Mr. President, I rise to address the Dodd-Frank financial reform bill and to share the reasons it makes a great deal of sense to restore the lane markers and traffic signals to our financial system–lane markers and traffic signals that were ripped away carelessly, thoughtlessly over the course of a decade and led to the economic house of cards that melted down last year, doing enormous damage to America’s working families.
There may be many in the financial world who feel pretty good about the most recent billion-dollar quarterly profits or million-dollar bonuses, but families in America’s working world are not feeling so good. They are looking at their retirement savings being decimated. They look at the value of their house and realize it is worth less than it was 6 years ago. For many families, the amount they owe on the house is more than it is now worth. Families are looking at lost jobs and lost health care that went with those jobs. They are looking at an economy struggling to recover, that is providing them few opportunities to get back on their feet.
The meltdown triggered by the economic house of cards built up over the last decade is enormous. It is not only the damage done to families; it is the damage done to the economy as a whole. We cannot talk to any room with owners of small businesses and not hear stories about frozen lending, about credit lines cut in half, about opportunities to expand a business, but, despite a regular banking relationship extended over a decade, that bank cannot now extend the loans that would enable them to seize that opportunity to create jobs. We still have massive disruption in our securities market that provides the credit that fuels not only home mortgages but many other parts of the economy.
This economic meltdown has been a huge factor in contributing to the national debt. In every possible way, the absence of responsible lane markers and traffic signals has wreaked havoc on the American family and the American economy. We are here now to set that straight, to restore those lane markers and traffic signals.
What really happened? It can be summed up in two words: irresponsible deregulation. Let’s get into the details a bit further. Let’s start with irresponsible deregulation that led to new predatory mortgage practices. One of those practices was liar loans, loans in which the loan officer was making up the numbers and putting them in because they knew they could turn around and sell that loan to Wall Street and have no responsibility for whether that family succeeded in making the payments.
Another predatory practice was steering payments–mortgage originators getting paid huge bonuses to sign people up for mortgages that had in the fine print hidden exploding interest rates, so the family could easily make the payments at 5 percent, but when that hidden language triggered 9 percent, there was no way the family was going to be able to make those loan payments. Since most of those were on a 2-year delay, we can think of it as a 2-year fuse, a ticking time bomb, a ticking mortgage time bomb that was going to go off and destroy that family’s finances. Then there were the prepayment penalties that locked people into those loans. These retail mortgage practices resulted in irresponsible deregulation.
Then we had the securities that were made from those bad mortgages by financial firms, packaging those bad mortgages, putting a shiny wrapper on them, and then selling them with AAA ratings to financial institutions, to pension funds, to investment houses, tossing those mortgage securities hither and yon without full disclosure. When those mortgages that were in those packages went bad, those securities were going to go bad. That is what happened in 2008 and 2009. It melted down this economy.
Another piece was the irresponsible deregulation lifting leverage requirements on the largest investment houses. Bear Stearns, in a single year, went from 20-to-1 leverage to 40-to-1 leverage. That means they were going to make a lot more money when everything is going up, but it means the moment things turn down, they can’t cover their bets and they are going to go out of business.
Then we had credit default swaps. That is a fancy term for insurance on the success of a bond. That new insurance was issued by AIG without any collateral being set aside to cover the insurance–complete failure to deregulate this new product. Those insurance policies, those credit default policies created an interwoven web in which if one firm failed and couldn’t pay off its responsibilities under the credit default swaps or insurance policies, then the firm that it owed was going to fail. It set up a web of potential collapse.
Those are the types of dramatic issues created through irresponsible deregulation that we must address in this body and that are addressed in the Dodd-Frank financial reform bill.
First, the bill ends those three predatory mortgage practices I spoke of. It ends liar loans. It creates underwriting standards. My colleague from Tennessee mentioned he would like to see underwriting standards in this bill. They actually are in the bill. That is a very important part of this legislation. This bill ends the steering payments, the bonuses paid to mortgage originators to basically guide people into tricky mortgages with hidden exploding interest rate clauses. This bill stops prepayment penalties that were used to lock families in. If you are in a mortgage and you have to pay several pounds of flesh to get out of that mortgage – and by that, I mean perhaps 10 percent of the value of your house – where is that 10 percent coming from? You can’t do it, so you are locked in. You are chained to the steering wheel of a car going over a cliff. We have gotten rid of that practice.
The second main thing we have done is establish real-time consumer protection to end scams and tricks and traps in financial documents. There was a woman from Salem, OR, who wrote to me. She wanted to share her story, just one of the little pieces of malfeasance that had occurred. She had paid her credit card bill on a timely basis month after month, year after year. She was very surprised when she received a letter saying she had a late payment and owed a fee. So she called up the credit card company and said: How can this be? I always pay on time.
The person on the other end said: Yes, we received your payment, as you indicated. But your contract says we don’t have to post your payment for 10 days, and so we didn’t post your payment right away. We posted it at the end of that 10-day period. At the end of the 10-day period, your payment was late. So you owe us this fee. It is all in your contract.
She said: How can that be fair?
That is why we need a consumer protection agency for citizens across the country. Members know what I am talking about because virtually every one of us has opened up a statement and gone: Wait, how can that be fair? We did have the delegation of consumer protection responsibilities to the Fed, but the Fed had its monetary mission in the penthouse of their office building. They had safety and soundness on the upper floors, but they put consumer protection down in the basement. They ignored it. They didn’t act on the responsibilities they had. So we put those responsibilities in an organization, a Consumer Financial Protection Bureau that has a single mission–not a third mission or a fourth mission, not a forgotten mission, not a mission we put in the basement, but a first mission–so that Americans can choose from responsible financial products, not ones that compete to see who can have the biggest scam, the biggest deception, the biggest trick or the biggest trap but instead can compete on the cost of the product and on the quality of the service.
The third thing this bill does is redirects banks to the mission of providing loans to families and small businesses. This is the core function of the banking world. What happened over the last few years is some of our banks said, “It is a lot more fun to bet on high-risk investments than it is to make loans to families and businesses.” But that is not the mission of the banks that have access to the Fed window for discounted funds from the Federal Reserve. That is not the mission of the banks that we insure their deposits. The function of those banks is to make sure there is liquidity in the hands of our businesses so they can thrive and so families can thrive. This bill redirects them to that mission.
Let me put it this way: High-risk investing is a little bit like high-speed car racing.
You know as you watch cars going around the race track they are going to push the boundaries, the limits of speed and traction, and they are going to do quite well. They are going to try to nudge ahead of the rest of the cars. But then, eventually, one is going to hit some rubber on the track or some oil or some gravel or get bumped by another car and the race car is going to crash.
When you go to the track, you pretty well know in advance you are going to see a car crash. That is the way it is with investment houses. They are competing with each other to find the best opportunities for the highest return, so we know they are going to crash – that some of them will – and we accept that. This is an important role in the formation, aggregation, allocation of capital. But we want them to crash on the race track, not to crash out on the streets of the city or the streets of the countryside. That is why this bill moves high-risk investing out of the banks that should be dedicated to the mission of providing loans to small businesses and families.
Another key thing this bill does is restore integrity in the formation of securities. Let me put it to you this way. Imagine that an electrician comes to your house because you are asking that electrician to wire up your basement. The electrician leaves, and you find out he or she took out a fire policy on your house. I think you might be a little worried about the quality of the wiring that was done in your basement.
Or consider this possibility: You buy a car and you find out the person who sold you the car took out a life insurance policy on you. Well, you do not like the idea, I do not like the idea, of the possibility that someone would sell a car that is defective so they can take out a life insurance policy and maybe cash in.
Yet that was what was happening with securities: companies taking bad loans, putting them in a shiny wrapper, selling them, and then taking out an insurance policy – a credit default swap – so when that security went bad they could cash in.
Well, we need to have a level of integrity in the formation of our securities or our bonds. This bill takes us in that direction. This bill puts the sale of swaps on organized markets. What are swaps? Again, they are insurance policies, based on interest rates; insurance policies, based on exchange rates; insurance policies, based on the success of securities.
You cannot sell insurance to the general public without setting aside reserves, but these swaps were sold without reserves. So this bill before us today says reserves are necessary so the bet can be covered if the event you are insuring should happen.
It also creates a market for them so the customer – that is normally a business that wants to hedge its interest rate risk or its exchange risk or its investments in securities, that wants to hedge and protect itself against the possibility that those will go down or change – they can get that at a much better price when they can do so through the power of a transparent, organized market.
So being able to hedge risk at a much cheaper price is a huge contribution to the formation and allocation of capital in our country.
Finally, this bill allows a systematic way to dismantle failing firms in the financial world so it minimizes systemic risk and so the industry itself picks up the cost of their failure, so we the taxpayers are not in a position of having to pick up that cost.
I know some of my colleagues on the other side have simply asserted the opposite to try to confuse the issue. Well, I think that is irresponsible because so much was done in this bill to make sure American taxpayers are never again on the hook for the failure of financial firms in our Nation. These are the type of responsible lane markers and traffic signals we need in our system.
Certainly every one of us here believes there are further strides that could be made. There are standards in this bill that I would like to have crisper. There are terms for which I know we will need fierce, vigilant regulation to make sure those terms are not expanded into loopholes.
This bill does not do as much as I would like to address the issue of perverse incentives in the system of rating securities, something the Presiding Officer was a huge advocate for, and put forward a terrific policy to address. We are going to have to keep working on that piece.
But in each of these areas I have described, this is a quantum improvement. I think colleagues on both sides of the aisle know that. So beware of efforts to confuse the debate trying to say what is north is south and what is east is west.
So these are the reasons – these core improvements to our financial system that enhance the ability to aggregate and allocate capital efficiently – why I am supporting this bill. I applaud the chairman of the Banking Committee, who steered this bill through enormous sets of obstacles. It is reported that Wall Street hired 1,000 extra lobbyists to try to torpedo the bill that is before us. That is a lot of obstacles to get through.
These are complex issues that required thoughtful analysis and had to be worked and reworked. So I applaud the chairman’s work in taking us to this point where we are prepared to send this bill on to the President’s desk.
I would like to particularly thank my colleague, Carl Levin, who teamed up to work with me on a proposal to take high-risk investing out of the bank holding companies and to improve the integrity of bonds. That was work that came straight out of the committee work he did in such a capable and timely fashion.
So with that, I conclude by saying we need a financial system that is not about quarterly profit margins on Wall Street, that is not about the size of bonuses on Wall Street but is about providing a foundation for business to thrive, for employment to be increased, for families to find work, and to build financial foundations for the success of those families over the next several decades.