Merkley: Let Volcker have a Vote

The amendment 410, is an amendment that is cosponsored by Carl Levin and myself and about 20 other Senators in this body. There are not that many amendments that have 20-plus cosponsors.  I will tell you that it is not the number of cosponsors, although that indicates a genuine interest among colleagues in debating this; it is that the substance that goes to the heart of the conversation between Wall Street and Main Street.

   This amendment is about how we aggregate capital in our country and how we allocate it. How do we get money where it does the most good to build our economy and build the success of our families?  We have a couple of different ways of doing that in our nation.  One is that we do deposits to a bank, and the bank also has access to the Federal Reserve window, where they get very low cost loans. The intent of us providing both access to the Fed window and the low-cost loans and providing government insurance on deposits – is that this money is going to go into loans to our families and our small businesses.  That access to capital is absolutely essential for building our small businesses.

   Right now, our businesses are having a difficult time accessing capital.  I bet every Member of this body has gone around their States and heard the stories I hear in Oregon.  I hear about credit lines being cut in half or eliminated.  I hear about projects that they are ready to seize a business opportunity but that opportunity is blocked because they can’t get a loan they would have gotten in a heartbeat last year or 2 years ago or 3 years ago.  Those opportunities are not just about the success of the business; it’s about the success of our families because when those small businesses expand, they put people to work.

   But right now, access to capital is frozen through much of our economy, inaccessible to our families and small businesses to be able to seize those opportunities and expand.  Why is that?  It is because we put in the same house both our lending system and our high-risk investing system.  Both of these work very well.

   Let me explain the high-risk investing side.  If you are so fortunate as to have a big chunk of capital, you say: I am going to put this into this private equity fund or venture capital fund or this hedge fund, and they are going to have some very capable managers who are going to look for opportunities–often high-risk opportunities.  They will scour the United States, and they are going to find opportunities to invest.  A lot of the time those opportunities pay off handsomely. Those who are fortunate enough to have the funds to be able to put them into such investment vehicles often do very well.

   Occasionally, the bets that are made go awry.  Why is that?  Well, a fund says: You know what – there is a huge new opportunity in Russia, for example, because the price of oil is going up and they have a lot of oil they want to develop.  They are changing their rules and there are new opportunities for business to thrive and take advantage of those new rules.  So they invest in Russia and it looks very good, but something goes wrong and the price of oil drops and their investments blow up—and suddenly, the investment fund blows up.

   If that investment fund is by itself, it doesn’t really hurt the rest of the economy. As long as it is by itself and not systemically so large that it poses a huge risk to the rest of the economy – it goes bust – the investors simply lose their money.  No harm done.  But if it is inside of a bank, now you have a problem because when that goes bust, the bank is responsible for the responsibilities of that fund, and the result is that the bank goes down.

   We saw this – Citibank went down.  We saw so many other big banks–when I say “went down,” I mean they had huge losses.  Citibank is still alive.  I know the folks in South Dakota will be happy to know that.  They had huge losses, and the former chair of Citibank believes we need to separate the high-risk investing and the function of depositing, accessing money through the Fed, and making those loans to our families and small businesses so they can thrive.  It is a separation between two functions.

   I would be happy to yield to my colleague if he wants to explain why he is objecting to having a debate on the floor of the Senate that is a debate that is so important to the success of our small businesses, so important to the success of our families, a debate that is so important because we should have learned over what happened in the last 2 years that if these two functions are combined, they hurt each other.  Why would we not want to debate the diversion of money out of the hands of our small businesses and into Wall Street?  I would yield if my colleague across the aisle would like to say why he is objecting to having this debate tonight. If he would like to jump up later and explain it, I will be happy to take that comment at that time.

   We cannot do our job here in the U.S. Senate if a Senator blocks the debate of issues that are important to the success of our Republic.  We cannot do our job here in the U.S. Senate if a Senator blocks the debate of issues that are important to our families.  We cannot do our job if folks, on behalf of Wall Street giants, come to the floor and object to the debate of fixing our financial system so our small businesses can thrive.

   I can tell you this: Back home, people know that this body helped out the biggest corporations in America last year in a very difficult time for them, when many of them would have gone bust.  They want to know why this body, tonight, is unwilling to debate changes in the law that will help the small businesses of America, changes that will help the families of America, debate that will enable us to discuss improving our system so that we can have decades of solid growth in the years ahead. Why should Wall Street veto a debate in this body tonight for Main Street? I can’t explain that to the folks back home.

   I can’t explain to the folks back home that we have an amendment that has been carefully worked on for months; that there are colleagues on both sides of the aisle who wanted to have this debate; that we have an amendment that was worked very carefully with experts from Wall Street to make sure we got it right; that we have an amendment about which the Treasury Department with all its experts, brought them in through meetings and said: Here is the challenge, here is what you need do and how you can fix it. How do I explain to them that all that work, we could have a rational debate.  But it isn’t going to happen because Wall Street is asking colleagues to block the debate for the American people.  Why is Wall Street winning and Main Street losing tonight?  I would like an explanation.  The American people would like an explanation.

   Another piece of this bill says that nonbank financial organizations–by this, you can simply say hedge funds, equity funds, funds that pool money and make risky investments–that if they are so large that they pose a risk to the economy as a whole, then the regulators can add additional capital requirements, so they have to set aside more dollars for every dollar they invest.

   Two years ago, the Fed lifted the capital requirements on the largest five investment banks in America.  Bear Stearns went from 20-to-1 leverage to 40-to-1 leverage in 1 year.  What do I mean by that?  For every dollar they set aside in case investments went bad, they invested $20.  So you only had to have a 5-percent drop in value to wipe out what they set aside.  That was at the beginning of the year, at the end of the year, they got 40-to-1 leverage, and that meant for every $100 invested, they only had $2.50 set aside, so you only needed 2.5 percent reduction in investments to go bust.  What kind of regulation system would allow 40-to-1 leverage?

   Shouldn’t we have a debate on the second main piece of this amendment, which says that regulators, when you have a systemically significant firm, can increase the leverage requirement, increase the capital set aside, so that firm is not operating in a way that it can bring down our economy or punch a huge hole in our economy?

   So the first part of the amendment says that high-risk investing is wonderful for allocating capital but do it away from our lending system so that our small businesses and our families can have access to a steady flow of capital, so that capital will not be frozen when investments go bad.

   The second part of the amendment says: Give the regulators the power to increase the capital requirement when they are large and can tear a big hole, so if they do crazy, risky things and they lose, they do not hurt the rest of the economy. I think it is common sense.  Why is that debate so scary to my colleagues who are objecting to it tonight?

   This is not about whether the amendment wins or not.  We offered tonight to have this vote with our arms tied behind our back and one leg.  What do I mean by that?  We offered to have this vote tonight with a 60-vote requirement, even though a number of Democratic Senators are missing–a supermajority requirement so that we can have a debate on Main Street about Main Street, about Main Street working better.  But Wall Street asked colleagues to block this debate.  That is wrong.

   The third part of this amendment says we need integrity in writing securities.  Now my colleague, Senator Levin, this is the superb work of my colleague.  I know he will expand on it in due course.  But here is the thing.  A system with integrity is good for allocating capital efficiently because people want to invest in a system that has integrity.  When we established the Securities and Exchange Commission to oversee the stock world, people gained more faith that the system was not rigged. They were more willing to buy stocks and, by that fashion, invest their money in the companies of America – build those companies. The success of those companies was good for our families–our working families–and the jobs that went with them.

   But now in securities, we have a very opaque, a very dark market where only a few companies have control of the information and people do not know what the price point is, and they do not know what the details are. We have swaps being written where if you participate in it, you do not even know who is on the other side of the deal.  There were folks doing deals with middlemen on Wall Street, and they did not know who the insurer was.  They did not know it was AIG on the other side of the deal.  When you buy insurance, you want to know who the insurer is.  They could not get access to that information.

   In securities, here is the thing.  Right now, we have companies that while they are designing and selling securities also are betting against the success of those securities.  I must say, that does not instill much confidence in the integrity of the system.

   I ask my colleagues, and I ask the citizens of this country: Would you like to buy a car from someone who would not tell you whether they installed brakes or not and who was taking out an insurance policy on your life; they are betting you are going to get in a wreck?  You would say: No, I would not want to buy a car from someone who is not telling me if they put in the brakes and is taking out a life insurance policy on my life.  I would be scared to death to buy that car.

   The story goes on. Would you buy a loaf of bread from someone who would not tell you what the ingredients were and you do not know if it is a good loaf of bread, and they are taking an insurance policy out on your life?  You would be a little worried about the ingredients in that bread.

   That is the problem we have in the securities world.  It is a very simple approach that Senator Levin has laid out in which it calls for integrity in securities.  If you are designing and selling them, you do not bet against them.

   There are all kinds of details that have been put into these three parts of the amendment to make them work.  Actually, there is nothing in this amendment that is very far outside a core set of issues being considered.  Modern bank holding companies do a lot of things.  They do wealth management.  They do broker dealers in securities and other financial products.  They do market making where they help bring together this group that wants to buy and this group that wants to sell.  They make loans to power up our families and our small businesses.  And they do insurance.  All those functions continue in our bill.

   But amidst that set, there is one thing that is being carved out, and that one thing is high-risk investing.  When Merrill Lynch blows up, you do not want it to take down Bank of America.  Two years ago, Merrill Lynch blew up.  It would not have taken down Bank of America because it was not in Bank of America.  But it is today.  It is a riskier system today than we had 2 years ago.

   We should have a debate about this on the floor of the Senate.  Bear Stearns, 2 years ago, was by itself.  But now it is part of JPMorgan Chase.  If Bear Stearns, 10 years from now, makes investments that go awry and it goes down, it blows up a major lender.  These types of bankruptcies need to not be in a situation where they send shock waves and paralyze our economy.  So common sense: more collateral, if you are a huge investor, set by regulators at a rational level with appropriate hearings.  That high-risk investing take it and do it under a different roof so if it blows up, it does not affect lending, and those securities–a little bit of integrity in the marketing of securities.

   These are simple ideas. These are common sense ideas that will make our financial system work better for everyone, making it more feasible for our small businesses to gain access to credit, making it more feasible for our families to gain access to credit, making it less likely that a major disruption in investing is going to freeze up those loans and the result in that credit lines are being cut so they cannot expand business and cannot hire.

   That is where we are now.  We are frozen.  In mortgages, we do not have a functioning securities market right now.  It is important because banks make loans and then they sell them on to the market. But they can only sell them if the market has somebody to sell to.  Right now investors are leery, and shouldn’t they be leery when there are these conflicts of interest that the good work my friend from Michigan has done addresses.

   This debate should happen. It is wrong for a Senator to object to the people of the United States having their day to talk about a financial system that works for small business and works for families.

   I know my colleague from Michigan is prepared to expand on the work he has been doing.  At the close of my remarks, I just want to thank many of my colleagues who have been immersed in this effort to design a better financial system.  Senator Dodd and his team on Banking, the staff has been working night and day, looking at every angle to get this amendment right.  My friends at Treasury–I cannot tell you how many nights they have been up working, consulting with folks who are deep in the industry, to understand what works and does not to get this right.  Senator Levin’s team and my team have been working so hard in consulting and facilitating and writing and rewriting so we could have this debate in a responsible way tonight.  We did not want to have a debate where we had an amendment that was illogical or had rough edges that had not been sanded off. We wanted to have a responsible debate.

   It may not have had the votes necessary to pass.  We do not know.  That is a mystery. But what we know for sure is that the people of America have been shortchanged tonight by some colleagues at the request of Wall Street blocking consideration of this amendment, and that is not right.