[Congressional Record (Bound Edition), Volume 157 (2011), Part 8]
[Senate]
[Pages 11650-11651]
[From the U.S. Government Publishing Office, www.gpo.gov]




             WALL STREET REFORM AND CONSUMER PROTECTION ACT

  Mr. LEVIN. Mr. President, we mark today the first anniversary of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act. This law was 
Congress's earnest attempt to answer a vital question: How do we avoid 
a repeat of the financial catastrophe from which we are still 
struggling to recover?
  I would like to describe the findings of our Permanent Subcommittee 
on Investigations report on the origins of the financial crisis, and 
how those findings informed my thinking and that of some of our 
colleagues about how to address Wall Street reform and design effective 
legislation. Then I would like to talk about a specific provision in 
the Dodd-Frank Act that my colleague, Jeff Merkley, and I--as well as 
Senator Reed and others--fought hard to include in Dodd-Frank, and why 
I believe that provision has the potential to remedy key failings of 
our financial system that helped contribute to the financial crisis. 
And then a few minutes on how, at the law's 1 year anniversary, we are 
fighting a second battle, just as important as the first, on how to 
implement Dodd-Frank.
  Many of my colleagues, and particularly Republican colleagues 
subscribe to the view that banks and the market know best. It is the 
same view espoused by those who told us in the 1990s that we should 
deregulate finance, give free rein to so-called financial innovation, 
and place our trust in the belief that the market was ``self-
correcting.'' It was a big mistake, and it led us to the brink of 
economic disaster, when only a massive taxpayer bailout of large banks 
prevented a second Great Depression. I can't imagine how one could look 
at those events and come to the conclusion that we need relaxed 
regulations.
  Our subcommittee reviewed literally tens of millions of documents, 
interviewed hundreds of witnesses, and held four lengthy hearings. We 
found that the financial crisis was the result of unchecked greed and 
conflict of interest up and down the line. Financial institutions that 
were too big to be allowed to fail engaged in reckless risk-taking in 
pursuit of massive, but short-term, profits. Government regulators and 
credit rating agencies, who were supposed to be the cops and 
independent referees to keep those reckless impulses in check, instead 
allowed or even encouraged them, in part because of their own conflicts 
of interest, which gave them incentive to go along.
  Our investigation started upstream, with mortgage lending. We looked 
specifically at Washington Mutual Bank, which was the Nation's largest 
thrift when it began a campaign of aggressive subprime mortgage 
lending, even though the bank's top executives recognized there was an 
unsustainable bubble in housing prices. We found massive evidence of 
fraud in WaMu's lending, fraud that people inside and outside the bank 
recognized. But bank executives ignored the red flags, allowing WaMu to 
make its fraudulent and high-risk loans, package those loans, flooding 
the financial system with toxic mortgages, and led their bank to the 
largest bank failure in our history.
  WaMu's primary regulator, the Office of Thrift Supervision, utterly 
failed to stop WaMu's reckless lending, despite identifying and logging 
nearly 500 serious deficiencies at the bank that they were supposed to 
regulate over 5 years, doing nothing about it. The OTS director--
perhaps out of deference to the fact that fees from WaMu were the 
biggest single source of OTS's budget--referred to WaMu as a 
``constituent,'' which surely would come as a surprise to his agency's 
real constituents, the American people, who counted on OTS to walk a 
beat--and not to toe the WaMu line.
  WaMu and other banks were aided and abetted in their pollution of the 
financial system with toxic securities by credit rating agencies that 
failed to accurately and objectively assess risks. Our investigation 
examined ratings failures at Moody's and Standard & Poor's. The 
testimony of employees of the two firms, corroborated by internal 
documents, show that the rating agencies were more focused on growing 
market share for themselves and increasing revenues than in improving 
rating accuracy. In other words, their ratings failed in part because 
they relied for their revenue on the same banks whose products they 
were supposed to impartially assess, a conflict of interest that led to 
AAA ratings being given to shoddy securities.
  Wall Street firms facilitated this whole chain of shoddy securities. 
They were hungry for mortgages, even poor quality mortgages, to package 
and sell, taking in large fees to underwrite these toxic financial 
assets. Some reaped huge returns by trading those assets for their own 
profit. The subcommittee found that some investment banks, such as 
Goldman Sachs, were engaged in conflicts of interest. Goldman misled 
its clients. It packaged mortgage-backed securities in an attempt to 
rid their own inventory of assets the firm's employees called ``junk,'' 
``crap'' and worse. Goldman Sachs bet secretly against their own 
products, bet that they were failed, and not only sold these products 
to unsuspecting clients, but misrepresented their own interest in the 
transaction.
  The four hearings we held in the spring of last year laid out this 
evidence in damning detail. Those hearings took place as the Senate was 
considering the legislation whose 1 year anniversary we are marking 
today.
  We saw the impact of our hearings on the law. For instance, Dodd-
Frank did away with the Office of Thrift Supervision, which failed so 
completely in the years leading up to the crisis. Dodd-Frank included 
important reforms in how credit rating agencies operate and attempted 
to resolve some of the conflicts of interest that tainted their work by 
taking steps to keep financial firms from shopping for high ratings.
  Dodd-Frank tackled abusive mortgage lending in many ways. We banned 
the ``liar loans'' that WaMu and others issued so recklessly to 
borrowers who provided little or no documentation of their ability to 
pay. We required banks to keep some of the mortgage-backed securities 
they issue on their books rather than making bad loans and selling 100 
percent of them and the risk

[[Page 11651]]

they carried. We prohibited banks from paying their employees more when 
they persuade home buyers to take out high-risk loans. We established a 
consumer protection agency with authority to police abusive lending.
  Throughout the debate, I focused in particular on an issue I see as 
the connecting thread tat ran through our hearings and our report: 
rampant, unchecked conflict of interest. The subcommittee's work showed 
how time and again, institutions within the financial and regulatory 
system chose their own short-term interests over the interests of their 
clients.
  We found a particularly vivid example in a $2 billion deal called 
Hudson Mezzanine issued by Goldman Sachs. Hudson was a collateralized 
debt obligation--that's a security that references or is backed by a 
pool of loans and other assets, in this case mortgage loans. In 
marketing Hudson to its clients, Goldman told clients that its 
interests were ``aligned'' with the buyers of the CDO, and that the 
CDO's assets had been ``sourced from the Street,'' in other words 
outside of Goldman. In fact, most of the assets backing Hudson were 
from Goldman's own inventory, assets the bank knew were risky and 
wanted to unload. And far from being ``aligned'' with its clients, 
Goldman's position was opposed to its own clients, because it held the 
entire short side of the CDO, making a $2 billion bet that Hudson would 
plunge in value. When it did, Goldman effectively took $2 billion out 
of its clients' pockets and made a handsome profit. And injecting those 
junk securities into the financial system did real damage to that 
system.
  The question of accountability is important here. I have said before, 
it is up to the appropriate authorities, and not to us in the Senate, 
to decide whether those responsible for transactions such as Hudson 
should be punished. But what I can say is I think it is vitally 
important that those authorities address and resolve that question. 
That is why our subcommittee forwarded our report to law enforcement 
authorities. They have the job of providing the Nation with the 
accountability that so far has been lacking.
  The congressional role is legislative. The amendment that Senator 
Merkley and I offered on the Senate floor, known as Merkley-Levin, 
codified the so-called Volcker rule, former Fed Chairman Paul Volcker's 
recommendation that we rein in proprietary trading by banks. Firms such 
as Lehman Brothers and Bear Stearns collapsed in part because their 
pursuit of short-term profit led them to risky trades that blew up in 
their faces. Merkley-Levin says that if you are a commercial bank 
protected by taxpayer-funded Federal deposit insurance, you can't 
engage in high-risk proprietary trading. Even if you are not a 
traditional bank, but because of your size, your collapse would damage 
the stability of the U.S. financial system. You are now required to 
adhere to certain capital requirements and other limitations.
  Merkley-Levin also breaks new ground in the area of conflict of 
interest. It explicitly bans the kinds of conflict of interest we saw 
so vividly in Goldman's Hudson transaction. It prohibits firms from 
assembling an asset-backed security and selling it to clients while 
betting against that same security, acting not as a market-maker, but 
as an investor for its own profit. You are either for your client or 
you are for yourself.
  We had to fight hard for Merkley-Levin's passage. When the Senate 
passed its version of Dodd-Frank, Republicans engaged in complicated 
maneuvers on the floor to block the Senate from even considering our 
amendment. But we succeeded in getting it included in the bill produced 
by the House-Senate conference committee, and despite intense lobbying 
by banks against Merkley-Levin, it is now law.
  But the battle is far from over. Since passage, regulatory agencies 
have been working to turn the provisions of Dodd-Frank into detailed 
regulations and have been subjected to the same barrage of bank 
lobbying that accompanied our debate in Congress. Banks have spent more 
than $50 million so far this year lobbying to weaken Dodd-Frank.
  Consumers and the American economy won an important victory one year 
ago today. But that victory will not be secure until Dodd-Frank has 
teeth--tough rules backed by conscientious enforcement. Some are 
pulling every trick in the book to slow these regulations and weaken 
their impact. But the success we had in passing Dodd-Frank shows that 
the powerful interests don't always win.
  Supporters of reform made their voices heard a year ago, and today, 
they are working to ensure that Dodd-Frank is implemented forcefully. 
They are telling regulators--many of whom once subscribed to the notion 
that banks know best--that the American people will not allow a return 
to policies that so recently did so much harm. Just like we need a cop 
on the street to enforce the traffic laws, we need a cop on the beat on 
Wall Street. Anything less threatens a repeat of disaster.
  Anything less will also damage confidence in our financial system, 
and we will not have a market that holds the confidence of investors 
and potential investors. That should be everybody's goal. The free 
market is incredibly important. We all depend on it for economic 
growth. But that market must be honest. That is in the interest of 
everyone. Whether you have invested in the market or thinking about 
investing in the market, that is in the interest of the American 
people. We are not talking about weakening the market--we are talking 
about strengthening it. And that is just what the Dodd-Frank Act can 
accomplish, if we implement it as Congress intended.

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