Senate Floor Statement on the Emergency Economic Stabilization Act

Mr. President, our nation’s economy is in crisis, the likes of which we haven’t seen since the 1930s. For years, we’ve traveled a disturbing path: foreclosures and unemployment are up while median income and purchasing power are down. CEO pay has skyrocketed while regular Americans are suffering. Economic growth has slowed because tight credit has forced businesses large and small to put investments for the future on hold while they focus on making sure they have capital to buy inventory or even make payroll.

But in just the last few weeks, we’ve seen something even more startling appear on the horizon: our current path ends at a cliff, and if we do not take quick action to change the course of our economy, we could go over the edge. The reasons we are at this cliff are many. The path we have traveled has been marked by an appalling lack of oversight by the regulators of the market place. Wall Street has run amok with greed while the Bush Administration and others urged them on in the name of deregulation. As in the run-up to the Great Depression, our free markets are running wild. We’ve reduced capital requirements, removed the authority of the Securities and Exchange Commission to regulate swaps, and speculators took over the majority of some commodity trading, like oil. Still, echoing Roosevelt’s opponents in the 1930s, some opponents of government stabilization actions argue that the kind of rescue plan before us today – and regulation of the practices that brought us here – threatens the freedom of our markets and our people.

The opposite is true. In a free country, we need to have stop lights and cops to maintain order, keep everyone safe and give everyone fair treatment and fair opportunity. The same is true of a free economy: when stoplights and cops are replaced by a drive to achieve total deregulation, the country is left with an absolute mess – and that’s what we face today. Cops have been taken off the beat in our financial markets; stop lights to put a hold on free markets running wild have been dismantled; and now, regular Americans are suffering, and face even more dire consequences.

There is plenty of blame to go around, and the excesses that continue to surface as this unfolds will no doubt be shocking. In the immediate term, however, the most pressing issue is how we turn our unstable economic situation around to avoid an even more dire result.

If we fail to take action, pensions and savings could quickly be decimated by a wrecked stock market, and Americans could suffer with significant job losses and less ability to buy everything from groceries to a new car or house. Small businesses and even large ones are likely to see their access to capital further reduced, home mortgages could become even more difficult to acquire or refinance, foreclosures could further skyrocket, and auto and student loans could be much more difficult to get. Construction jobs would likely disappear, automakers would cut back even further on production and lay off workers, and retail and service jobs would be cut. Retirees who are counting on a 401(k) or other type of pension would see their nest eggs shattered. If the stock market crashes, investments – even those made years or decades ago in supposedly “safe” assets – would be drowned.

It’s clear to me that we cannot allow our nation’s economy to fall off this cliff. We need to take action before it is too late. Doing nothing is not an option. But, it is with reluctance that I will vote for this rescue plan, because it’s not entirely clear that it will unlock enough credit and stop enough foreclosures to turn things around. It is also evident that this plan only includes the first steps towards getting regulatory cops back on the beat to make sure our markets are not allowed to continue running wild. But there also is no better alternative at this time, so I will vote for this plan with the hope that allowing the government to buy up a significant portion of the troubled assets that are weighing down banks and other financial institutions will unlock enough capital to restore flexibility and credit to businesses and consumers, before Americans suffer even greater consequences of our current course.

In addition, if done right, the government can use this plan to purchase, modify, refinance, and re-sell mortgages that are based on accurate home values, have fair, longer-term repayment terms that homeowners can meet, and will return mortgage repayment rates to their historic high levels of dependability and profitability. If that’s how this program is carried out, it can avert a disaster. Unlocking credit and restructuring mortgages will also help soothe investor concerns, and therefore protect pensions, savings and investments.

I could not have supported the original plan sent to Congress by the Bush Administration. It did nothing to protect taxpayers or provide any oversight. It also did nothing to address the core of the problem, which is the foreclosure crisis. I think, however, that we in Congress have decided that if taxpayer dollars are used to clean up the financial mess, the Administration is going to have to accept taxpayer safeguards and taxpayer oversight.

Notable Provisions. Congress has done significant work to add in some of the needed taxpayer protections, and to make sure that this plan is grounded in helping regular Americans. Among other safeguards, this rescue bill provides the government, and thus the taxpayers, with options to acquire an equity stake in companies that take advantage of the program. By doing so, the government is providing some financial protection to taxpayers.

The bill also includes limits on executive compensation for entities that take advantage of government assistance, though, like other provisions, the effectiveness of these provisions will depend upon how well they are implemented. The bill also imposes needed internal controls and oversight provisions to make sure this unprecedented power and amount of money is used responsibly. These controls include immediate public reporting of the assets purchased, including the price paid; GAO audits of those financial reports; and Inspector General oversight to prevent fraud, favoritism, waste of taxpayer dollars, and abuse of power. In addition, a special House-Senate oversight panel will be established to track this program and ensure that taxpayer interests are protected. These protections are important. Still more important is that Congress revamp oversight and regulation of our financial markets to prevent future financial disasters like this one.

There are other provisions in the bill that are particularly important that I want to mention.

Promoting Loan Modifications. I am pleased that this bill, in Sections 109 and 110, requires the Treasury Department to maximize assistance for homeowners and encourage mortgage service providers to minimize foreclosures so as to keep families in their homes. Rampant foreclosures are at the core of this economic crisis, and a recovery can only come when the housing market turns around. This effort to limit foreclosures will be bolstered when the Federal government holds, owns or controls mortgages or mortgage backed securities. As the owner of loans that are at risk to be foreclosed upon, the government can consent to modifications, and can rework mortgages so that the homeowner can continue to make payments. Homeowners, communities and taxpayers generally will be better off than if these mortgages go into foreclosure.

It should be noted that foreclosure mitigation measures will become much more difficult to enforce when the government buys mortgages that have been securitized and divided up into smaller parts. In these cases, Section 109 requires Treasury to coordinate with the Federal Deposit Insurance Corporation, the Federal Reserve, Fannie Mae, Freddie Mac, the Department of Housing and Urban Development and other Federal entities that hold troubled assets to attempt to identify opportunities for the acquisition of classes of troubled assets. This will enable Treasury to improve the loan modification and restructuring process.

All of the homeowner assistance and foreclosure mitigation programs included in this bill set worthy goals, but they could be stronger. Rather than encouraging servicers to modify unaffordable loans, the United States should undertake a systematic effort to minimize foreclosures, and the Treasury’s efforts should be built around that principle. I would also like to have seen a similar requirement in any mortgage-related asset that the United States resold to the private sector. Unfortunately, such a carry-forward provision is not included in the final bill.

Conflicts of Interest. I also support the bill provisions in Section 108 that require Treasury to issue regulations or guidelines to “manage or prohibit” conflicts of interest. One conflict of interest that deserves special attention involves companies that service residential mortgages. These companies make a stream of revenue from servicing the loans; they may not specialize in loan modifications or refinancing. If a mortgage loan is refinanced through FHA or otherwise, the loan servicer may lose the business. For that reason, some loan servicers may have a conflict of interest when it comes to implementing the bill’s policies promoting loan modifications and the HOPE for Homeowners Program. Therefore, in addition to companies that service loans, the Treasury Department should consider hiring companies who have the experience and technology to modify and refinance loans with and without FHA insurance. These companies need to be committed to working with borrowers to develop a loan that they can pay, and the companies need not be worried about servicing the modified or restructured loan. I am assured that the Treasury Department has the authority to accomplish this.

Helping U.S. Financial Institutions. Another important bill provision limits purchases of troubled assets to “financial institutions” which are “established and regulated under the laws of the United States.” We cannot afford to bailout offshore hedge funds, foreign banks, and sovereign wealth funds that purchased high risk mortgage-backed securities and other high risk investments to obtain high returns. I am relieved that we are focusing our efforts on U.S. institutions subject to U.S. regulation.

I am also pleased that many state and regional banks, auto finance companies and other off-Wall Street entities will be eligible for participation in the troubled asset relief program. These entities are hurting, and their financial stability has a direct impact on American consumer; they should have access to this new market for otherwise illiquid assets. Furthermore, under this bill, the Treasury Secretary has the authority to purchase troubled assets that are not mortgage-related, so long as, after consulting with the Chairman of the Federal Reserve, he or she determines that doing so would promote financial market stability.

Bill Shortcomings.

While this final bill is miles ahead of the Bush Administration proposal sent to Congress, I am disappointed that it does not contain a number of additional taxpayer protections I advocated. Those missing protections included limits on the types of assets that could be purchased, requirements for contract competition, policies to minimize foreclosures, and regulation of credit default swaps.

Limiting Bailout to U.S. Mortgages. One of the taxpayer safeguards I advocated, for example, was to limit the bailout to purchasing troubled mortgages on “real estate located in the United States.” That limitation was not, however, included in the final bill. Its absence means that, as currently written, Treasury is able to purchase troubled mortgages on real estate located in Germany, Japan, China, anywhere in the world where U.S. financial institutions bought mortgages. That doesn’t make sense, and I don’t know why this basic limitation was left out of the bill. We can’t afford to bailout mortgages or mortgage-backed securities on real estate in other countries, and I hope we won’t.

Competing Contracts. Another problem is that the bill does not require that competition be used to select the contractors who will manage the hundreds of billions of dollars in troubled assets that will be purchased under this Act. A prior draft version of the bill stated that the Secretary “shall solicit proposals from a broad range of qualified vendors interested in performing the work.” That language disappeared from the final bill. The American taxpayer is left hoping that the Bush Administration or the next Administration will not continue the Bush Administration’s prior record of awarding huge, no-bid contracts to a favored few.

Regulating Credit Default Swaps. Finally, I am disappointed that the bailout bill does not restore the authority of the United States to regulate one of the prime culprits responsible for this financial disaster, credit default swaps.

Credit default swaps are a type of financial derivative typically used to insure payment of a debt obligation. Some companies, like AIG, issued them to the debt holder in place of insurance policies to assure payment, while others used them like short sales, betting on whether an unrelated company will fail to pay its debts. These bets, called credit default swaps, are primarily responsible for the federal bailout of AIG, they are the focus of an ongoing SEC investigation into market manipulation, and they continue to threaten U.S. financial market stability because so many financial firms have credit default swaps on their books.

Eight years ago, the Commodity Futures Modernization Act of 2000 prohibited the Securities and Exchange Commission (SEC) from regulating all types of swap agreements, including credit default swaps. As a result, a completely unregulated $60 trillion credit default swap market has developed with no capital requirements like insurance companies have, no disclosures, no safeguards, and no oversight by any federal agency.

The statutory bar against regulating swaps is a prime example of the deregulatory policies that landed American taxpayers in this $700 billion mess. It is a prime reason why financial institutions are afraid to lend to each other -- no one knows who has how many credit default swaps outstanding, with which counterparties, involving how much money. Yet this bill fails to address this problem.

At a Senate hearing on September 23, SEC Chairman Christopher Cox testified that the credit default swap market “is completely lacking in transparency,” “is regulated by no one,” and “is ripe for fraud and manipulation.” He stated that the SEC’s lack of regulatory authority over swaps is a “regulatory hole that must be immediately addressed,” warning that otherwise “we will have another crisis on our hands.” Chairman Cox stated: “I urge you to provide in statute the authority to regulate [credit default swap] products to enhance investor protection and ensure the operation of fair and orderly markets.”

Three days later, on Friday, September 26, SEC Chairman Cox repeated his warning and the need for SEC regulation: “[I]t is critical that Congress ensure there are no similar major gaps in our regulatory framework. Unfortunately, as I reported to Congress this week, a massive hole remains: the approximately $60 trillion credit default swap market, which is regulated by no agency of government. Neither the SEC nor any regulator has authority even to require minimum disclosure. I urge Congress to take swift action to address this.”

Congress should have heeded that call and addressed the problem in this bill. This bill should have repealed the existing statutory prohibition and given the SEC general authority to regulate swap agreements. Such a provision would have closed the swaps regulatory loophole, while giving regulators and Congress additional time to determine what specific regulation might be appropriate. But neither this nor any other provision to regulate credit default swaps, or swaps in general, was included. It is a missed opportunity that we can only hope does not come back to haunt us. I hope the next Congress will address this issue as part of an effort to strengthen regulation.

Requiring Honest Accounting. A final provision in the bill that was added at the last minute may also come back to haunt the American public. Section 132 authorizes the SEC to suspend the generally accepted accounting rule that requires publicly traded corporations to report the fair value of their assets in their financial statements.

If it were to suspend this accounting rule, the SEC would strike a blow against honest accounting. Such suspension could essentially allow corporations to inflate their asset values by reporting something other than their fair market value – presumably allowing them to use instead historical data, mathematical models, best estimates – who knows? In a blink of an eye, corporations would have stronger balance sheets than they do now, essentially cooking their books with the approval of the SEC. It is an approach that echoes the excesses of the Enron debacle.

The bill seems to prompt the SEC to allow this fantasy accounting at the very time that financial institutions are leery of lending money to each other, under the mistaken impression that artificially inflated balance sheets will encourage lending. But allowing inaccurate financial reporting, with inflated asset values, will not increase confidence in the markets and it will not unlock credit.

As far as I know the SEC has never reached into the generally accepted accounting principles to suspend a particular rule, and I hope it doesn’t start now. It would be a terrible precedent. And to the extent that including this provision in this economic stabilization bill was an effort to convey Congressional approval of that approach, I would like to make it clear that I oppose suspension of Financial Accounting Standards Board Rule 157. Honest accounting, using fair market values, is essential to resolving the financial disaster that now threatens our markets.

Financial Regulatory Overhaul. The financial mess we’re in is the result of 8 years of inadequate regulation of U.S. financial markets by the Bush Administration. It is long past time to strengthen market oversight. The regulatory gaps are everywhere. Unfortunately, due to the urgency of adopting this legislation, many much-needed reforms were simply not included in the rescue plan.

In 2004, the SEC voluntarily weakened the net capital rule that establishes capital reserves for securities firms. We need to restore the net capital rule that was weakened in 2004, and resulted in securities firms over-borrowing. Another glaring problem is the absence of regulation of the more than 8,000 hedge funds that use American markets; they don’t even have to register with the SEC. Still another problem is the weak regulation of credit rating agencies, including the failure to resolve the conflicts of interest inherent in these agencies’ rating the securities of the firms that hire them. Weak accounting rules that allow companies to hide their liabilities and over-value their assets continue to undermine investor confidence.

We must also take action, as I’ve already mentioned, to regulate credit default swaps and other derivatives that financial institutions have loaded up on with little or no disclosure, regulation, or oversight. The collapse of credit card securities is another crisis waiting to happen due to abusive practices, excessive interest rates, growing debt, and the lack of credit card reform. There was talk early on of this bill setting an expedited schedule for addressing these and other financial regulatory issues, but nothing was included in the bill.

Tax Extenders. I am pleased that the Senate has chosen to include in this legislation its Tax Extenders bill, which the Senate passed separately last week. With regard to tax incentives for advanced and alternative energy technologies, the extension of many critical existing tax incentives – including those for wind, solar, biomass, and alternative fuels production and infrastructure – will facilitate the development and commercialization of all of these technologies. I am particularly pleased about the inclusion of a new tax credit for plug-in hybrid and all-electric vehicles, which is essential not only to the development of these technologies but also to consumer acceptance and widespread use of these vehicles.

In addition to the energy tax provisions, tax extenders, and the adjustment to the Alternative Minimum Tax, the legislation before us now also includes the important provisions of the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act. Mental health parity is about basic fairness and equity. Individuals suffering from mental health illnesses deserve access to adequate and appropriate health care. I have spoken previously about the significance of addressing this issue, and I am glad that Congress is righting this wrong. I hope the House will accept this package.

In conclusion, I will vote for this rescue package with many qualms but with the hope that it will prevent even greater harm to our economy and hard working American families. It is clear that a financial regulatory overhaul should be one of the first priorities of the next President and the new Congress.