[Congressional Record (Bound Edition), Volume 156 (2010), Part 6]
[Senate]
[Pages 7668-7669]
[From the U.S. Government Publishing Office, www.gpo.gov]




                      FINANCIAL REGULATORY REFORM

  Mr. SESSIONS. Mr. President, I wish to make a few remarks about the 
financial regulation bill, the Restoring American Financial Stability 
Act. Certainly, we need to take some steps to deal with the catastrophe 
we have gone through--the damage and destruction, and the financial 
mismanagement that has been wreaked on us and from which people are 
still suffering today.
  This crisis exploded in the fall of 2007. It was centered in the 
housing market and home loans. The question people ask and should ask 
is: How did it happen? Did Congress know about it? Why didn't Congress 
do something about it?
  There is a false myth out there--many have heard it--that somehow 
this crisis was a product of Ronald Reagan and his disciple George Bush 
because they did not believe in regulations, they opposed regulations, 
deregulation is what caused this and more regulations would have 
prevented it. And so to the rescue, this myth says, come Democratic 
colleagues and President Obama with more new regulations that are going 
to fix the problem.
  I believe good regulations can be helpful. Anybody who has lived in 
the world and been in businesses and governments knows there are bad 
regulations that drive people crazy every day, that drive up the cost 
of products, that costs jobs in America, and that should not be on the 
books. The question is: How do we have a good regulation or a bad 
regulation?
  Let me focus for a second on a critical component of the fundamental 
problem, which was the housing market, and how our government-sponsored 
entities, Fannie Mae and Freddie Mac, came to be responsible for half 
of the housing loans in America--50 percent of the housing market. How 
did they get involved in that, and how was this the big factor in the 
economic destruction we suffer?
  Fannie Mae, Freddie Mac, the Federal Housing Administration, and the 
Veterans Administration backed 96.5 percent of home loans in the first 
quarter of 2010. It used to be you went to your bank and they loaned 
you the money. If they did not think you were creditworthy, you did not 
get the money. Some people would complain, but a lot of times people 
were saved from very unwise decisions because their banker correctly 
intuited they were not going to be able to make these payments, there 
was too much risk because they had a better perspective on who could be 
successful in paying off the loans.
  Before Freddie and Fannie collapsed in 2008, they owned or guaranteed 
$5.2 trillion in mortgages and mortgage-backed securities, almost half 
of their $12 trillion market. Prior to that, Freddie and Fannie were 
leveraged at twice the rate at Bear Stearns which failed. In other 
words, they had half the real capital for the loans they made, as did 
Bear Stearns, which failed.
  Because of this improvident policy, Freddie and Fannie have cost the 
taxpayers $126 billion. That is an incredible sum of money. Fannie Mae 
reported a $72 billion loss for 2009; Freddie Mac reported a $22 
billion for 2009; and it came in last week asking for another $10 
billion.
  CBO, our Congressional Budget Office which analyzes these costs, 
projects Fannie and Freddie will ultimately cost the taxpayers $389 
billion. But that amount is not on the government's books. Because of 
the way our books are managed, these two institutions are supposed to 
be somehow quasi-private and thus not affecting the government 
Treasury. But they did affect the government Treasury.
  I asked the question at the beginning: How did it happen? What did 
Congress know and did not know, and why did Congress not act? These are 
good questions. I am pushing back a little bit. I am not going to 
continue to have all this talk that somehow Ronald Reagan is 
responsible for this crisis.
  Let me read a letter. I do not think a lot of people paid much 
attention to it at the time, but it was very real. I remember reading 
from it in debate during that time. It is a letter to my colleague from 
Alabama, Senator Richard Shelby, who was chairman of the Banking 
Committee. It is dated March 31, 2008, from the Board of Governors of 
the Federal Reserve System, signed by none other than Alan Greenspan, 
Chairman of the Federal Reserve.
  Remember, at this time, Senator Shelby and Republicans had become 
concerned about the health of Freddie and Fannie. They realized they 
were overleveraged and presented great risk. This was 2004, about 3 
years before the collapse occurred. Senator Shelby felt something 
should be done about it. My Republican colleague offered legislation to 
do something about it. This is what Alan Greenspan wrote:

       Thank you for requesting the views of the Federal Reserve 
     Board on the legislation you have proposed to improve the 
     supervision and regulation of government-sponsored 
     enterprises.

  That is GSEs, that is Freddie and Fannie.

       As I stated in my testimony of February 24, the Congress 
     needs to create a GSE regulator with authority on a par with 
     banking regulators, with a free hand to set appropriate 
     capital standards, and with a clear process sanctioned by the 
     Congress for placing a GSE in receivership.

  It had begun to dawn on them that these GSEs could go into 
receivership. They were so overleveraged. They were on the verge of 
collapse. That is what he wrote to Senator Shelby in early 2004.
  He goes on to say, and this language is dramatic:

       To fend off possible future systemic difficulties, which we 
     assess as likely if current trends continue unabated, 
     preventive actions are required sooner rather than later.

  Isn't that a dramatic statement, ``To fend off possible systemic 
difficulties''? Did we not have the whole system go into a spin and we 
are still suffering from it and may for years to come?
  Then he goes on to say:

       The Board believes your proposed legislation makes 
     substantial progress toward meeting these objectives.
       With regard to the receivership issue, the Board continues 
     to believe that the Congress needs to clarify the 
     circumstances under which a GSE can become insolvent and, in 
     particular, the resulting position--both during and after 
     insolvency--of the investors that hold GSE debt. The process 
     must be clear before it is needed. Leaving the matter 
     unresolved, as it is under current law, only heightens the 
     prospect that a crisis would result in an explicit 
     guaranteeing of GSE debt. In this area, too, your proposal 
     makes substantial strides.

  It is basically an endorsement of Senator Shelby's efforts. Not 
basically, it is a flat out endorsement. He goes on to say:

       With regard to capital, the Board continues to believe that 
     determining the suitable amount of capital for GSEs is a 
     difficult and technical process, and, that a regulator should 
     have a free hand in determining both the minimum and risk-
     based capital standards for these institutions. Your 
     proposal, which gives the new regulator more discretion in 
     these areas, is an important improvement in this respect.

  This was an endorsement by the Federal Reserve Board of Senator 
Shelby's efforts to reform. What happened? Senator Shelby brought it up 
in the Banking Committee, and it passed the committee on a straight 
party-line vote. All Republicans voted for increased regulations, 
increased accountability, increased capitalization of Freddie and 
Fannie, and every Democrat on the committee voted against it.
  When it got to the floor, it was subject to a 60-vote filibuster. It 
was clear the Democrats had sent word they were not going to support 
it, and there was no prospect of passing the bill. Although he bill 
passed in committee, it never actually passed the Senate floor.
  I want to say the idea that the only greed, the only mismanagement 
was with private bankers is not accurate. There was plenty of that. I 
have no grief to bear for the big guys on Wall Street. They rolled the 
dice. I voted against their bailout and I do not believe they should 
have been bailed out at all. They should have suffered the 
consequences. We would probably be better off today economically 
because we would have taken the hit and gotten it out of our system. We 
can dispute that. All I can say is there are

[[Page 7669]]

other areas of greed and mismanagement.
  But currently, 96 percent of home loans are backed by government 
institutions--Fannie, Freddie, VA, the Housing Administration. Who is 
to say they are always perfect? We know, as Senator McCain has pointed 
out in his amendment to this legislation that is before us today, that 
we can still do more about it.
  Since 96 percent of housing mortgages are now backed by government 
institutions, why does this legislation not deal with it? Why does it 
not? It completely sidesteps the issue. Why? Because we would have to 
deal with how to score and add to our debt another $400 billion. Is 
that one reason?
  Is another reason because Freddie and Fannie have been so powerful 
politically that they have been able to fend off the oversight they 
should have been subjected to from the beginning? Is it a belief 
somehow because they are quasi-government institutions that they can do 
no wrong, that only private industries and institutions can do wrong?
  I don't know exactly why all of this is so, but it is not dealt with, 
and it should be dealt with. Senator McCain's legislation will deal 
with it. He made a speech Thursday in which he delineated the history 
of how this all occurred. I thought it was very valuable insight. 
Americans should know about this. When the government comes in and 
allows politics and governmental policy to override financial reality, 
then we can get in trouble. If you order agencies or agencies are 
willing to make bad loans because they think that somehow it is good 
policy, do people think nobody is going to have to pick up the tab some 
day in the future? I am afraid they are.
  The situation we are in arose from the fact that richly paid GSE 
executives and their political supporters had no skin in the game on 
the loans they were making. They were getting their salaries, and they 
kept getting their salaries even when it became clear the firms were 
mismanaged and heading for disaster and were going to be bailed out by 
the American taxpayers. They operated recklessly and they, I believe it 
is fair to say, were the precipitating cause, frankly, of the collapse 
of the financial markets; if not the cause, one of the primary causes 
of it. It is unbelievable and improper that when we propose legislation 
to restore America's financial stability, we don't fix the Freddie and 
Fannie problem.
  The ACTING PRESIDENT pro tempore. The Senator's time has expired.
  Mr. SESSIONS. I ask unanimous consent for 30 additional seconds.
  The ACTING PRESIDENT pro tempore. Without objection, it is so 
ordered.
  Mr. SESSIONS. The Wall Street Journal wrote that ``reforming the 
financial system without fixing Freddie and Fannie is like declaring a 
war on terror and ignoring al-Qaida.''
  Fannie and Freddie were at the center of it. They were a cause of it. 
They need to be reformed, and I am disappointed that the one thing this 
government should be doing, which is fixing these quasi-government 
agencies, is not occurring.
  I thank the Chair, and I yield the floor.

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