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Overview of Wall Street Reform legislation from polar opposite views of U.S. Rep. John Yarmuth (D) and U.S. Sen. Jim Bunning (R).

Yarmuth: "The legislation ends taxpayer-funded bailouts."

Bunning:  "The bill does not shut off the Federal Reserve’s bailout powers."

Yarmuth

Landmark Legislation to Hold Wall Street Accountable and End Taxpayer-Funded Bailouts Clears Congress

Supported by Congressman Yarmuth, Wall Street Reform and Consumer Protection Act Ends “Too Big to Fail” and Creates New Protections to End Predatory Lending

 (Washington, DC) Today, historic legislation supported by Congressman John Yarmuth (KY-3) to rein in Wall Street and end taxpayer-funded “Too Big to Fail” bailouts was approved by the U.S. Senate by a vote of 60 to 39.  Last month, Congressman Yarmuth voted in favor of the Wall Street Reform and Consumer Protection Act which was approved by the U.S. House of Representatives by a vote of 237 to 192. The legislation aims to prevent future economic crises by reining in Wall Street banks, ending the Troubled Asset Relief Program, and strengthening consumer protections to help ensure Americans are protected from the abusive practices of mortgage lenders, credit card companies, and big banks.

 “These common sense protections will prevent big banks and Wall Street executives from ever again playing Russian roulette with the U.S. economy and the financial security of American families,” Said Congressman Yarmuth. 

 The legislation ends taxpayer-funded bailouts. Firms acting irresponsibly will be preemptively dismantled with the use of funds contributed from the financial services industry – not the taxpayer.

 Endorsed by the AARP, the Consumer Federation of America, and the Consumers Union, this legislation was was publicly debated for more than 50 hours, and includes over 70 Republican and bipartisan amendments.

 Other provisions include:

• Creates the Consumer Financial Protection Bureau, streamlining the bureaucracy to prevent predatory lending practices and make sure consumers get the clear information they need to be empowered to make the best choices for the financial future of their families. 
• Gives shareholders a say on bonuses given to company executives and limits risky pay practices of executives at major financial institutions. 
• Closes loopholes and strengthens oversight on large banks and financial firms – including new regulation of credit rating agencies and riskier hedge funds, derivatives, and other complex financial deals. 
• Protects 401(k) and pension plans by stopping big Wall Street institutions from taking unnecessary risks that threaten the financial system and your assets. 

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Statement of Senator Jim Bunning

The Restoring American Financial Stability Act

July 15, 2010

 Mr. President, I have come to the floor to talk about the conference report on the financial regulation bill the Senate has just passed.  I think that was a mistake.  I voted against the bill and now I want to take some time to explain why.  The short explanation is this bill does not address the causes of the financial crisis, and instead it sows the seeds of the next financial crisis, while adding unnecessary strains on our already struggling economy.  I am going to spend the next little while giving the longer explanation.

 As I have said many times in the Banking Committee and on the Senate floor, I want to pass a strong financial reform bill that reigns in the excesses of our largest financial companies and the Federal Reserve.  No one has been a stronger voice against the financial industry’s enablers at the Fed than me.  And I have fought every bailout brought through Congress, as well as the bailouts that the Federal Reserve and both the Bush and Obama Administrations put in place without approval from Congress. 

 I very much want to pass a bill that ends bailouts and reigns in the reckless activity in our financial system.  Unfortunately, just like the bill passed by the Senate earlier this year, the conference report before the Senate today does not end bailouts.  In fact, it does just the opposite and makes them permanent.  This bill will also lead to future financial disasters because it ignores the root causes of the crisis, fails to put the necessary handcuffs on key parts of the financial system, and will result in even greater concentration of the financial system in a few very large firms.

 The largest single contributing factor in the current financial crisis and most other financial crises in the past is flawed Federal Reserve monetary policy.  Starting in the late 1990’s, former Fed Chairman Alan Greenspan used easy money to prop up financial firms, manipulate the stock market, and micromanage the economy.  That easy money inflated the tech stock and dot com bubble.  After that bubble burst and also following the September 11 terrorist attacks, he again loosened monetary policy, which began to inflate the largest asset bubble in history.  While the bubble was most visible in housing, it was really a debt bubble that spread across all household, corporate, and government borrowing. 

 In about 2004 the housing bubble started to become unstable, but lending standards were relaxed and the rise of subprime and other non-traditional mortgages enabled the bubble to keep growing for another couple years.  Eventually the housing bubble became unsustainable and popped.  The corporate debt bubble largely did the same, and we are now seeing government debt become unsustainable all around the world – including here in the United States.

 Despite the Fed’s history of causing financial crises and its clear role in the current crisis, this bill does nothing to reign in the Fed. Chairman Dodd’s original draft bill presented to the Banking Committee last year took some positive steps to get the Fed back on track by removing the Fed as a regulator, but unfortunately that did not make it into the final bill.  Nothing in this bill will stop the next bubble or collapse if the Fed continues with its easy money policies.  Cheap money will always distort prices and lead to dangerous behavior – no amount of regulation can contain it.

 In addition to its flawed monetary policy, the Federal Reserve failed as a regulator leading up to this crisis.  The Fed was responsible for regulating most of the largest financial holding companies, but instead of regulating them it was a cheerleader for them.  The Fed, along with other regulators, allowed those firms to grow ever larger and take unwise risk.  And in what may be the Fed’s greatest regulatory failure, Chairman Greenspan refused to do the job Congress gave him and the Fed in 1994 of regulating mortgages.  Instead of taking actions that could have prevented at least the part of the housing bubble inflated by subprime and non-traditional mortgages, Chairman Greenspan encouraged homebuyers to get those kinds of mortgages.  He and Chairman Bernanke, along with many others at the Fed, sang the praises of those mortgages as financial innovation that reduced risk.  How well did the Fed’s approach to regulation work?  Well, in 2008, most, if not all, of the largest firms regulated by the Fed would have failed had they not been bailed out through TARP or by the Fed on its own.

 That seems like a pretty open-and-shut case to me for removing all regulatory responsibility from the Fed and giving it to someone who will use it.  But that is not what this bill does.  Instead of real regulatory reform, the bill concentrates regulation of the largest financial firms at the Federal Reserve despite the Fed’s long history of failed regulation.  As I mentioned earlier, the original draft of this bill removed bank and consumer protection regulation from the Fed and all the other regulators and created a single new bank regulator.  That is a better approach, but it was dropped before the bill ever got out of the Banking Committee and now the Fed gets more power for both jobs. 

 Except for possibly Chairman Dodd, no one has criticized the Fed more than me for its failure to use its consumer protection powers to regulate mortgages.  Chairman Greenspan did nothing for 12 years after Congress gave him the power, and Chairman Bernanke took another 2 years to act after he replaced Chairman Greenspan.  Clearly the Fed did not take consumer protection seriously and it deserves to lose the job.  I support strengthening consumer protection in the financial system, but I just cannot understand keeping that job inside the same Fed that ignored it for decades. 

 Next to reigning in the Fed, the most important goal of this bill should be to end bailouts and the idea of “too big to fail”.  Instead, the bill makes too big to fail a permanent feature of our financial system and will increase the size of the largest financial firms.  As I said earlier, the bill concentrates regulation of the largest financial institutions at the Federal Reserve.  The Fed failed as a regulator leading up to the crisis and should not be the regulator of any banks, but now Fed regulation will be a sign that a firm is too big to fail.  And on top of the new Fed seal of approval for the largest banks, this bill creates a new stability council that will designate other non-bank firms for Fed regulation, and thus too big to fail. 

 Fed regulation of the largest banks is not the only way this bill makes too big to fail and bailouts permanent.  The largest bank holding companies and other financial firms will now be subject to a new resolution process.  Any resolution process is by definition a bailout because the whole point is to allow some creditors to get paid more than they would in bankruptcy.  And the regulators will have the power to pick winners and losers by paying some creditors off on better terms than others.  Even if the financial company is closed down at the end of the process, the fact that the creditors are protected against the losses they would normally take will undermine market discipline and encourage more risky behavior.  That will lead to more Bear Stearns’, Lehman’s, and A.I.G.’s, not less. 

 The resolution process is not the only way this bill keeps bailouts alive.  The bill does not shut off the Federal Reserve’s bailout powers.  While some limits are placed on the Fed, the bill still lets it create bailout programs to buy up assets and pump money into struggling firms through “broad-based” programs.  That will put taxpayers directly at risk and make Fed bailouts a permanent part of the financial system. 

           Instead of putting all these bailout powers into law, we should be putting failing companies into bankruptcy.  Bankruptcy provides certainty and fairness, and protects taxpayers.  Under bankruptcy, similar creditors are treated the same, which prevents the government from picking winners and losers in bailouts.  Shareholders and creditors also know up front what losses they are facing and will exercise caution when dealing with financial companies.  Some of us tried to replace the bailout provisions with a revised bankruptcy section for financial companies, but unfortunately we were not successful.

 Since the bill does not take away government protection for financial companies and send those that fail through bankruptcy, it should at least make them small enough to fail.  Decades of combination have allowed a handful of banks to dominate the financial landscape.  The four largest financial companies have assets totaling over 50 percent of our annual gross domestic product, and the six largest have assets of more than 60 percent.  The four largest banks control approximately one-third of all deposits in the country.  This concentration has come about because creditors would rather deal with firms seen as too big to fail, knowing that the government will protect them from losses.  I would rather take away the taxpayer protection for creditors of large firms and let the market determine their size.  But if that is not going to happen we should place hard limits on the size of financial companies and limit the activities of banks with insured deposits.  Any financial companies that are over those size limits must be forced to shrink.  This will lead to a more competitive banking sector, reduce the influence of the largest firms, and prevent a handful of them from holding our economy and government hostage ever again.  Like most of the other real reform ideas that were proposed while previous versions of this bill were in the Banking Committee or on the Senate floor, meaningful limits on the size of banks were left out.

 Along with not solving too big to fail, this bill does not address the housing finance problems that were at the center of the crisis.  First, there is nothing in this bill that will stop unsafe mortgage underwriting practices such as zero down-payment and interest-only mortgages.  There is a lot of talk of making financial companies have skin in the game, but when it comes to mortgages, the skin in the game that matters is the borrower’s.  Second, the bill ignores the role of government housing policy and Fannie Mae and Freddie Mac, which have received more bailout money than anyone else. The bill does not put an end to the government-sponsored enterprises’ taxpayer guarantees and subsidies or stop the taxpayers from having to foot the bill for their irresponsible actions over the past decade.  Over 96 percent of all mortgages written in the first quarter were backed by some type of government guarantee.  Until we resolve the future of the these entities, the private mortgage market will not return and the risk to the taxpayers will continue to increase.  

As I mentioned at the beginning of my statement, this bill is going to have real consequences for the economy at a time when the recovery is looking more like a second dip of the recession.  Combined with the tax increases that will take effect at the end of this year, I am afraid we may not see real recovery until 2012 or later.  One way this bill is going to affect the economy is by the increased consumer protection regulation that will reduce the availability of credit from banks and other firms that had nothing to do with the financial crisis. 

Another way was highlighted in a front-page article in the Wall Street Journal yesterday on the impact of the derivatives regulation in the bill on farmers.  I have been as critical as anyone of the lack of regulation of derivatives – which was again largely thanks to Alan Greenspan – and I think we need more transparency and oversight in that market, especially for credit default swaps and related products.  But the bill goes too far in its impact on ordinary end users who are using derivatives to hedge commodity costs or interest rate and currency risks.  The Wall Street casino needs to be shut down, but the bill should not prevent legitimate derivative customers from buying responsible protection.

I have many other concerns about this bill that I have discussed in the past on the floor and in the Banking Committee.  The bill returned by the conference committee will not solve the problems in our financial system.  It is regulation without reform.  I had hoped we could work together in a bipartisan way to craft a bill that ends too big to fail forever, but this is a highly partisan bill that will accomplish little.  And one of the chief authors of the bill, Chairman Dodd, admits that even he does not know how the bill will work and won’t until after it is in place.

In the end, the bill gives so much discretion to the Fed that the best description of the new regulations is they are whatever the Fed says they are.  Or, to borrow the title of David Wessel’s recent book, it can be described as “in Fed we trust”.  We saw how well that worked out the last time.  I cannot understand why anyone expects it will work out better this time. 

I yield the floor.