did not pose dangers to 
     the broader financial system.
       Anton Valukas: What is clear is that the regulators were 
     not fully engaged and did not direct Lehman to alter the 
     conduct which we now know in retrospect led to Lehman's ruin.
       Bill Moyers: The regulators were not fully engaged. I mean, 
     this is an old story. We all know about regulatory capture 
     where the regulated take control of the regulators.
       William K. Black: Yeah, but this one is far worse. That's 
     not very candid testimony on anybody's part there. The Fed 
     had unique authority. And it had it since 1994 to regulate 
     every single mortgage lender in America. And you might think 
     the Fed would use that authority.
       And you might especially think that, if you knew that 
     Gramlich, one of the Fed members, went personally to Alan 
     Greenspan and said, there's a housing bubble. And there's a 
     terrible crisis in non-prime. We need to send the examiners 
     in. We need to use our regulatory authority. And Greenspan 
     refused. Lehman was brought down primarily by selling liar's 
     loans. It was the biggest seller of liar's loans in the 
     world.
       And when we look at these liar's loans, we find 90 percent 
     fraud. 90 percent. And we find that most of the frauds are 
     not induced by the borrower, but they're overwhelmingly done 
     by the loan brokers.
       Bill Moyers: And liar's loans are?
       William K. Black: A liar's loan is we don't get any 
     verified information from you about your income, your 
     employment, your job history or your assets.
       Bill Moyers: You give me a loan, no questions asked?
       William K. Black: No real questions asked. Certainly no 
     answers checked. In fact, we just had hearings last week 
     about WaMu, which is also a huge player----
       Bill Moyers: Washington Mutual----
       William K. Black [continuing]: In these frauds. Washington 
     Mutual, which used to make, run all those ads making fun of 
     bankers who, because they were stuffy and looked at loan 
     quality before they made a loan. Well, WaMu didn't do any of 
     that stuff. And of course, WaMu had just massive failures. 
     And who got in trouble at WaMu? Who got in trouble at Lehman? 
     You got in trouble if you told the truth. They fired the 
     people who found the problems. They promoted the people that 
     caused the problem, and they gave them massive bonuses.
       Bill Moyers: I watched the testimony where you were present 
     the other day in the Lehman hearings. And there was a very 
     moving moment with a former vice-president of Lehman Brothers 
     who had gone and tried to blow the whistle, who tried to get 
     people to pay attention to what was going on. Take a look.
       Matthew Lee: I hand-delivered my letter to the four 
     addressees and I'll give a quick timeline of what happened, 
     May 16th was a Friday, on the Monday I sat down with the 
     chief risk officer and discussed the letter, on the Wednesday 
     I sat down with the general counsel and the head of internal 
     audit, discussed the letter. On the Thursday I was on a 
     conference call to Brazil. Somebody came into my office, 
     pulled me out, and fired me on the spot without any 
     notification. I stayed, sorry.
       Bill Moyers: Matthew Lee, vice-president of Lehman 
     Brothers, fired because he tried to blow the whistle. What 
     does that say to you?
       William K. Black: Well, it tells me that they were covering 
     up the frauds, that they knew about the frauds and that they 
     were desperate to prevent other people from learning.
       Bill Moyers: Matthew Lee told the accounting firm Ernst & 
     Young what was going on. Isn't the accounting firm supposed 
     to report this, once they learn from somebody like him that 
     there's fraud going on?
       William K. Black: Yes, they're supposed to be the most 
     important gatekeeper. They're supposed to be independent. 
     They're supposed to be ultra-professional. But they have an 
     enormous problem, and it's compensation. And that is, the way 
     you rise to power within one of these big four accounting 
     firms is by being a rainmaker, bringing in the big clients.
       And so, every single one of these major frauds we call 
     control frauds in the financial sphere has been--their weapon 
     of choice has been accounting. And every single one, for many 
     years, was able to get what we call clean opinions from one 
     of the most prestigious audit firms in the world, while they 
     were massively fraudulent and deeply insolvent.
       Bill Moyers: I read an essay last night where you describe 
     what you call a criminogenic environment. What is a 
     criminogenic environment?
       William K. Black: A criminogenic environment is a steal 
     from pathology, a pathogenic environment, an environment that 
     spreads disease. In this case, it's an environment that 
     spreads fraud. And there are two key elements. One we talked 
     about. If you don't regulate, you create a criminogenic 
     environment because you can get away with the frauds. The 
     second is compensation. And that has two elements. One is the 
     executive compensation that people have talked about that 
     creates the perverse incentives. But the second is for these 
     professionals. And for the lower level employees, to give the 
     bonuses. And it creates what we call a Gresham's dynamic. And 
     that just means cheaters prosper. And when cheaters prosper, 
     markets become perverse and they drive honesty out of the 
     market.
       Bill Moyers: You also wrote that the New York Federal 
     Reserve knew about this so-called three-card monte routine. 
     But that, the man who led it, at the time, Timothy Geithner, 
     now the treasury secretary, testified that there was nothing 
     he could do.
       Timothy Geithner: In our system the Federal Reserve was a 
     fire station, a fire station with important, if limited, 
     tools to put foam on the runway, to provide liquidity to 
     markets in extremis. However, the Federal Reserve, under the 
     laws of this land was not given any legal authority to set or 
     enforce limits on risk-taking by large financial institutions 
     like the independent investment banks, insurance companies 
     like AIG, Fannie and Freddie, or the hundreds of non-bank 
     financial firms that operated outside the constraints of the 
     banking system.
       Bill Moyers: Now, what I hear is the gentleman who was then 
     chairman of the New York Fed, saying, I, we had this job to 
     do, but we didn't have the authority to do it.
       William K. Black: Yeah.
       Bill Moyers: We were the fire truck, but we didn't have any 
     water in our hose.
       William K. Black: Yeah, this was pretty disingenuous, 
     because other portions of his testimony, he explained why 
     there was this gap. And he said it was because we repealed 
     Glass-Steagall. Well, the Fed pushed for the repeal of Glass-
     Steagall.
       Bill Moyers: Glass-Steagall was the act that was repealed 
     in the late nineties that separated regular banks from 
     investment banks, right?
       William K. Black: Correct. So this is a deliberately 
     created regulatory black hole, created by the Fed. And then 
     the Fed comes into the hearing, eight years later, and said, 
     we were helpless. Helpless to do anything, because of a black 
     hole we designed.

 Interview: Excerpts From Bill Moyers Journal, April 16, 2010, Guests: 
                      Simon Johnson and James Kwak

       Simon Johnson is a former chief economist at the 
     International Monetary Fund. He now teaches at MIT's Sloan 
     School of Management and is a Senior Fellow at the Peterson 
     Institute for International Economics.
       James Kwak is studying law at Yale Law School--a career he 
     decided to pursue after working as a management consultant at 
     McKinsey & Company and co-founding the successful software 
     company, Guidewire. Together James Kwak and Simon Johnson run

[[Page 6584]]

     the indispensable economic website BaselineScenario.com.
       Welcome to you both.
       Let me get to the blunt conclusion you reach in your book. 
     You say that two years after the devastating financial crisis 
     of '08 our country is still at the mercy of an oligarchy that 
     is bigger, more profitable, and more resistant to regulation 
     than ever. Correct?
       Simon Johnson: Absolutely correct, Bill. The big banks 
     became stronger as a result of the bailout. That may seem 
     extraordinary, but it's really true. They're turning that 
     increased economic clout into more political power. And 
     they're using that political power to go out and take the 
     same sort of risks that got us into disaster in September 
     2008.
       Bill Moyers: And your definition of oligarchy is?
       Simon Johnson: Oligarchy is just--it's a very simple, 
     straightforward idea from Aristotle. It's political power 
     based on economic power. And it's the rise of the banks in 
     economic terms, which we document at length, that it'd turn 
     into political power. And they then feed that back into more 
     deregulation, more opportunities to go out and take reckless 
     risks and--and capture huge amounts of money.
       Bill Moyers: And you say that these this oligarchy consists 
     of six megabanks. What are the six banks?
       James Kwak: They are Goldman Sachs, Morgan Stanley, 
     JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.
       Bill Moyers: And you write that they control 60 percent of 
     our gross national product?
       James Kwak: They have assets equivalent to 60 percent of 
     our gross national product. And to put this in perspective, 
     in the mid-1990s, these six banks or their predecessors, 
     since there have been a lot of mergers, had less than 20 
     percent. Their assets were less than 20 percent of the gross 
     national product.
       Bill Moyers: And what's the threat from an oligarchy of 
     this size and scale?
       Simon Johnson: They can distort the system, Bill. They can 
     change the rules of the game to favor themselves. And 
     unfortunately, the way it works in modern finance is when the 
     rules favor you, you go out and you take a lot of risk. And 
     you blow up from time to time, because it's not your problem. 
     When it blows up, it's the taxpayer and it's the government 
     that has to sort it out.
       Bill Moyers: So, you're not kidding when you say it's an 
     oligarchy?
       James Kwak: Exactly. I think that in particular, we can see 
     how the oligarchy has actually become more powerful in the 
     last since the financial crisis. If we look at the way 
     they've behaved in Washington. For example, they've been 
     spending more than $1 million per day lobbying Congress and 
     fighting financial reform. I think that's for some time, the 
     financial sector got its way in Washington through the power 
     of ideology, through the power of persuasion. And in the last 
     year and a half, we've seen the gloves come off. They are 
     fighting as hard as they can to stop reform.
       Simon Johnson: I know people react a little negatively when 
     you use this term for the United States. But it means 
     political power derived from economic power. That's what 
     we're looking at here. It's disproportionate, it's unfair, it 
     is very unproductive, by the way. Undermines business in this 
     society. And it's an oligarchy like we see in other 
     countries.

  Mr. KING of Iowa. Reclaiming my time and, Mr. Speaker, I would point 
out that it is unusual for Democrats and Republicans to share time 
spontaneously on the floor, but it's because there is a bond of common 
interest and a bond of a serious legislator that I recognize that's 
here on the floor for a serious reason.
  I thank the gentlelady from Ohio for the presentation.
  I'm going to shift off now into the subject matters that I had on the 
front of my mind, but I was compelled to address this and I appreciate 
the response.
  Mr. Speaker, I come here to the floor tonight to talk about a range 
of issues. Perhaps if I would pick up on the financial side of this and 
go through a list of some of the things that have happened that I think 
contributed to the ``Great Recession'' that some refer to it as. And I 
would take us back a long ways. I would take us far back to the time 
that there became implicit guarantees that the Federal Government would 
do bailouts.
  I remember those years of the eighties that the gentlelady mentioned. 
I went through 28 years of business, and I was highly leveraged going 
into the farm crisis of the eighties. I know the pain of that. I lived 
for 3\1/2\ years with a knot in my stomach that didn't go away unless 
there was something incredibly distracting that would cause it to 
disappear, and then I remember it would form again.
  The SPEAKER pro tempore. The gentleman will suspend.

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