[Congressional Record (Bound Edition), Volume 157 (2011), Part 2]
[House]
[Pages 2940-2943]
[From the U.S. Government Publishing Office, www.gpo.gov]




                    WHAT CAUSED THE FAILING ECONOMY

  The SPEAKER pro tempore. Under the Speaker's announced policy of 
January 5, 2011, the gentlewoman from California (Ms. Speier) is 
recognized for 30 minutes.
  Ms. SPEIER. Thank you, Madam Speaker, and I appreciate the 
opportunity this evening to talk about something that we're not talking 
much about right now. We talk about the loss of jobs, the unemployment. 
But what really caused it?
  You know, a few weeks ago the Financial Crisis Inquiry Commission 
actually submitted its report to Congress. The good news is that it's 
on the best seller list. The bad news is that I

[[Page 2941]]

am fearful that it's going to be gathering dust in the Chamber here and 
throughout this building because in this document it speaks volumes 
about why we are sitting where we are today; why our economy has 
tanked; why there are 15 million people unemployed in this country; and 
why there are 4 million people who now have been foreclosed on, and 
another 4 million who are underwater relative to their mortgages.
  So this evening I am joined by the distinguished member from the 
Financial Services Committee, my good friend from the State of North 
Carolina, who is a powerful voice on consumer protection and the 
financial crisis that we've endured. And we're going to spend the next 
half hour just talking about it.
  Well, first and foremost, what was this commission? This commission 
was a bipartisan, independent 10-member committee composed of private 
citizens with experience in economics, finance, housing, market 
regulation. They held 19 public hearings in affected communities across 
this country including Washington, New York, Miami, Sacramento, Las 
Vegas, and Bakersfield; 115 witnesses appeared before the commission in 
sworn public hearings, including leading figures in the crisis.
  In addition, the commission interviewed over 300 people, virtually 
all of the key players in the financial collapse, including Angelo 
Mozilo of Countrywide, Richard Fuld of Lehman, and Joe Cassano of AIG 
Financial Products Division, and examined thousands of documents--all 
of which are posted on the Web. A totally transparent process.
  And the single most important statement they made was this crisis 
could have been avoided.
  Now, they gave just a few examples. The Securities and Exchange 
Commission could have required more capital and halted risky practices 
at the big investment banks, but they did not. The Federal Reserve Bank 
of New York and other regulators could have clamped down on CitiGroup's 
excesses in the run-up to the crisis. They did not. Policymakers and 
regulators could have stopped the runaway mortgage securitization 
train. And they did not.
  So this document has line and verse of what went wrong. But one of 
the most telling parts deals with the mortgage fraud, and I would like 
to just put this up.
  How many executives have been held accountable for their actions in 
this financial crisis?
  As you can see, two have been criminally charged. There have been 
zero convictions, zero sent to prison.
  Well, what happened when the savings and loan crisis occurred in this 
country decades ago?
  The results there were much different: 1,188 were criminally charged, 
915 were convicted, and 582 went to prison. Convictions included more 
than 260 thrift CEOs and senior executives including, of course, the 
famous Mr. Keating.
  So it is very important for us tonight and through the next year or 
two to not only study this document but to put it to paper. By ``put it 
to paper,'' I mean legislate around it.
  Now the Dodd bill is an incredible effort in that regard. The Dodd-
Frank effort was one that we were successful in moving through; but as 
this report points out, there were powers that many of these regulators 
already had but chose not to use.
  Now, the second poster talks about mortgage fraud; and the compelling 
information in the report that I think is important to point out is 
that, again, there were people that were looking at the problem and 
saying, Wait a minute, we need to do something about this. One in 
particular was the Deputy Director of the FBI who began to look at this 
issue and thought something is wrong here.
  According to the FBI, 80 percent of the cases of fraud involves 
insiders. So if there was fraud being exercised in the mortgage 
industry, it was coming from the inside. FBI Assistant Director Chris 
Swecker began noticing a rise in mortgage fraud back in 1999 and in 
2002 led a successful criminal prosecution against the owner of 
Beneficial Mortgage in your State, my dear friend from North Carolina, 
for selling fraudulent loans to Fannie Mae.
  First Beneficial repurchased the fraudulent loans from Fannie but 
then proceeded to resell them to Ginnie Mae without any interference 
from Fannie. Fannie later paid $7.5 million in restitution to the 
government for allowing the sale.
  Assistant Director Swecker told a congressional committee in 2004 
that if fraudulent mortgage practices became unrestrained and 
systematic, it would ultimately place financial institutions at risk 
and have adverse effects on the stock market. Boy, was he prescient or 
what?
  So here is an interesting chart that shows how we've seen an increase 
in fraud reports at financial institutions.
  Now, these are really undervalued. They're probably five times higher 
because many institutions do not actually report like they should. But 
what is even more disturbing is that while the number of mortgage 
frauds have increased, the number of actual prosecutions have slowed 
down. So as we are trying to kind of somehow come to some understanding 
of why this all happened and how do we make sure it doesn't happen 
again, if we don't have enforcement tools, if we don't have those who 
have the enforcement tools seeking to go after the mortgage fraud, then 
in all likelihood it will continue to happen.
  So I know that my good friend from North Carolina is interested in 
weighing in on this issue. I think that as we discuss this issue, it's 
important to know, one, that there are enforcement tools, but they have 
to be used.
  I yield to my good friend.
  Mr. MILLER of North Carolina. Thank you, and thank you for organizing 
this Special Order tonight to talk about an issue that we should not 
turn our attention from because we need to remember how we got here if 
we're going to figure out how to get out and how to make sure we don't 
get here again. This has been the worst economy since the Great 
Depression, and we need to make sure that the mistakes that got us here 
are mistakes we avoid in the future.
  Our colleagues across the aisle have said the great issue in American 
politics now is between those who want big government and those who 
want small government.

                              {time}  1910

  The real issue is which side government is on; and for too long, 
government has not been on the side of working and middle class 
families who are trying to make an honest living, who are trying to 
support themselves, support their families, do the right thing, do 
something useful with their lives. Government has been on the side of 
people who were trying to make a killing by getting themselves into a 
position where they can take advantage of the economy, where they can 
extract money, they can loot the economy, is what economists called 
rent-seeking, doing nothing particularly useful, but just taking a 
piece of other people's productive work.
  There has been a lot of gloating in the last little bit about how 
successful the financial rescue has been, and by many measures it has 
been. The banks have not actually collapsed; the financial system 
didn't collapse. We did not have a Great Depression, as painful as this 
has been, but the financial collapse and the rescue profoundly offended 
Americans' sense of justice, and it offended my sense of justice.
  What led to the financial collapse was not some perfect storm of 
unforeseeable macroeconomic forces and this weird combination of events 
that no one could possibly have seen. It really was the result, as the 
FCIC report concluded, it was not just preventable; it was the result 
of blame-worthy conduct that we should never have allowed to happen.
  I first got involved in this issue, not knowing it would result 
eventually in a financial crisis, through working on the issue of 
mortgages, knowing that the mortgages were terrible for consumers, for 
homeowners. And the way that they had been portrayed, as a good-faith 
effort by the financial system to try to make home ownership available 
to people who could not otherwise afford it, was completely different 
from what was really going on with subprime mortgages.

[[Page 2942]]

  There was an explosive growth of subprime mortgages. They grew from 8 
percent of all mortgages in 2003 to 28 percent in 2006. That is 
enormous growth in just 3 short years. And they certainly were not 
about helping people buy homes who otherwise could not have afforded 
home ownership.
  In fact, every study that has looked at it has concluded the great 
majority of people who got subprime loans qualified for prime loans. 
They got cheated. They got steered into loans that obviously were not 
in their interest. They weren't about helping people into home 
ownership.
  In fact, subprime was almost entirely a creature of refinances. 
Seventy percent, even during that 2003 to 2006 period, 70 percent were 
refinances. People already owned their homes, but they needed to borrow 
money. Some of them lived beyond their means, there is no doubt about 
it. Some of them were using the equity in their home as an ATM machine. 
But the fact is for the last generation the means of middle class 
families have not been enough. Americans, as the economy has grown, as 
the Nation has prospered, that prosperity has not been widely shared as 
it has been in the past.
  And so when Americans got into trouble, when they needed to borrow 
money from somewhere, when someone in the family got sick, when someone 
lost their job, when they went through a divorce, when they needed to 
borrow money, the only way they could borrow money was to borrow it 
against their home, to refinance their home. Seventy percent of 
subprime loans were refinances. And again, the great majority, The Wall 
Street Journal estimated 55 percent, most of the other estimates have 
been more than that, were people who qualified for prime mortgages.
  Ninety percent were not fixed rate, 30-year mortgages. They had a 
quick reset after just 2 or 3 years. So they were 2/28s or 3/27s. Most 
people who got those loans did not even know that. They did not know 
that the initial mortgage payment that they had to make, monthly 
payment, was going to be subject to a very quick increase. And the 
increase after just a couple of years was generally 30 to 50 percent a 
month. To get out of the mortgage, the great, great majority had to pay 
a prepayment penalty, usually like 3 percent of the outstanding balance 
of the mortgage.
  Now, those were not mortgages that were designed to help middle class 
families. Those were mortgages designed to take the equity in their 
home, to strip them of the equity of their home as house prices were 
going up. There was never any thought that they really would be able to 
pay off those mortgages over the course of 30 years and then invite 
their friends and family over to have a ceremony where they would burn 
their mortgages, as earlier generations of Americans had done. They 
were mortgages that had the effect of trapping people in debt and 
taking from them the equity in their home and making sure that that 
ended up in the pockets of the financial sector, not in the pockets of 
the middle class families.
  Other practices in that last decade that should never have happened, 
overdraft fees. Now, overdraft fees serve a useful purpose. In another 
generation, we used the criminal laws to prosecute people who wrote bad 
checks. There are a lot of perfectly honest folks who got themselves in 
just a little bit of trouble, or didn't balance their checkbooks, who 
ended up with prosecutions for writing bad checks. But overdraft fees 
became a source of profit for banks. A typical overdraft fee would be 
40 bucks. The biggest banks actually developed what was called ``fee 
harvesting software.''
  If you had an overdraft agreement, and you had one unless you 
specifically asked not to have one, and you went to an ATM machine and 
you asked for your balance, it wouldn't actually tell how much you had 
in your account. It would say ``funds available.'' That meant how much 
your balance was plus what they would allow in overdraft fees.
  And they would run the bills through in a way that would maximize 
your overdraft fees. So if you were like a lot of people and you got to 
the end of the month and there was more month than there was paycheck, 
and you went to the ATM, and you had a hundred bucks in your account, 
and you went to the ATM machine and you took out 20, and then you took 
out another 20, and then you made a $20 purchase, and then another $20 
purchase with your debit card, and then maybe a $15 purchase, and then 
you wrote a $100 check or a $105 check, the banks would put the $105 
check through first, putting you over your limit, charging you a $40 
overdraft fee on that and the 20, the 20, the 20, the 20, and the 15. 
Now, that's just crooked. And that was legal.
  Ms. Speier, my colleague from California, has pointed out the lack of 
prosecutions. But perhaps the greatest scandal of this financial crisis 
is what was legal; not that illegality was blinked at, but what was 
legal in all of this.
  We have now passed legislation that should reform much of this, but 
we have to stick to it to make sure that those reforms are enforced, 
they are given meaning, and that the regulators do not fall into that 
tendency to be controlled by the people they are supposed to be looking 
after. They are supposed to be the cop on the block, and they have to 
exercise independent judgment on behalf of the American people.
  We need to make sure these reforms work because we cannot allow what 
happened in the last decade. It truly offended Americans' sense of 
justice, that the people who caused it have come out unscathed. Not 
only have they not been criminally prosecuted, but they are now back to 
making the same kind of bonuses they made before. And the people who 
have suffered, suffered the most, are the working and middle class 
families who got trapped in those mortgages, or who lost their jobs, or 
even people who had good mortgages have now seen the value of their 
homes collapse. And with the loss of the value of their home, one in 
four people with mortgages now are underwater, owe more on their home 
than their home is worth.
  With that, they have seen the loss of their life savings. That is the 
life savings for most middle class families, the equity in their home. 
So of course people have a knot in their stomach. They have a knot in 
their stomach about whether they're going to keep their jobs. They have 
a knot in their stomach over what they really own in the world when 
they have seen the value of their home collapse in the way that it has.
  So I thank the gentlelady from California for organizing this Special 
Order so that we can call attention again to the kind of misconduct, 
the kind of corrupt, rent-seeking looting of the economy that we have 
seen in the last decade that got us to where we are.
  Ms. SPEIER. I thank the gentleman. Reclaiming my time, you know, you 
had said earlier that our friends on the other side of the aisle were 
bemoaning the big government; and yet if any of the records that have 
been established by this commission are really studied, without the 
kind of government to do the kind of investigation and enforcement, 
then we are setting ourselves up for another financial crisis.

                              {time}  1920

  Mr. MILLER of North Carolina. I am reminded of one of my favorite 
quotes from Will Rogers, who is responsible for many of my favorite 
quotes, that in the New Deal, even after the financial collapse, even 
after the stock market collapse and the revelation of all of the 
conduct that had led to that stock market collapse, the securities 
industry fought tooth and nail. Wall Street fought tooth and nail the 
regulation of the securities markets, the stock markets.
  Will Rogers said, ``The boys on Wall Street don't want a cop on their 
block.'' Well, they still don't. They still do not want someone 
standing between them and the kinds of profits that they made in the 
last decade.
  Ms. SPEIER. You know, you are absolutely right, and so is Will 
Rogers. I think that it's important for us to communicate to the 
American people that while we don't want bloated government, we want to 
make sure that there is a government that has the cop on the street.

[[Page 2943]]

  Look at the savings and loan crisis and those who were criminally 
charged and those who were convicted and those who went to prison. The 
FBI deputy director at the time, John Pistole, testified before 
Congress and said that there were a thousand people working on the S&L 
crisis at its height within the FBI, a thousand people.
  That compares to about 240 agents working on the mortgage fraud cases 
last year. So, you see, no numbers in terms of convictions, and you can 
see that if you don't have cops on the beat, then you are going to have 
people that are going to take advantage, that are not going to follow 
the rules, and that, frankly, will not be charged nor convicted for 
their crimes.
  I am reminded, too, that during much of this review by the commission 
they talked about the action that some regulators did take in 2005 
where they weren't willing to actually take action against the banks, 
but they did issue what they called was a nonbinding guidance. The 
guidance was to recommend the banks consider a borrower's ability to 
make the loan payment when the rate adjusted.
  What a lightbulb going off. I mean, why wouldn't that be naturally 
part of the process when you were going to assess whether someone could 
carry the loan, to see whether or not they could carry the loan after 
the rate adjusted? But as you pointed out, they were all interested in 
the yield spread. They were all interested in churning. They were all 
interested in securitizing these loans and making more and more money. 
So it wasn't about making sure people could actually pay for the loans 
moving forward.
  I see we have been joined by another colleague. Welcome. I yield to 
the gentleman from New Jersey.
  Mr. PASCRELL. I didn't come to speak on this issue tonight but 
another issue, but I can't help but look at the graphic message that's 
right there in front of everybody, in front of the country, about the 
financial, Great Recession, depression--who was charged and how many 
were convicted. This is a very, very, very sad omen.
  If we go back into the nineties and into the first decade of this 
century, very, very specific, as we understood what was going to come, 
you need to have a Justice Department that's willing to stand up and 
fight the very people who many times fund our campaigns.
  Now, if you can't say it, then you shouldn't be here.
  AIG is a perfect example. They became the poster child of everything 
that was going wrong in our financial institutions. But AIG, in 2003 
and 2005--rather, 2003 and 2005, got what are called deferred 
prosecutions. Deferred prosecutions to me are the very center, the very 
apex of what is corrupt about those moneylenders in the temple.
  Now, what is AIG all about? They made and packaged many of these 
financial deals that we read about it for so many years. And people 
look at this and they read about it. They may not know all the specific 
definitions about every one of these packages, these financial 
products, as they were called, but they do understand that nobody ever 
pays for anything, and nobody ever is held accountable.
  So how can people, the average person who is struggling, particularly 
now, see it's all right when things are going well, the AIGs become 
simply a fault, a sand pebble on the beach of our brains.
  But the fact of the matter is, when things get tough, then you will 
wonder where this money is going. Because money doesn't disappear into 
the ocean, it doesn't disappear into the atmosphere, into the sky. It 
goes someplace and it winds up in someone's pocket. It's simple one-on-
one mathematics, beyond the course.
  When you look at deferred prosecutions and how many corporations got 
deferred prosecutions, where the government said, where the Justice 
Department said, look, if you straighten out and fly right, and we will 
have a Federal monitor there to make sure that you don't do the 
financial practices that you did before, then we will let you go. No 
one will be prosecuted, and no one will be taken to task, and no one 
will go to trial, and no one will, therefore, ever be convicted. My 
friend, it did not work with AIG, and it hasn't worked with any of the 
large corporations.
  You know what? I don't blame one party for this. We were part of the 
situation as well, and until we stand and tell the truth about our own 
implications in this thing, this is never going to be changed.
  People want to be confident in their government and their Justice 
Department, to get to those people who made money on the backs of the 
working men and women of this country.
  Ms. SPEIER. The gentleman from North Carolina.
  Mr. MILLER of North Carolina. Thank you very much. I think we all 
struggle with what phrase to use to describe the people that have been 
hurt by this. I think we use the words, the phrase working and middle 
class families, sometimes we say ordinary people. Sometimes we say 
regular people. But the phrase that keeps coming to me is people who 
are trying to make an honest living.
  And I think my model for that was my own parents. I am a child of the 
middle class. My father worked for the post office. He managed, at the 
end of his life, he worked for the post office almost all of his life, 
almost all of his working life. He died in 1965. At the end of his 
life, when I was 12, he was a manager of a neighborhood branch of the 
post office.
  After that I saw my mother support me on her own as a widow, when I 
was 12 forward. I remember my law school graduation, my mother 
trembling. I thought that she was overcome with pride since my 
generation was the first in our family to go to college. She later 
admitted to my sister that she had actually, after my father died, 
prayed that if her youngest, me, could just get through school, He 
could take her at any time. So she was expecting to be struck down at 
any moment and was trying to negotiate a new deal with God.
  I am deeply offended by the suggestion that my parents, both of whom 
were public employees, my father worked for the post office, my mother 
was a bookkeeper for the local school system, were not making a 
contribution to society, that they were taking, that they were takers 
and not givers. I saw how hard they worked to do right by me and to do 
right by the people who were paying their salaries.
  I am deeply offended by the arguments that public employees are 
people who are taking from our society and not giving back. The idea 
that they are takers, and the people who came up with this stuff, are 
the ones doing something useful to society, that they are the ones who 
are making a valuable contribution, offends me deeply.
  Ms. SPEIER. It offends me as well.
  As we conclude this half hour, I just want to say to our colleagues 
that this commission report must not gather dust. This commission 
report has got to be read by everyone, particularly our colleagues on 
the other side, and that we have got to take it to heart.
  One of the points they make in this report was that $2.7 billion was 
spent by the financial services industry over 10 years to lobby all of 
us, and another $1 billion was given out in contributions to Members of 
Congress.

                              {time}  1930

  So, it's no surprise that the enforcement hasn't been as strong as it 
should be. Thank you for sharing this half hour with me, and let's hope 
that we can continue to shed light on this issue.

                          ____________________