Senator Warner spoke on the Senate floor to explain his efforts to prevent taxpayer-funded bailouts and correct misleading characterizations over the past several days about proposed Wall Street reforms.  

Mr. WARNER: Mr. President, today I also rise to discuss Financial Reform. And, to be blunt, to try to set the record straight about some misleading statements that have been made on this floor about both the process and the substance of the bill that the Banking Committee recently approved.

Under Chairman Chris Dodd’s leadership, and working with Ranking Member Richard Shelby, I’ve worked hard since coming to the Senate to understand the root causes of this crisis, the crisis we are beginning to emerge from economically and to recognize that we’ve got to have a robust solution in place to make sure that we never again are confronted with type of crisis and the lack of preparation that this nation faced back in the Fall of 2008.

I also came to this body, Mr. President, as somebody who spent a lot of time around the capital markets -- quite candidly, I’ll put up my free market and pro-capitalist credentials up against anybody in this body. And I come to the floor today as somebody who’s tried to recognize that the financial crisis, perhaps more than any other issue that we address, doesn’t have a Democratic or Republican origin or solution set, that we’ve got to recognize that perhaps on this piece of legislation, more than ever, we’ve got to have a bipartisan basis to establish a long-term financial framework for the next hundred years.

I’m very proud of the fact that we’ve worked so far in a bipartisan way. I have particularly appreciated the partnership I’ve built over the last year with Republican Senator Bob Corker from Tennessee. We both recognized that while we both had backgrounds in business and both had experience and exposure to the capital markets, the complexity of trying to rewrite the financial rules -- not only for this country but, because the rest of the world will follow what America does, for the whole world – would require a great deal of humility and recognition that we have got more to learn. So Senator Corker and I, starting early in 2009, started holding a series of seminars where we invited established financial leaders and members of both parties to come and just learn with us as we tried to put in place rules and regulations governing the financial system.

While I’ve been particularly disappointed in the Republican leader’s comments yesterday, I still believe there is a path to a bipartisan bill. What we need to do is simply lower the rhetoric and do what is needed for the American people: put in place a robust set of rules and a robust regime of reforms that will ensure that the American taxpayer will never again have to bail-out firms that are too-big-to-fail. This is one area – whether it’s a liberal blog site or a Tea Party convention – where you get unanimity of opinion that never again should the American taxpayers be put at risk because of the interconnectedness of large financial firms.

Soon, the Senate will consider the bill that Chairman Dodd has put together. And while there are bits and pieces that different folks will disagree with, this is a strong bill that vastly improves the regulation and structure of our financial markets. Let me repeat: Senator Dodd has put together a strong bill.

One part of the bill that Senator Corker and I have been particularly engaged in is on systemic risk -- in ending the notion of too-big-to-fail. And that was the subject yesterday of some wildly inaccurate statements on this floor. I have to admit that I’m deeply invested in this section because of the months of work that Senator Corker and I put into this area. Let me acknowledge at the front-end that there are parts of this section that both Senator Corker and I will want to amend. Those changes and amendments -- we could probably reach agreement on within five or ten minutes. But the basic structure that we set up is one that I believe will lead to meaningful financial reform.

Now let’s get to what we’re talking about. At the outset, we recognized that the regulatory system and the legal system have no recourse or rules on how we deal with an impending financial crisis and there was very little collaboration and coordination between different regulators. You might have the prudential supervisor that’s looking at the depository institution having one view of an institution, and you might have another regulator that’s looking at the banking holding structure have another view, and, because these complex institutions may also have securities aspects, you could have the S.E.C. have a third view. There was no coordinated place beyond the stove pipes and beyond the silos where all the regulators could come together and recognize that while an institution’s single actions or a single sector might not pose a systemic risk, these risks, when aggregated together, put our financial system in jeopardy.

So what do we propose? Working with Senator Corker and experts from the industry, we propose creating a systemic risk council that would, in effect, be the early warning system to spot these large systemically risky institutions and put some speed bumps in their path.

I may not agree with some of the members on my own side of the aisle that say we ought to go out and proactively break up these institutions just because they’re too large. Size in and of itself was not the problem in certain cases. It was the interconnectedness of these institutions’ activities and the fact that if you started to pull on the string of these activities, you would in effect collapse the whole house of cards. It was not size alone; it was interconnectedness and recognizing how we spot that interconnectedness at the front end and put speed bumps on these large, systemically risky institutions.

One of the things that we found in our investigations was that the regulators often do not have current, real-time data on the extent of these transactions and this interconnectedness. So a part of the bill that has received very little attention is the creation of the Office of Financial Research, which will aggregate, on a daily basis, all the transactions of these interconnected institutions and provide the regulators with the transparency to know what’s going on beyond the last quarterly report. This information will go to the systemic risk council. This systemic risk council will then be able to put in place what I call speed bumps on these systemically large institutions.

Increased capital: One of the questions that comes back time and again from financial experts is that we need to increase the capital reserves levels of many of these large institutions. We’ve got to look at their liquidity. In certain cases, the institutions that failed during the crisis were not insolvent but, this can be addressed because of new sets of financial structures we will require in these large institutions will convert to equity in the precursor before a crisis takes place. In effect, shareholders will be diluted by this contingent capital requirement, putting more pressure on management not to take undue risks.

We believe these speed bumps, while they may not prevent any future crisis, will be huge impediments to these large, systemically risky institutions taking undue risk and outrageous actions.

We’ve also put a new requirement in place, one that again has not gotten a lot of review. But we will require the managements of these large institutions to put in place their own “funeral plans,” their own plans on how they will unwind their institution through an orderly bankruptcy process. I believe there were large, systemically important institutions in the Fall of 2008 that came to the regulators and said, “We’re so big and interconnected that we wouldn’t even know how to unwind ourselves.” Never again should we allow that to happen. We allow the regulators to work on and bless the “funeral plans” that these systemically large institutions will put in place.

Now, we think that we have put out these appropriate barriers that will restrict some of the unduly risky activities on these large institutions, but you can’t predict and can’t foresee every crisis. So what we need to do is set a framework on how we would address the crisis if these speed bumps and this early warning system doesn’t fully function.

I don’t completely agree with my colleague from Delaware. I do believe we need a strong, robust bankruptcy process that gives predictability to investors so they know what will happen through normal dissolution of a firm that’s made mistakes in the marketplace. And we need to ensure that bankruptcy becomes the normal default process. Having these firms write their own bankruptcy plans that have been approved by the regulators will give us guidance on that path.

We also have to realize that when there may be a management team that doesn’t see the handwriting on the wall or when a failing firm, even with all these checks, becomes systemically risky, we have the ability to act. But let me state very clearly: with the resolution process that was put in the Dodd bill, no rational management team would ever elect to choose it because it will lead to extermination of the firm. The shareholder’s equity will be wiped out. Resolution will never be chosen as a preferred route -- bankruptcy will be the preferred route.

Even in that case, we still put additional protections in place so no future administration – and, having seen the blowback from the public on using resolution in 2008, I can’t imagine any administration actually wanting to use this mechanism -- but Senator Corker and I have spent a great deal of time on this so that resolution is not misused. We put in place very strict criteria before it can be implemented. We require three keys, in effect, to be turned simultaneously. It’s the nuclear option analogy of different keys being turned before this tool could be used. We require the chair of the Federal Reserve, the FDIC, and the Treasury Secretary, in consultation with the President, to all agree that we have to act to move a firm into resolution rather than going through bankruptcy.

But, again, that’s not all. Senator Corker, I think, rightfully pointed out that we need, in case there was an overly aggressive administration, a judicial check, as well. So we put an additional judicial check in place before resolution could be implemented. So resolution -- only as a last resort, only as a path to make sure that the parts of systemically important firms can be transferred to some other existing entity, not preserved. The firm will be wiped out, but the functions that are important don’t bring down the overall financial system.

One of the most curious comments of the Republican Leader yesterday was the critique that if you invoke resolution, the question becomes where’s the money going to come from and who’s going to pay for it? What I found very curious from the Republican Leader’s comment yesterday was that we -- and this was by no means set in stone -- put in place a $50 billion fund that would be prefunded by the industry. It’s not the $150 billion that was in the House Bill that potentially could create what’s called a moral hazard. But a dollar amount up-front -- and it could go down lower -- would keep the lights on at these institutions until the FDIC could get in and, in effect, borrow against the unencumbered assets of the firm to get the real dollars in place to keep the resolution process going in an appropriately functioning way.

Is $50 billion the right number? It may not be. Reasonable people can disagree. $25 billion might be the right number. There may be even other paths. Senator Corker and I worked on the notion of a trust that could be created. But what I find curious is no one in the financial sector that we have spoken to thinks this will be an adequate amount of capital to resolve the whole crisis. The funding to resolve the whole crisis will come from the ability we give the FDIC to borrow against the unencumbered assets. If there is a better way to get there, we’re all for it. At least I can say from my side that I’m willing to look at any other option. But what I find curious is I believe that if we had not put up this industry-prefunded amount to, in effect, bridge until we can actually get the FDIC process in place, we would hear criticisms from some who would say that not putting up any industry-prefunding would allow taxpayer exposure. And one of the things we want to make clear is that taxpayers are never, ever exposed to the kind of risk that took place in 2008.

Did we put in place something that is perfect? No. There are ways we can improve. But the framework we put in place, the almost uniform response we have received has been that we have taken a gigantic step towards ending too-big-to-fail with a rational, thoughtful approach.

I see my colleague, the Senator from Tennessee, has arrived on the floor, and again I want to compliment him for his work. Both of us have said at the outset that, for neither one of us, has this been religion. We just need to get it right. If we have to ruffle a few feathers on both sides of the aisle so that never again are the American taxpayers put in the same position they were put in in 2008, then so be it.

I appreciate the Senator from Tennessee’s good work on this effort. I appreciate our working together on a preference toward bankruptcy, that we have to an initial check, that we don’t go out and grab firms willy-nilly. I ask my colleagues on both sides of the aisle to lower the rhetoric a bit, to recognize that this can and still should be the place where this Senate shows it can work in a bipartisan fashion to put a set of rules in place so that we can put the appropriate speed bumps in our financial system for those firms that are systemically important -- that we do put in place financial rules of the road for the 21st Century -- that we do allow America to continue to be the financial capital and financial innovator of the world. I think we can still get there, and I look forward to working not only with my friend from Tennessee but also colleagues on both sides of the aisle to get it right.

I yield the floor.