Mr. WARNER. I appreciate the opportunity to follow the chair and the ranking member of the Banking Committee and the chair and the ranking member of the Agriculture Committee on this critically important debate.
I commend their work, the great amount of work that has been done, actually, in a bipartisan fashion already on this important piece of legislation. There are differences. But an awful lot of work has gone into getting this product that now can be fully aired on the floor of the Senate.
I want to pay particular compliments to my dear friend, someone I had the opportunity to actually work for close to 30 years ago, the chairman of the Banking Committee, who, while I am a new guy in the Senate, seems to me, on this bill, has kind of done it the old-fashioned way. He has had an open door to any Member of both sides of the aisle.
As this issue got more and more complex, he asked various members of the committee to roll up their sleeves and take on portions. Senator Corker and I--and nobody has been a better partner than Bob Corker for me during this process--took on a major portion of the bill. Then, as we kind of got to the Senate floor, time and again--and I will come back to certain specific examples--he has said: How can we find that common ground that seems to be so often missing from this debate?
I also commend the ranking member, Senator Shelby. Nobody has been kinder and no one has spent more time with me kind of helping me learn the ropes of this institution than Senator Shelby. But I also have to say that as we get into the substance, some of the comments that have been made from my colleagues, particularly on the other side, do not resemble the bill we are actually starting debate on, particularly some of the portions in which I personally have been very involved.
I want to try to address some of those briefly. In some of the comments we have heard from my colleagues, they have talked about that we did not put in too big to fail. If there was one overriding challenge that we were all tasked with--I believe my colleagues from the other side of the aisle would completely concur with this--it was ending too big to fail and never again exposing taxpayers to the financial mistakes made by large systemically important institutions, made by Wall Street.
What I have not heard from my colleagues--and I guess this will be assent--is that a lot of the things that we have put in this legislation, bipartisan, take us down that path. We have created a systemic risk council so for the first time the regulators can actually get above their silo-like focus, so they can look ahead of the crisis and create early trip wires to make sure we do not get to the kind of catastrophic place we ended up in September of 2008.
This systemic risk council will make sure that these systemically important firms--and there will be systemically firms no matter what we do--but that the price of getting so large will actually be borne by those institutions and not by the taxpayers.
So what are those speed bumps, as I have called them? Increased capital requirements, making sure there is a better management of leverage, making sure they actually have in place risk management plans.
Then we have created two brand new tools that regulators have never had before. In fact, the price of getting so large, one is a whole new--and I apologize to my colleagues and those who are viewing because some of this is in the weeds, but the weeds are where billions of dollars are made or lost.
But we are creating a whole new area of capital that is called contingent debt, that any of these firms will have to put in place. That debt will convert to equity and dilute shareholders and dilute management if any firm even gets close to getting into trouble.
It will be an immediate check by current management on not getting too far over the edge, because we believe the bankruptcy process should be the way that firms unwind themselves; if they get into trouble, go into bankruptcy. They may or may not come out at the other end, but you have to have a plan in place.
We have spent an awful lot of time looking back, back to the Bear Stearns crisis, the Lehman crisis, AIG. All of the stories show there was no plan in place for how to unwind these firms.
So we have given this risk council the ability to require these systemically important firms to basically put forward a plan on how they will unwind themselves in bankruptcy at no risk to taxpayers. If the regulators do not approve, they have the ultimate sanction of actually being able to break up these firms.
Now, time and again, in this legislation--and I hear some of my colleagues saying: We are going to always default to resolution. If this works, resolution should rarely and hopefully never, ever have to be called upon. But who would have ever predicted that we would have ever gotten to the point of complete financial meltdown of September 2008? So we cannot go responsibly forward without also having--and we heard this from people across the spectrum--without having some form of a resolution plan in place.
There has been a great deal of comment made about the notion that the chairman's bill says we ought to go ahead and in effect ask these financially important firms to pony up a little bit of the resources so that if one of them gets into trouble and has to be unwound, there is some capital available to, in effect, keep the firm operating so the market doesn't lose faith in that institution and then create a financial run. We saw institutions that seemed to be very well capitalized but, because the market lost faith in them, their capital disappeared virtually overnight. You have to make sure there is an assurance that the firm can continue to operate and be out of business.
Senator Corker and I looked at different options, but we thought perhaps the best way is to have some resources available, whether the number is $50 billion, as the chairman proposed, or a lesser amount, subject to valid debate, and perhaps the industry ought to be paying for that.
I have heard others criticize that, but what I have not heard from my colleagues on the other side is, if the industry is not going to pay to keep these firms alive through the process of being put out of business--again, resolution means your firm is going out of business, your management is gone, your shareholders are gone, your unsecured creditors are gone. No rational management team would ever want this to happen. They would always prefer bankruptcy. That is how we have tilted this process. But if you are going to do that, you need to put them out in an orderly way. You don't want to have what happened when there was no plan to unwind Lehman. What I would ask is, if they don't like the prefund from industry--and some even in the Treasury don't like it--then who will pay and how do we make sure taxpayers are not exposed?
My two goals are--and I know Senator Corker agrees--that taxpayers should not be exposed, and you have to have some liquidity operating so you can keep the firm operating so you can put it out of business.
I have also heard critiques that somehow in this process there would be some preference for one creditor over another. Nothing could be further from the truth in terms of what the Dodd bill proposes. It is as if somehow a whole new process was created out of whole cloth where somehow the firm that was going to be put out of business was going to be choosing which creditor was going to be paid or not paid. Nothing could be further from the truth. The model I believe the chairman's bill adopted was basically the model the FDIC uses as it puts banks out of business through the normal resolution process.
The fact is, the FDIC is charged, as this resolution authority is charged, to say you have to maximize value as you put the firm out of business. So, yes, you may have to pay the electric bill to keep the lights on, but there will be a recoupment process at the end so that creditors balance out. It is not some new process. This has been used for decades relatively effectively.
I also heard comments made about some new bureaucracy in the Office of Financial Resolution. Nothing could be further from the truth. One thing we heard time and again as institutions came in, as regulators came in, was that too often they didn't have current real-time data. So when AIG was going down, nobody knew the extent of the interconnectedness. When Lehman went down, nobody understood the state of their transactions. The Office of Financial Resolution that is proposed is to make sure that the regulators--experts from all across the field, not Wall Street--have real-time data on the state of interconnectedness of all the transactions that take place on a daily basis. To me this could be one of the most effective tools in this whole piece of legislation, making sure we have an immediate snapshot of the market.
In the consumer area, I think there is, again, broad agreement that we need to improve consumer protections; that we ought to make sure financial products are regulated by the nature of the product, not by the charter of the organization that is issuing the product.
There are still parts we need to work on. We need to make sure, particularly for community-based banks, that a community-based bank, a smaller institution that didn't create the crisis in the first place, doesn't have one regulator come in on a Monday on a consumer issue and another come in on a Wednesday on safety and soundness, and get conflicting advice. How we get enforcement right is an issue we have to work through. But again, common ground can be found on this issue.
I commend the Agriculture chair and Senator Chambliss on the issue on derivatives. There has been a lot of discussion. There is an agreement that derivatives, while they have been oftentimes appropriately vilified as some of the tools that created the crisis, are also a useful way that legitimate businesses hedge risk. At the same time, as we try to put in place new rules around derivatives, we don't want to push the whole derivatives market offshore. While I commend the end-use exemption that was created and the goal of trying to get everything cleared and on exchanges, my hope is we can put some penalties in place. Some of the penalties the Agriculture Committee has put in place perhaps could be triggered if the banks do not end up meeting what they basically said, not overusing the end-use exemption or not getting all their products cleared or on the exchanges. My concern is that no matter how good the end-use exemption we write, there will always be more resources on Wall Street to find ways around even the best written legislation on something where as much money was put in place. So putting in place trip wires that might then cause a Draconian response would help self-police the industry.
One more example of the approach Chairman Dodd has taken on this bill. In my background, I spent 20 years in the finance industry before I was Governor. I was in the early stage capital formation business, something that is very important in the tech community. A lot of firms that are thrown around on this floor and elsewhere I have been a client of, worked with, worked against. One of the areas I had great concerns about in an earlier draft was anything that might stop or slow the ability for startup companies to access capital. There were some provisions in the bill that looked at the definition of a qualified investor that could hurt the creation of angel investors which are so critical to creating new jobs. There were perhaps provisions put in around the SEC in terms of new deals that might have to be vetted for a long period.
If you are a startup company, you don't have 120 days before you can raise your dollars to kind of get to the next step to stay alive. I cite these two examples because instead of simply saying no to the chairman, I said: Yes, you raise good points. Others have raised these points. They are changing the bill. I think that spirit is what the chairman is going to bring to the debate.
In the 20 years of being in the finance business or around the finance business, I came to this body thinking I might know a little something about this subject. There was probably a month in which I realized that whatever I knew was incremental and that the last year and a half I have had to go back and retest all of my assumptions. It has been an enormously challenging and exciting experience. I come away from this year and a half--again, particularly working with Senator Corker, where we had everybody from across the political spectrum talk to us to get us up to speed on these issues--with a couple conclusions.
One, there is no Democratic or Republican solution to financial regulatory reform. If there is ever an area that should not be broken down on partisanship, it is this issue. Second, what the market craves most is predictability. Sometimes it is overstated: if you do this, oh, my gosh, it will be the death knell of American capitalism--there has to be balance. But oftentimes those statements are overstated. At the end of the day, what the market wants is a good, commonsense bill that will set the tone, not just for the next year or two but for the next 20 to 30 years.
Finally, because of the good work of Chairman Dodd, Senator Shelby, and many others, common ground is attainable. I look forward to spending as much time as needed and appreciate in particular those on the Republican side who agreed to bring this bill to the floor and no longer are there going to be political shenanigans; let's air these issues back and forth.
There is a lot more to say about some of the critiques that are made of the bill. I look forward to that discussion and look forward to working toward that common ground so we end up with 21st century financial rules of the road.
I yield the floor.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, before we hear from my colleague from California, I thank Senator Warner of Virginia. He is a relatively new Member of this body and a new member of the committee, but I can't even begin to aptly characterize his contribution to this product. Since day one, he has been at every meeting, been involved in almost every conversation about this bill, particularly the focus that he and Senator Bob Corker agreed to take on in working out title I and title II of the bill dealing with resolution authority and too big to fail. His background, his experience, his knowledge made a wonderful contribution to this product. His interest in other matters is valued as well, because he brings two decades of living in a world in which these matters were something he absolutely grappled with. We have a long journey in front of us in the coming weeks to get through all of this, but his continuing involvement in this Chamber on this subject matter will be invaluable to all of us as we go forward. I thank him for that.
Mr. WARNER. Mr. President, I rise today to urge my colleagues to support bringing forward Chairman Dodd's regulatory reform bill. The chairman has just spoken with great passion about how we got here. I want to take perhaps somewhat of a similar tack and describe, as a new Member, why I think this legislation is so terribly important.
I have had the opportunity today and on other Mondays, as is often noted, to sit in the chair and listen to my colleagues come in and talk about this issue. I heard today my colleagues talk about health care, talk about stimulus, talk about unemployment, as somehow reasons why we should not start a debate about financial regulatory reform. I am not sure I understand the connection.
Candidly, the American people could do with a little less political theater and a little more action. Regardless of what happens this afternoon at the vote at 5 o'clock, I hope--and I honestly believe most of my colleagues on both sides of the aisle hope--that we will get to that agreement in a bipartisan new set of rules of the road for the financial sector that will stand the test of time for not a year or two but for decades to come.
Before I get into a substantive discussion about how we got here and how I believe the Dodd bill takes dramatic steps forward, there is one other issue I need to address. I have sat in the chair as the Presiding Officer and have heard--and I know as Presiding Officer we have to bite our tongues sometimes--colleagues come forward and somehow portray this piece of legislation as a partisan product.
I have only been here for 15 months but in the 15 months I have had the honor of serving this body, I have not seen any piece of legislation that anywhere approaches the type of bipartisan input, discussion, and ongoing dialog that Chairman Dodd's bill has. Literally, in the 15 months I have had the honor of serving on the Banking Committee, we held dozens if not hundreds of hearings on the objectives of this legislation, objectives, again, that I think colleagues on both sides of the aisle agree upon: making sure there is never again taxpayer bailouts for mistakes made by too large financial institutions, making sure we have more transparency and, as the chairman said, a return of a sense of fairness to our whole financial product system and, third, that ultimately the American people, the consumers of this Nation, will make sure there is somebody watching out for the financial products that sometimes they have been purchasing without appropriate knowledge or appropriate recourse, when these products explode in their faces.
Again, unlike the Presiding Officer who served around this body for many years, I am a new Member. But I saw where the chairman did something I thought was somewhat unusual with a major piece of legislation. Rather than saying he had all the knowledge and all the input, he actually invited in the members of the committee, junior members, senior members of both parties to set up working groups to take on some of the challenging aspects of this bill--consumer protection, systemic risk, corporate governance, the whole question of derivatives. Let me state absolutely, because I can state from the systemic risk/too big to fail portions, the products we developed that are critical parts of this legislation are bipartisan in nature, bipartisan in ideas, and find that common ground that has been so absent from so many of the previous debates we have had over the last 15 months--I think particularly about the fact of the systemic risk, too big to fail, and resolution authorities Senator Corker and I worked on. There has been no better partner I could have had than Senator Bob Corker, grinding through hundreds of hours, recognizing there was no Democratic or Republican response to systemic risk and too big to fail, but we had to get it right. While there may be parts of this bill that can still be tightened and need to be tweaked here and there, and the Senator and I may add a few improvements, on the overarching goal of making sure the taxpayers never again would be on the hook, I believe we have taken giant steps forward.
As you heard from the chairman already, those conversations are ongoing even today. Please, while we kind of get sometimes subject in this body to hyperbole, anyone who makes the claim that this legislation is partisan only doesn't recognize the facts or has not seen the experience of the members of the Banking Committee over the last 15 months.
Let me also acknowledge--and I recognize I have a number of things I want to say and maybe other Members want to come, but let me acknowledge something else about this discussion. Sixteen months ago, when I came to this body, I actually thought I knew something about the financial services sector. I spent 20 years prior to being Governor around financial services, taking companies public. I had some ideas about how we would sort through these issues. I have to tell you what I quickly found was that oftentimes my original idea, or oftentimes the simplistic sound bite solution that I thought might be the solution, more often
than not proved not to be the case and that trying to sort our way through this labyrinth of financial rules and regulations in a way that brings appropriate regulation but maintains America's preeminent role as the capital markets' capital of the world has been challenging.
Again I thank my colleague Senator Corker. I think we both realize there is no Democratic or Republican way to get this right but we had to get it right. Over the last year we have set up literally dozens of seminars where we invited members of the Banking Committee to come in and kind of get up to speed as well. Fifteen months later, with this legislation now before the floor, I think we have taken giant steps forward in getting it right.
I also want to revisit for a moment, before we get to the substance of the bill, how we got here. I have actually been stunned sometimes, sitting in the Presiding Officer's chair, hearing colleagues come in and try to cite as the causation of the crisis that arose in 2007 and 2008 a single legislative action back in the 1970s or a single individual's activities over the last two decades. The claims are so patently absurd, sometimes they do not even bear recognition or bear rebuttal. But it is important to take a moment to look back on the fact that none of us comes with clean hands to this process of how we got to such a mess in 2008 that we were on the verge of financial meltdown.
Think about the fact back in the early 1990s, back in 1993, Congress actually passed legislation to give the Federal Reserve the responsibility to regulate mortgages--responsibility that we have seen time and again they didn't take up the challenge to meet.
The Presiding Officer spoke very eloquently earlier this afternoon about the actions of Congress in 1999, the Gramm-Leach-Bliley bill, that basically broke down the walls between traditional depository bank and investment banking that had been set up by the Glass-Steagall Act in the early 1930s. Where the Presiding Officer and I may differ now is I am not sure we can unscramble those eggs, but clearly we needed a little more thought back in 1999, as we internationalized our financial markets and turned these large institutions into financial supermarkets, which was one of the precipitating factors in this crisis as well.
Candidly, bank regulators were not given the tools to regulate, and oftentimes regulators of both depository institutions, their bank holding companies, and their securities firms, had no collaboration or coordination.
During our hearings in the Banking Committee when we looked into one of the most egregious excesses in the last few years, the Bernie Madoff scandals, we heard regulators had started down the path to try to find out the source of some of the criminality that took place in the Madoff case, only to find because of our mismatch of regulatory structure they got to a door they couldn't open because that was the purview of another regulator.
Regulators, under our existing rules, were actually prohibited from looking at derivatives. Derivatives, as the Chairman mentioned, in the last decade have gone from what seems like a large number--$90-plus billion--to literally hundreds of trillions of dollars in value.
Responsibility continues, again, in some of our monetary policy. In the early part of the 2000s--and again, not many people sounded the alarm at that point. We over-relied on low interest rates and monetary policy to pull us out of the 2001 recession. But as we came out of that 2001 recession, we left those monetary policies in place, which led to a housing bubble for which we are still paying the price.
I know some of my colleagues on the other side said this bill does not take on the GSEs, Fannie Mae and Freddie Mac. And, yes, to a degree, they are right. And then, in a subsequent action, we will have to make sure we have a new model in place for these institutions. But that should not be used as an excuse to not put in place major financial regulatory reform.
Candidly, if we are going to be really truthful with each other and the American people, we have to acknowledge that everyone--not just the banks but everyone--got overleveraged. Quite honestly, we all, the American people, probably need to take a look in the mirror as well. I think, as we bought those adjustable rate mortgages; took out that second and third loan on our home; ended up getting that deal that seemed too good to be true; moved away from the conventional idea that you ought to go ahead and, before you get a mortgage, be able to put 20 percent down and be able to show you can pay it back, we all got swept up in this ``who cares about tomorrow; let's just borrow for today.''
We also saw innovations, and American capitalism has worked pretty well, particularly in the last 100 years. But we particularly saw innovations in the last 5 or 6 years alone, innovations that originated on Wall Street that were supposed to be about better pricing risks: derivatives and all of their cousins, nephews, and bastard offspring. But these tools that were supposed to be a better price risk we have now found were more about fee generation for the banks that created them and, instead of lowering overall risk, created this inter-tangled web that, once you started to put the string on, potentially brought about the whole collapse of our markets.
Time and again, we saw, rather than transparency in the market, opaqueness and regulators who never looked beyond their silos.
I think most all of our colleagues want reform. Colleagues on both sides of the aisle want to get it right. But I believe there are two real dangers as we go down this reform path. One is to resort to sound-bite solutions that at first blush sound like an easy way to solve the problem but in actuality may not get to the solution we need.
I know we are going to have a fervent debate on this floor--and I look forward to it--about the question of whether the challenge with some of our institutions was their market cap or was it really putting pressure on the regulators to look at their level of interconnectedness and the level of risk-taking that was taking place. I look forward to that. There are valid points on both sides. When we get to that debate, I will point out the fact that in Canada, where there is actually a higher concentration of the banking industry than in the United States, because there was greater regulatory oversight and actual restrictions on leverage, those Canadian banks didn't fall prey to the same kind of excess we found here in the United States.
I know the chairman and Chairman Lincoln are working through the question of derivatives, where they should be housed, because they do provide important tools when used properly. And there will be a spirited debate on whether we should break off derivatives functions from financial institutions. I look forward to that discussion. By simply breaking off these products into a more unregulated sector of the industry, we could, in effect, if we do not do it right, create an even greater harm down the road than we have right now.
So the first challenge is to make sure we don't fall prey to the simple solutions and recognize the complexities of these issues.
The other challenge we have to be aware of is the converse. I know the chairman has heard, I know the Presiding Officer has heard--any of us who have tried to get into this issue have had folks from the financial industry come in and talk to us about the unforeseen consequences of any of our actions. Some of those arguments are valid, but oftentimes those arguments are simply--they always start the same: We favor financial reform, but don't touch our portion of the financial sector because if you do this, the unintended consequences would be enormous.
Because the knowledge level and the complexity of these discussions are so challenging, what we also have to fight against in this body is the more easy process to default to the status quo because timidity in this case will not solve this crisis and will not provide the new 21st-century financial rules of the road we need.
We can't be afraid to shine the light on markets or, for that matter, to raise the cost of certain activities, because the unforeseen consequences of the interconnection of these activities, as we saw in 2007 and 2008, pose grave risk to our financial system--and as we have seen with the 8 million jobs lost and literally trillions of dollars of value lost from the American public.
So what does S. 3217 do to accomplish this? I spent most of my time on the two titles that Senator Corker and I worked on and the chairman and his staff adopted and changed a bit but that still provide the framework and, I believe, the right structure.
First--the chairman has already mentioned this--we create for the first time ever an early warning system on systemic risk. If there is one thing that has become clear from all of the hearings that have been held, not just at the Banking Committee but under Senator Levin's Investigations Committee and Chairman Lincoln's Agriculture Committee, it is that there was very little combination and sharing of information between the regulatory silos.
The chairman's bill creates a nine-member Financial Oversight Council chaired by the Treasury Secretary and made up of the Federal financial regulators. This group will bear the responsibility, both good and bad, if they mess up, of spotting systemic risk and putting speed bumps in place because we can never prevent another future crisis, but to do all we can to slow and minimize the chance of those crises. The most important part of this systemic risk council is it will actually share information, so no longer will we have one regulator who is looking at the holding company, another regulator looking at the depository institution, a third looking at the securities concerns and not sharing that data.
We will place increased cost on the size and complexity of firms. The largest, most interconnected firms will be required--not optional but required--to have higher capital, lower leverage, better liquidity, better risk management. Those have all been traditional tools that have already been in our regulatory system, but this systemic risk council will require those large institutions to meet all of these higher costs--in effect, their cost of being so large and interconnected.
But what we are also bringing to the table are three brand new tools that I think, if executed and implemented correctly, will provide tremendous value in preventing that next financial crisis. Those three tools are contingent debt, our so-called funeral plans, and third, the Office of Financial Research. Since these are new tools, let me spend a moment on each.
One of the things we saw in the 2007, 2008 crisis was that as these firms got to their day of reckoning, it became virtually impossible for them to raise additional capital and shore up their equity. Once they start going down the tubes, the ability to attract new investors, particularly from a management team that sometimes doesn't recognize how far and how close they are coming to the brink, is a great challenge.
So working with folks from the Fed and experts across the country, this bill includes a whole new category within the capital structure of those large institutions: contingent debt. There will be funds within the capital structure that will convert into equity at the earliest signs of a crisis. Why is this important? This is important because if this debt converts into equity, the effect it has on the existing shareholders is it dilutes them. It takes money right out of their pockets. So existing shareholders will have a real incentive to hold management accountable, not to take undue risks, because long before bankruptcy or resolution we will be able to have this trigger in place that will convert this debt into equity, diluting existing shareholders and, candidly, diluting management as well. How effectively we use this tool has yet to be seen, but it will provide another early warning check on these large institutions.
The second new addition to the chairman's bill is basically funeral plans for these large institutions. What do I mean? I mean a management team will have to come before their regulators and explain how they can unwind themselves in an orderly way through the bankruptcy process.
We heard stories--I will not mention the institution--we heard stories in the height of the crisis in 2008 about how certain very large international institutions in effect came before the regulators and said: You have to bail us out because we cannot go through bankruptcy; it is just too hard. Never again should any institution be allowed to be in that position. And if we use this tool correctly--this is an area where I know the Presiding Officer has great interest--if the regulator does not sign off on the funeral plan for this institution, on how it can unwind itself, even with many of its international divisions, through an orderly bankruptcy process, then the regulator can, in effect, make this institution sell off or dispose of parts that can't be done through a regular order of bankruptcy. By doing this, we create the expectation in the marketplace that bankruptcy will always be the preferred option.
Never again will there be an excuse that, we are too big and too complicated to go through that orderly process. Creditors and the market will know there is a plan in place that has to have been approved by the regulator and constantly updated so we have a way out.
The third area--again, I was very pleased to hear the chairman mention this because within the press and the commentary, it has gotten no information or no focus at all--is the creation of a new Office of Financial Research within the Treasury.
One of the things we heard time and again from regulators as we kind of went back and looked at how we got in the crisis of 2007 and 2008 was that the regulators didn't realize the state of interconnectedness of some of the institutions they were supposed to be regulating. No one had a current, real-time market snapshot of all of the transactions that were taking place on a daily basis, so nobody knew what would happen if you pulled the string on AIG, even though it was their London-based office, what would happen if those contracts suddenly all became suspect.
By creating this Office of Financial Research, we will give the regulators and the systemic risk council, on a daily basis, the current state of play across all the markets of the world.
This tool, if used correctly, would be another terribly important early warning system. But as the chairman has mentioned, with all this good work, we still can't predict there will never be another financial crisis. Chances are Wall Street and others, creativity being what they are, will find some way, even with all this additional regulatory structure and oversight. We can never predict there might not be another crisis. So what do we do?
First and foremost, what this bill puts in place is a strong presumption for bankruptcy so that creditors and the market alike will know what happens if they get themselves in trouble. Particularly for these largest institutions that are systemically important, they will have to have their preapproved, in effect, bankruptcy funeral plan on the shelf so that we can pull that off in the event of a crisis and allow the institution to go through an orderly bankruptcy process. Again, bankruptcy will be the preferred option of any reasonable management team because through bankruptcy there is at least some chance they may emerge on the other side in some form or another. They may be able to keep their job, if they are part of management. Some shareholders may still have some equity remaining.
What happens if we have a firm that doesn't see the inevitable and isn't willing to move to bankruptcy? What happens if we have a circumstance where the failure of an institution could cause systemic risk and bring down the whole system?
With an appropriate check and balance--and again, I commend Senator Corker for his additions--in effect, simultaneous action of three keys: the Treasury Secretary, the head of the Fed, the FDIC, and additional oversight--all of these actions taking place, there then is an ability to say, how do we resolve an institution, in effect put it out of business--unlike in 2008 where the government invested, in effect, in a conservatorship approach that said: We will prop you up to keep you alive because we don't know what to do with you to keep you alive because you are so large and systemically important.
We have created in this bill a resolution process that says: If you as a management team are crazy enough not to go into bankruptcy, but actually allow resolution to take place, you are going out of business. Senator Corker said: You are toast. Your management team is toast. Your equity is toast. Your unsecured creditors are toast. You are going away.
Again, we are going to put this institution out of business in a way that does not harm the overall financial system. We have to have an orderly process.
We saw during the crisis of 2008 what happens when one of these institutions fails without any game plan. We saw the value of these institutions disappear overnight as confidence in the market, confidence within the market in the institution was lost. So working with my colleagues and experts from the FDIC and others, we said: What you have to do is, you have to have some dollars available to keep the lights on so that you can sell off the portions of the institution that are systemically important and unwind this in an orderly way that doesn't have an effect, the equivalent of a run on the bank or a run on the financial system.
Again, we have heard critiques of the approach Senator Corker and I came up with in this resolution fund, this ``how do you put yourself out of business in an orderly way'' fund. We actually thought it ought to be paid for by the financial industry, with the ability then to have that fund, in effect, replenished after the crisis is over.
I saw polling today that shows the overwhelming majority of Americans actually think the financial sector ought to bear the cost of unwinding one of these large, systemically important firms. Let me say, if there are other ways to do it--as a matter of fact, some in the administration have suggested other ways--I am sure we can find common ground as long as we do have at least two principles: First and foremost, the taxpayer must be protected, and industry, not the taxpayer, has to take the financial exposure. Second, funding has to be available quickly to allow resolution to work in a way to orderly unwind the process. But it ought to be done in a [Page: S2618] GPO's PDF way--again, this is where some of the judgment comes in--where there is not so much capital available that we create a moral hazard, but a bailout fund is created.
Personally, I believe the House legislation goes too far in creating a fund of that size. I think the chairman's mark strikes a much more appropriate balance. But if there are ways to do this that protect the taxpayer, allow speedy resolution with funds that will be available so we don't have a run on the market, a run on the institution that creates more systemic risk, as long as the industry at the end of day is going to pay for it, I am sure there are other ways and we can find that common ground.
What we did in this process of resolution is we said: Let's take what is working. Let's see what is best from the FDIC process which currently resolves banks on a regular basis. One of the things I have heard from some of my colleagues on the other side--I don't know about their community banks, but my community banks in Virginia; I would bet the community banks in Delaware and the community banks in Connecticut--we don't want to get stuck paying the bills for the large Wall Street firms that bring the system to the brink of financial catastrophe. So, again, one of the aspects of the chairman's bill is to make sure any resolution process does not burden, charge, or in any way otherwise interfere with community banks.
What we think we have struck is a process that puts costs on those institutions that make the business decision to get large and systemically important. We think we have put in place abilities for the regulators, with the funeral plans, to make sure if this interconnectedness is so large that they can't go through bankruptcy, then we can stop them from taking on these new activities. But because we can't always predict eventuality, we have then said: If you need to use a resolution process, let's make sure it is orderly, paid for by industry, and that you have stood it up in a way that no rational management team would ever expect or want to choose resolution.
I know my colleague from New Hampshire has been a great partner in this legislation and is on the Senate floor. I will end with just a couple more moments. There are other parts of this bill that have not received a lot of attention. In this bill, the chairman has included an office of national insurance.
One of the things we saw in the crisis in the fall of 2008 was that nobody knew how entangled AIG's activities were with the whole financial system. This doesn't get to the question of who should regulate insurance companies, but it does create at the Federal level at least the knowledge within the insurance sector of its interconnectedness. The chairman has mentioned that he and Chairman Lincoln are working to grapple through one of the toughest parts of the bill--again, an area I know my colleague, Senator Gregg, has been working on: How we get it right around derivatives.
Again, there is no policy difference. Both sides agree derivatives are an important tool when used appropriately. Particularly industrial companies need to use the derivative to hedge against future risk within their business. The challenge is, how do we not draw that end user exemption so large that every institution on Wall Street suddenly transforms itself into an industrial end user. Secondly, while these contracts are unique, they have to have more light shown on them in terms of clearing and exchanges.
I know Chairman Dodd and Chairman Lincoln and Senator Reid and Senator Gregg will be working through this. One suggestion I would have--because as someone who has seen Wall Street act time and again, I wish them all the luck--part of my concern is that whatever rule we come up with, there is so much financial incentive on the other side that a year or two from now, we may be back because they found a way around it that we again need to give the regulators certain trip wires. I, for one, believe we ought to take the industry at its word. The industry says end users are only going to be 10 percent of total derivative contracts. Then let's put that in as a regulatory goal. If they end up exceeding that, then we can bring draconian consequences to bear. Or if they say, yes, we can make most of these transactions and most of these contracts transparent through clearing or exchange, great; let's accept them at their word.
But if they don't get to those totals, then perhaps some of the actions that particularly Members on my side of the aisle would like to take can be put in place. But, again, folks of goodwill can find common agreement.
Finally, the area around consumer protection, where the chairman and the ranking member have worked at great length to kind of sort this through, everybody agrees on the common goal. There needs to be enhanced consumer protection, particularly for the whole nonregulated portion of the financial industry that now exceeds the regulatory half. Too often it was the community bank that was chasing the mortgage broker on some of the bad financial products because there was no regulation on the mortgage broker to start with. So, again, there will be differences, but I think the approach of the chairman, which is to keep this with the appropriate rulemaking ability but to make sure, particularly for those smaller banks, that we don't end with conflicting information of a consumer regulator showing up on Monday and a safety and soundness regulator showing up on Wednesday, to do that in a combined fashion so there is commonality of message, particularly to smaller banks, that strikes that right balance.
Again, I can only say for the banks in my State of Virginia, those smaller banks who oftentimes have said they didn't cause the crisis--and they didn't--they are the first to say: We need enhanced consumer protection to make sure that our financial products are regulated by the type of product, not by the charter of the institution that issues the product. There may be ways to improve on this section. But, again, I think Senator Dodd and Senator Shelby are working to get it right.
We have seen, as well, major action on the rating agencies, questions around underwriting. There are tremendous parts of this bill that haven't been the subject of great criticism because they are that common ground that, I think Senator Shelby has said in earlier quotes, 80 or 90 percent of both sides agree on. Where we don't agree, we ought to debate and offer amendments.
I look forward to candidly working with a number of colleagues on the other side of the aisle on technical amendments to this bill where we think we can make it slightly better. But if we are going to get there, we have to get to the debate.
I hope we move past procedural back-and-forth that, as a new guy, I still don't fully understand. I think it is time to fully debate this bill out in the open. The chairman made mention of what has been taking place in the last few weeks in Greece. I know the Presiding Officer has helped educate me on a whole new activity that is taking place in the financial markets right now around high-speed trading and co-location that could be the forbear of the next financial crisis.
How irresponsible would we be, 18 months after, again, the analogy of the chairman, after our house was broken into, when we haven't even put new locks on the door, if we ended up with another robbery, whether it was caused by international action or whether it was caused by high-speed trading, because we don't have new rules of the road in place?
In the 15 months I have had the honor of serving in the Senate, I can't think of a piece of legislation that better represents what is good about the Senate, folks on both sides of the aisle coming forth with their ideas, trying to fashion a good piece of legislation. I can't think of an area where there is less traditional partisan, left versus right, Democrat versus Republican divides. I can't think of an applause line better, whether I am talking to a group of liberal bloggers or folks from the tea party, than the notion that we have to end taxpayer bailouts.
I urge my colleagues on both sides of the aisle, let's get through the procedural wrangling. Let's find that common ground that I think we are 90 percent of the way there. Let's pass a bill that gets 60, 70, 80 Members of the Senate and set financial rules of the road that will last not just for the next congressional session but for decades to come.
I yield the floor.
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.
I would like to begin by commending Chairman Dodd for his leadership in bringing forward this bill. It is bold, broad and comprehensive, and it is vitally necessary that we move forward with the process of reviewing, improving, and passing it into law.
It was not easy to get here – we have had dozens and dozens of hearings. I have tried to work across the aisle with my colleague from Tennessee, Senator Corker, to better educate myself and to bring in outside experts who could speak directly to us and our colleagues about these very complex issues.
Chairman Dodd’s work and that of his outstanding staff obviously began before I arrived here last fall when they worked with the Bush administration to stabilize our financial system and prevent a depression. He started, and many of us have supported, this enormous effort to stabilize the economy -- some of it unpopular and an easy target of criticism.
We should all keep in mind that in March, the Dow was at 6500, GDP growth was negative 6.5% right after a previous quarter of negative 5.4%. If we said in March that by Thanksgiving we would have an economy with third quarter GDP growth of 3.5%... with a Dow once again over 10,000… and with indications of increased stability in the housing market, we would have been called wildly optimistic.
But while having the Dow over 10,000 is a positive development, it means nothing to those who have just lost their jobs and had their retirement savings depleted.
A basic trust in our financial system has been broken, and we must fix it.
We need to make sure that the small business owner in Norfolk has access to credit so they can buy inventory, or hire more workers.
We need to fix our capital markets so that the engineer graduating from Virginia Tech with an idea for a start-up can find access to capital and grow that startup and develop the next transformative technology.
We need to make sure that the retiree in Abingdon can have confidence that her financial advisor is looking out for her best interests and that her savings won’t disappear because the markets have tanked.
Banking seemed exciting when it was booking year after year of record profits. But those gains were black magic. The magic of the marketplace has turned into a nightmare for families, homeowners, and most businesses. It is time to make banking boring again.
In recent years, we have been favoring debt over equity. Why would anyone invest in the equity of a start-up when you could leverage-up through debt and financial engineering to get a guaranteed return, even though it doesn’t create anything new or productive? Our bias towards debt over equity needs to be examined.
I’ll match my free market credentials with anyone but I believe we need to have rules of the road. I emphatically believe we must fix our regulatory structure in order to grow and prosper once again. Right now, investors and entrepreneurs are sitting on the sidelines of our economy. They don’t trust the current system and they aren’t sure what the next one will look like. They need these rules so that they can go out and invest, innovate, and even take measured risks with some confidence.
This is the only way we can return to sustainable growth and innovation, and create jobs over the next ten, twenty, or thirty years.
We have to make this bill as good as we can. But we have to remember that none of us here is capable of writing a perfect bill because none of us can anticipate the future. If there is a risk, it is in not acting.
Each of us here has some concerns about various provisions in the bill, and I know there are some concerns that the language before us meets the real intent. But I also know Chairman Dodd knows that and wants to use this process to make this bill as strong as possible.
We should not lose sight of the forest for the trees. The bill that comes before us today is better than any proposal to date to accomplish three things:
I have paid specific attention to systemic risk regulation and resolution authority. Earlier this year, I spoke on the floor of the Senate about the need to create a strong systemic risk council, and I would like to thank the Chairman for including a number of my ideas in his “Agency for Financial Stability.” I may have one or two ideas to strengthen it further, but I know the bill starts from a strong base.
I am also concerned that we make sure our systemic resolution process is rarely, if ever, used, but is also effective and cost-efficient when implemented. I intend to keep working to ensure that prudential regulation is improved and that non-systemic resolution processes, such as FDIC’s current authority over depositories and bankruptcy work well enough that we don’t have to call upon the special process.
There are many more issues to talk about and discuss and there may be additional adjustments to make, but I would like to focus on the process we use here in the Senate. I know there are colleagues across the aisle who may not like everything in the bill. But for the sake of the confidence and well-being of the American people and our economy, we must move to legislate, and it would be best if we moved in a bipartisan manner.
I know Ranking Member Shelby has worked on these issues for many years, and cares very deeply about the work of this committee. I know he has spent many hours discussing this with Senator Dodd. I know other Senators across the aisle also care very deeply that we get this right. Senator Corker and I have had many discussions on these topics and tried to wrestle through these issues together.
As we move through this process, we should keep in mind that the vast majority of these are highly technical matters, and there is not a right or left, Democrat or Republican solution. We will have our disagreements, but I think we start by agreeing about the vast majority of this, and we have a real opportunity to come together in a bipartisan way and pass this vitally important and time-sensitive regulatory modernization.
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