[Congressional Record (Bound Edition), Volume 156 (2010), Part 6]
[Senate]
[Pages 8406-8408]
[From the U.S. Government Publishing Office, www.gpo.gov]




                        PRIVATE POOLS OF CAPITAL

  Mr. REED. Mr. President, like many of my colleagues, I have several 
amendments that have been filed. At this moment, it is not possible to 
call up all the amendments, but I wish to speak to one of them and hope 
that prior to the conclusion of our debate, I will have the 
opportunity, and I hope my colleagues do have an opportunity, to call 
up amendments that are still important to the legislation and deserve 
consideration by the body.
  My amendment would require registration with the Securities and 
Exchange Commission for private equity funds, hedge funds, and venture 
capital funds that are larger than $100 million. It recognizes that 
large pools of capital without any connection to regulatory authority 
could pose a systemic risk. It is a function, as we found out, in some 
cases, that if they make erroneous judgments, that could cause a 
systemic problem.
  This proposal has been embraced by a wide cross-section of interested 
and knowledgeable parties. It has the support of the Obama 
Administration. It has the support of the North American Securities 
Administrators Association, who represent State securities regulators. 
It has the support of the Private Equity Council, the Managed Funds 
Association, Americans for Financial Reform, the AFL-CIO, and AFSCME. 
It has broad-based support, and I think it is part of the major effort 
of this legislation to increase transparency and, as a result, to 
preclude and prevent fraud, particularly when we are dealing with these 
large pools of private capital.
  Private equity firms' activities can often make or break companies, 
resulting in a significant loss of jobs. We have seen of the 163 
nonfinancial companies that went bankrupt last year, nearly half were 
backed by leveraged buyout firms.
  There are startling examples of companies, going concerns that employ 
thousands of Americans, that are acquired by private equity companies. 
Their business model, in many cases, is to leverage that company by 
borrowing extensively and by using these proceeds to purchase the 
company and then hopefully to repay themselves handsomely. If they are 
at a point in which the company is burdened with too much debt, they 
will either attempt to sell it off or they are forced into bankruptcy. 
The result, unfortunately, in many cases, is thousands of working men 
and women in this country lose their jobs. The company goes bust. There 
is nothing left.
  This behavior has to, at least, be on the radar screen, if you will, 
of the regulators. They have to know that these funds above $100 
million are operating. There are many other examples we can cite.
  The bill before us has one category. That is hedge funds. We have to 
recognize there are other major private pools of capital, venture 
capital funds and private equity funds that should also have to 
register. The other thing we have to recognize is that the regulatory 
capacity of any agency is limited. What we have seen over the last 
several years is a situation where regulators may have had the 
authority, but they did not have the resources, or they saw situations 
where certain activity was regulated and other activity was not.
  What this amendment argues for is to ensure that we recognize both 
the potential dangers of large pools of private capital and the 
limitations of regulations to really differentiate between the pools. 
That is why the amendment I propose provides no categorical exemptions 
for these private pools. The rationale is that I do not think, frankly, 
the regulators can keep up with private funds that can describe their 
business plan in a way to qualify for an exemption but very well might 
be conducting the same type of behavior that causes concerns. So I have 
suggested, and it has been supported by a wide number of individuals 
and institutions, that we provide this broad-based registration 
requirement--firms above $100 million would be required to have Federal 
registration. That is something, I think, that is important. Therefore, 
we have proposed the amendment.
  The investors in these firms deserve, I think, our protection as 
well. The

[[Page 8407]]

benefits to the financial system outweigh, in my view, the modest 
associated costs, and as a result I think we could and should move 
forward. Many of these firms, frankly, if you have $100 million under 
management or for investment, and if you don't have good financial 
controls, I think we have to ask ourselves: Should these firms be 
operating? Should they be allowed to continue to operate?
  The second aspect of this, too, is that the infrastructure of 
compliance--the infrastructure of risk management--is built into these 
firms. If it is not, frankly, we should ask: Why are they still doing 
business? The cost of registration--and this is simply registration; 
simply telling the Federal regulators, the SEC, that we are doing 
business like this; we have a certain amount of assets under management 
or investments that we are managing, and several other items of basic 
information--has been estimated to be rather modest compared to the 
money under management and the other operational expenses of these 
firms.
  So again, I think this is a valuable amendment. It is a valuable 
amendment that reinforces the basic tenets of this legislation--
transparency, accountability, and giving our regulators an overall view 
of the financial situation--the money that is there, the types of 
business activities that are there--so that they can develop 
appropriate information for their regulatory endeavors.
  The other point I would make is that if we were to stop the camera 
today and look at the financial scene, we might make judgments that, 
well, this entity is not very large, this particular entity doesn't do 
the type of business, et cetera. With the dynamism of our economy, 
which is a value, going forward 2 or 3 years, those firms could change 
dramatically, and something that seemed innocuous today could be 
systematically risky in the future. It might be called the same thing, 
but its functions are different.
  I make a final point in this regard. In some respects, legislation 
that was considered here in the 1990s looked at derivatives, looked at 
securitization as a phenomenon that would be static and that wouldn't 
change. But we know it changed, and it changed in a way the regulators 
didn't anticipate and weren't prepared to anticipate. So mortgage funds 
in the 1990s were based on those old-fashioned 20 percent down, a FICO 
score of 680, income sufficient to amortize the mortgage over the 
lifetime. The mortgages they were securitizing in 2005-2006--no money 
down, no income statement, liar loans, et cetera--was a different 
product. And yet we legislated for products and for business entities 
that transformed dramatically in the subsequent years.
  We have to provide our regulators with the flexibility to not only 
deal with the problems of today but to fairly anticipate a dynamic and 
changing financial situation. That is at the heart of this legislation 
also. So I hope we have an opportunity to further debate this and to 
offer it and to ask colleagues for their consideration.
  With that, I yield the floor to the Senator from Michigan.
  The PRESIDING OFFICER (Mr. Merkley). The Senator from Michigan is 
recognized.
  Mr. LEVIN. Mr. President, I want to briefly come to the floor to talk 
about what happened here today. We saw the long arm of Wall Street come 
to the Senate and reach right into this Chamber. It should not have 
happened. We all should have learned the lesson as to what Wall Street 
plunged us into. And the idea that Wall Street could do this, through a 
number of Republican Senators who objected to our even coming to a vote 
on the so-called Merkley-Levin amendment, is nothing less than 
shameful. But that is what happened.
  We have been going back and forth, a Democrat and a Republican 
amendment, and it came time for Senator Dodd, who is a cosponsor of 
Merkley-Levin, to offer this amendment, to bring this up to the floor, 
and it was rejected. It was rejected by the Republican leadership 
acting through the manager of the bill.
  This amendment has been worked for many days. We have attempted very 
hard, and succeeded in addressing a number of concerns which were 
raised, but what we insisted upon and will continue to insist upon and 
will not yield on is our determination that banks not engage in risky 
bets. Our commercial banks have access to the Fed window. That is 
taxpayer money. Our commercial banks have access to the Federal Deposit 
Insurance Corporation. It guarantees that the accounts will be paid. We 
cannot permit--we cannot allow--banks to engage in risky bets and then 
expect to be bailed out by taxpayers. That happened to us. It got us 
into big trouble. We are in a deep recession as a result of what the 
Wall Street banks did.
  There were a lot of other contributors. They were not alone. Our 
subcommittee hearings were prepared over many months. In fact, the 
investigation lasted about a year and a half, with millions of 
documents that were subpoenaed and brought into the subcommittee's 
offices. What our hearings showed is that upstream we had a number of 
banks and mortgage companies that were willing to package bad loans, in 
many cases loans that they knew were fraudulent, and in some very 
serious cases loans that they knew were likely to go into default. 
Nonetheless--and the e-mails show this--those upstream banks decided 
they were going to bundle these mortgages--these dubious risky 
mortgages, many of which were likely to default--they were going to 
securitize these mortgages and ship them downstream, where Wall Street 
was panting for these bundled securitized mortgages because then they 
were going to slice them and dice them and cut them up into these 
collateralized deals, which were so complicated and very difficult to 
explain to the public.
  Nonetheless, what happened is the public took a bath, and a number of 
firms on Wall Street did very well, including Goldman Sachs. It did 
extremely well through their dealings. Some of the e-mails from Goldman 
Sachs show how well they did, while everybody else was losing their 
homes, losing their jobs, and most banks were losing money. In one of 
their e-mails Goldman Sachs said:

       Much of the plan began working by February as the market 
     dropped by 25 points and our very profitable year was 
     underway.

  So the market dropped 25 points and the profitable year at Goldman 
Sachs was underway. Why? Because they bet against their own clients.
  As Senator Merkley pointed out--and he has been a real pleasure to 
work with as a partner--we had a situation here where Goldman Sachs was 
selling billions of dollars of securities--many of which they knew 
contained bad assets, and their own e-mails show it--selling to their 
clients with their right hand and with their left hand betting heavily 
against those same securities. The way they bet against them is a 
complicated story--going short, betting short, the big short, using 
those default swaps, which were described earlier on the floor of the 
Senate. But they were making a lot of money out of the losses of their 
clients.
  What added insult to injury--the injury was the conflict of interest 
and betting against something they were selling, and not even 
disclosing that fact, by the way, to their clients and customers. But 
the insult that was added was when their own e-mails, over and over 
again, show that their own salespeople were describing these securities 
that they were selling to our pension funds and our educational 
institutions as junk and worse. That is the insult. The underlying 
injury is the conflict of interest.
  Our amendment, as the Senator from Oregon described, goes after the 
proprietary trading, which is highly risky, in one part of the 
amendment. Another part of the amendment goes directly at the conflicts 
of interest which were exemplified by what Goldman Sachs did. Then they 
tell us in the Permanent Subcommittee on Investigations: Well, that is 
the way Wall Street does business. You just don't understand.
  Well, Main Street understands. We understand the values that Wall 
Street exemplified in these last years by selling junk to clients and 
then betting against them. We understand very well what went on, 
because we, the people

[[Page 8408]]

of the United States, ended up paying for those bets. When they won the 
bets, they made out like bandits. Wall Street--Goldman Sachs--won many 
of those bets because they bet against the very securities that they 
thought were dubious. But there were also a lot of banks that lost 
bets, that didn't do what Goldman Sachs did, but nonetheless got stuck 
with these bad securities. And what happened then? Because of the 
proprietary trading of those banks and risky securities, they ended up 
losing a lot of money and the taxpayers had to bail them out.
  So the taxpayers of this country lose either way. Our pension funds, 
our educational institutions lose out to a Goldman Sachs, with their 
conflicts of interest against their own clients--essentially dealing 
with themselves as a client against the interest of the person they 
were selling securities to. You have the Goldman Sachs on the one hand 
making a lot of money that way. You have the banks, which lost money 
because of those risky bets on the other side of the bet, ending up 
being at the public trough and having to be bailed out because they 
were too big to fail and would have plunged us even more deeply into a 
deeper recession or a depression had they not been bailed out.
  We are trying to prevent that from happening again. The Merkley-Levin 
amendment is trying to go right to the heart of that problem, and that 
problem is a very deep one, involving the examples which the Senator 
from Oregon I believe cited but, if not, let me very briefly summarize. 
Wall Street has attempted to argue that proprietary trading, which our 
amendment would seek to end in a very thoughtful way, without hitting 
the kind of activities that are client oriented, that should be 
allowed--Wall Street has attempted to argue that proprietary trading 
was not a significant factor in the downfall of our financial system. 
The numbers here tell a very different story.
  By April of 2008, the Nation's largest financial firms had suffered 
$230 billion in losses based on their proprietary trading. So by the 
end of 2008, taxpayers put up hundreds of billions of dollars in so-
called TARP funds to avoid the collapse of our economy. One example of 
the damage here: In 1998, Lehman Brothers had $28 billion in 
proprietary holdings. Less than 10 years later--2007--its proprietary 
holdings had soared more than 10 times to $313 billion in those kind of 
high-risk bets. When the values of the holdings declined in 2007 and 
2008, Lehman Brothers then lost $32 billion. Those losses exceeded 
Lehman Brothers' net worth. By September of 2008, the firm collapsed in 
the largest bankruptcy in our history.
  That is what we are trying to prevent a recurrence of in our 
amendment. And what happened? Because the Republican leadership decided 
they would use a parliamentary approach here to stop Merkley-Levin from 
even being offered, we have been unable to get the remedy for that kind 
of a catastrophe happening again to the floor of the Senate for a vote.
  That is a tragedy which is lying in wait, if we allow it to exist. So 
Senator Merkley and I--the Presiding Officer now and I--are going to do 
everything we possibly can in the few hours that remain before the 
cloture vote to prevent the Republican obstruction from succeeding. We 
are going to continue to try tomorrow morning to see if we can't get 
our amendment considered by the Senate. We simply cannot stand by and 
do nothing. We have seen too many massive costs to the taxpayers.
  Another example was with Bear Stearns. Bear Stearns lost more than $3 
billion, thanks to an investment of about $30 million in two hedge 
funds. So the losses at Bear Stearns, because of the leverage they used 
and were allowed to use under existing law, which we would not allow 
them to use--their losses were 100 times greater than the original 
investment that crippled the bank and led to an emergency sale to 
JPMorgan Chase.
  We have to protect depositors and taxpayers from the risk of this 
high-risk proprietary trading at the commercial banks. We have to 
protect taxpayers from the dilemma of having to pay for Wall Street's 
risky bets or watch our financial system disintegrate. We have to 
protect investors and the financial system at large from the conflicts 
of interest that too often represent business as usual on Wall Street.
  We worked with Senator Dodd. As Senator Merkley pointed out, Senator 
Dodd and his staff worked very closely with us. Senator Dodd supports 
our amendment. So the chairman of the Banking Committee wants our 
amendment to be considered, and even he cannot persuade the Republican 
leadership to not use a parliamentary gimmick to stop us, to thwart us, 
to stymie us from bringing this remedy to the floor of the Senate.
  I thank Senator Dodd, Senator Merkley, and his staff for working so 
closely with us. We have worked with the Treasury Department very 
closely, with the Securities and Exchange Commission closely, to make 
sure we would fix the problems we target without endangering legitimate 
market activity or activity that is on behalf of clients instead of on 
behalf of the banks. A number of our colleagues worked with us to make 
sure there would not inadvertently be restriction of activities that 
did not cause and would not cause this kind of financial crisis again. 
Federal Reserve Chairman Paul Volcker endorsed our amendment, as did 
business leaders such as John Reed, former chairman and CEO of 
Citibank, and major organizations for Wall Street reform.
  But as we stand here and sit here at 9:30, we are stymied. Unless we 
can unlock this tomorrow morning, there is going to be a cloture vote 
later on that day which, unless we can figure out a way to make our 
amendment germane postcloture, will prevent us from getting a vote on 
this amendment.
  Are we serious about reforming the worst excesses of Wall Street? On 
this side of the aisle, we are. On the Republican side of the aisle, 
what we have seen now is obstruction, a decision that has been made 
that they are going to protect Wall Street instead of Main Street. Wall 
Street has a long arm and hundreds of lobbyists swarming around this 
Senate. They are determined to stop us from taking up the Merkley-Levin 
amendment.
  There is going to be a dramatic opportunity tomorrow. There is going 
to be another effort made to have our amendment considered. At least 
one effort will be made tomorrow, and maybe more, because it is 
absolutely essential that the average American out there, the average 
family, that average business on Main Street that we are trying to make 
sure has funds available to it for its needs--they are going to be 
looking, hopefully, at this body tomorrow when a decision is going to 
be made as to whether the reforms that are so critically important to 
preventing a reoccurrence of this disaster, this economic disaster, 
will prevail.
  Again, I thank Senator Merkley for all he has done, for the huge 
energy he has put in, he and his staff working so closely with us, with 
the Treasury Department. I am proud to have the name ``Levin'' come 
after the name ``Merkley'' in Merkley-Levin. Someday--hopefully it will 
be tomorrow--we are going to get Merkley-Levin considered by the 
Senate. It is a sad day when the power of Wall Street can overwhelm and 
overcome the determination of the American people to reform it, to get 
that cop back on the beat on Wall Street.
  We will know tomorrow morning or tomorrow afternoon very early as to 
whether Wall Street's effort to thwart this Chamber's majority view 
that the Merkley-Levin reform be voted on--and a majority that would 
clearly adopt it--whether Wall Street succeeds or not we will know, at 
least short term, by about noon or 1 o'clock tomorrow afternoon.
  I yield the floor.

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