Issues > Stabilizing our Economy and our Financial Markets

The recent turmoil in our financial markets has left many Kansas families concerned and wondering how this may affect them. I've heard from many of you wanting a legislative response that strengthens oversight, does not provide a blank check and ensures that C.E.O.s won’t get taxpayer funded 'golden parachutes'. As your representative, I have worked in a bipartisan way to address your concerns.

Like many of you, I am just as upset that our country is faced with this economic crisis. But we were left with very few choices and little time to preserve our economic stability. The bipartisan rescue plan I supported is about protecting our families, seniors and small businesses from the devastating effects of doing nothing. I hope the additional information regarding the economic crisis and legislative response below will be helpful to you.

Stabilizing our Economy and Restoring Confidence in our Financial Markets
More Info: Congressional Reserch Service (CRS) and Other Reports
More Info: Proposals to Modernize Financial Market Regulation
More Info: Financial Market Rescue Proposals and Congressional Hearings

Stabilizing our Economy and Restoring Confidence in our Financial Markets

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What happened?

The current market crisis became apparent due to difficulties in the subprime mortgage [issued to borrowers with poor credit histories] market last summer, but the origins of the problem began several years ago. Lack of adequate regulation of subprime mortgage lending practices, lax oversight of complex financial products and services like derivatives [derivative financial contracts gain or lose value as the price of some underlying commodity, financial indicator, or other variable changes; essentially, traders promise to buy or sell a commodity in the future at today's price], and favorable lending rates encouraged questionable practices by lenders, borrowers and Wall Street. Low interest rates and loose monetary policy created a "housing bubble" based on inflated housing values that could not be maintained. Mortgage lenders, many of whom were unregulated, non-bank entities, engaged in imprudent and sometimes fraudulent lending practices, and borrowers sought out easy mortgages, often for properties that they could not afford. Most of these mortgages were packaged, securitized and sold to investors in the form of complex structured securities [known as "mortgage backed securities"] that were highly rated by credit rating agencies.

The decline in housing values was accelerating at the beginning of 2007. Inventories of unsold homes began climbing and prices stagnated at the same time short-term interest rates began rising. Borrowers, including those in the subprime market, who had depended on being able to refinance their mortgages at low interest rates or on continued home price appreciation, found their plans frustrated and defaults occurred at increasing rates. Mortgage foreclosures exacerbated the decline in home values. Structured mortgage-related assets became illiquid, difficult or impossible to value, resulting in chaos in the global wholesale credit markets. By the summer of 2008, trust evaporated as financial institutions disposed of what mortgage-related assets they could, incurred losses as they wrote down assets they could not sell, hoarded cash and stopped providing credit to other institutions. Meanwhile, investment banks and other major financial players had reduced underwriting standards, making risky investments in less regulated, often non-transparent markets, like derivatives [contracts that gamble on the future value of assets] and hedge funds [using aggressive strategies unavailable to regular mutual funds] that they could not cover when the time came to do so.

How have individual Americans been affected by this global credit crunch?

As banks tightened lending standards, people and businesses with good credit histories are finding it difficult to get loans for a variety of purposes, including for a home mortgage, car, student loan, small business financing or commercial paper, or home equity financing. Additionally, it is now estimated that one out of every five subprime mortgage loans made in recent years will fail. According to the Pew Charitable Trusts, one in 53 homeowners in Kansas is expected to face foreclosure in the next two years as a result of subprime loans. During the first quarter of 2008, nearly 1,400 foreclosures were reported in Kansas -- a 46 percent increase in the number of foreclosures compared to this same time last year, nearly twice the national rate. The accompanying instability in the stock market has severely reduced the value of investors’ and retirees’ holdings in the market. The Congressional Budget Office has already estimated that $2 trillion in retirement savings have already been lost in the falling markets.

What will the omnibus financial rescue legislation do?

I voted for the Emergency Economic Stabilization Act [P.L. 110-343], which along with the extension of several Senate-authored existing provisions of the tax code [referred to by the news media as "earmarks"] more importantly includes the following:

Through 2009, the Treasury Department has broad authority to purchase "troubled" assets from banks and other financial institutions, generally defined as mortgages or mortgage related securities. The Treasury may decide whether to make these purchases through auction or directly from an institution. The Treasury has been given $250 billion available immediately to purchase assets [which they have indicated will be used to purchase stock directly from troubled financial institutions], and with a certificate of need from the president, an additional $100 billion will be available. A further $350 billion may be requested and will be available unless Congress approves a resolution of disapproval that itself is subject to presidential veto. The Treasury is required, within 2 business days of exercising authority under this law, to publicly disclose, via the Internet, the details of any transaction.
Although as much as $700 billion in assets may be acquired, most or all of that should be recovered for the taxpayers through later sales of the assets. If after five years, the government has lost money on the program, the president is required by this new law to submit legislation for recovering the lost funds from the financial industry.
The government is required to take a non-voting equity stake in companies that participate in this program. Warrants for shares in a company must have terms to protect taxpayers from losses associated with the eventual sale of any assets purchased.
As has been suggested by many citizens, the Treasury must establish a program for insuring the long-term performance of mortgage related assets. Financial companies would participate voluntarily, and the Treasury would change premiums for the overage.
A five member oversight board made up of federal banking regulators and cabinet officials and a separate five member congressional panel will be established to review the Treasury asset purchase program and to protect taxpayers’ interests. A special Treasury inspector general will also watch over this program.
The Treasury will also create a plan to mitigate foreclosures and encourage those who service mortgages to modify loans. The Treasury may use loan guarantees and other credit enhancements to avoid foreclosures.
Homeowners whose mortgage debts were forgiven as part of a foreclosure or forced below price sale will not be taxed on the amount forgiven for transactions up to January 1, 2013 [previous law set the deadline in 2010]. Banks may count losses on holdings in Fannie Mae and Freddie Mac stock against current income, rather than writing them off over time.
The per-account limit on deposit insurance in banks protected by the Federal Deposit Insurance Corporation [FDIC] is increased to $250,000 from $100,000 through 2009, which will lead to increased premium payments by banks. The FDIC also has guaranteed senior debt issued by all insured banks through June 30, 2009.
The Securities and Exchange Commission [SEC] is ordered to review the mark-to-market rule, which requires banks to value salable loans and securities at the price they are currently trading at on secondary loan markets. Telling the truth about the value of these securities, rather than estimating potential asset value if held until maturity, is intended to maintain investor confidence. The SEC is also given the authority to suspend this mark-to-market requirement, which has been suggested by some commentators.
Finally, companies that participate in the Treasury asset purchase program are limited in the amount they can deduct for pay in excess of $500,000. "Golden parachutes" for terminated executives are prohibited.

Separately from this new law, the Treasury and the two primary mortgage finance companies, Fannie Mae and Freddie Mac, will increase their purchases of mortgage backed securities. The SEC issued a temporary ban on short sales [sales of unowned financial instruments with the intention of profiting by purchasing them later] of endangered financial stocks and the Treasury also began insuring eligible, existing money market mutual funds.

Will there be future congressional oversight and reform of the financial markets?

The House Government Reform and Oversight Committee has already held hearings on the regulatory mistakes and financial excesses that led to the bankruptcy filing by Lehman Brothers and the government bailout of AIG insurance. This committee also will hold hearings on the role of credit rating agencies, the Federal Reserve System, the SEC, and the impact of the unregulated hedge funds market. Other committees holding oversight hearings in the next few weeks include: the Agriculture Committee, on unregulated swaps; the Education and Labor Committee, on retirement security; the Judiciary Committee, on bankruptcy and home foreclosures; and the Financial Services Committee, on which I serve, on regulatory restructuring and reform of the financial markets, including financial institution oversight and regulation, systemic risk, and housing finance. This committee also will take the lead in 2009 in overhauling our regulatory system for financial markets to remove overlapping regulatory agencies, establishing tougher rules on maintaining capital and liquidity, and overseeing currently deregulated traders and financial instruments, including hedge funds, other derivatives, mortgage brokers and credit rating agencies.

From 1995 - 2006, under the leadership of House Speakers Newt Gingrich and Dennis Hastert, Congress did not exercise meaningful taxpayer protections over the financial markets, although they controlled the agendas of all House committees; their party also had sole power to issue investigative subpoenas. Federal Reserve Chairman Alan Greenspan also actively opposed regulation of financial derivatives. Additionally, the Commodity Futures Modernization Act, which the House leadership and then-Senator Phil Gramm added at the last minute to a must-pass bill funding the federal government in fiscal year 2001, explicitly prohibited federal regulators from overseeing the derivatives markets on behalf of taxpayers and investors. I supported enactment of a law in 1999 that repealed the Glass-Steagall Act, which had kept commercial and investment banks separate. The 1999 law encouraged bank mergers and brought additional capital into the financial marketplace, but the Clinton and Bush Administrations and the Republican-controlled Congress failed to monitor the performance of the markets under these new laws. For example, Fannie Mae and Freddie Mac, two government-sponsored organizations that guarantee millions of American home mortgages by purchasing them for resale to the secondary market, were encouraged to insure additional subprime loans, despite the dramatic weakening of underwriting standards for those mortgages. While Fannie and Freddie have suffered severe losses due to the collapse of the secondary mortgage market, they were subject to tougher standards than many of the unregulated private sector institutions which have now gone bankrupt or face severe losses. Nonetheless, in 2005, I voted for the Federal Housing Finance Reform Act [H.R. 1461], which would have increased oversight and regulation over Fannie and Freddie. Despite the strong support of then-Financial Services Committee Chairman Michael Oxley, this proposal was opposed by the Bush Administration and Senate leaders and, therefore, did not become law.

What’s next?

The Federal Bureau of Investigation is now investigating possible criminal wrongdoing connected to this financial crisis, involving Lehman Brothers, AIG, Fannie Mae and Freddie Mac. Additionally, President Bush has proposed convening a summit of leaders of the industrialized and developing world, to take place after our country’s November elections, with the intention of improving oversight and better coordinating financial market regulation around the world, since investment capital regularly crosses international boundaries.

Government intervention in the marketplace should always be an option of last resort, but we have been left with few realistic choices and little time to preserve the stability of the worldwide economy. With the help of both Republicans and Democrats who were willing to put country before party, and our economic security before ideology, members of Congress put aside our differences and did what was in the best interest of our country. We owe the American people no less. While we act to preserve our economy, you may be assured that I will continue fighting for fiscal responsibility, putting an end to runaway deficits and our mounting federal debt. Moreover, I will work with my Republican and Democratic colleagues on the House Financial Services Committee to aggressively investigate what went wrong in the credit markets, and work in a bipartisan way to improve the regulatory structure so we can have a modern oversight structure that will make sure Wall Street acts in a responsible way. We must do all we can to protect the future economic health of our country. The severity and complexity of the current crisis presents a compelling case for a comprehensive reassessment of how best to regulate and supervise financial institutions and transactions. Recent events have highlighted the gaps in the current regulatory structure and demonstrated the need for a detailed examination of the adequacy of that structure and for regulatory reform to better monitor and manage systemic risk to prevent similar future occurrences.

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