Hearing Of The Senate Banking, Housing And Urban Affairs Committee: The State Of The Securities Markets

Statement

Hearing Of The Senate Banking, Housing And Urban Affairs Committee: The State Of The Securities Markets

SEN. REED: Thank you, Chairman Cox, for joining us today.

Thank you, Mr. Chairman, for holding the hearing.

There is a growing concern that systematic risks may be creeping into our financial markets in ways that no one fully appreciates. Risk is being distributed more widely across investors and markets and brokers and borders. However, as The Wall Street Journal pointed out last week, because the risk gets spread so widely, regulators can do little but watch and try to reassure everybody it is all under control. A system designed to distribute risk also tends to breed it.

The proliferation of products such as CDOs that have not been tested in market downturns, the accumulation of large pools of capital and unregulated, highly leveraged hedge funds, and accounting rules that do not produce transparency and financial reporting seem to have created a potential for problems that could spill over from the financial markets to the general economy.

Bear Stearns recently announced that two of its hedge funds are now nearly worthless after some of its investments in subprime mortgages went badly. Moody's and Standard & Poor's have significantly downgrade ratings on hundreds of subprime-related bonds. The ABX Index has hit new lows. Portions of this index that tracks especially risky mortgage products at junk grade rating have been falling, but now these declines are spreading to the portions of the index that tracks bonds with ratings of AAA or AA. And according to Merrill Lynch's latest manager survey, 72 percent of managers said that credit or default risk was the biggest threat to financial market stability.

Furthermore, when we all witnessed structured mortgage products that were initially rated AAA at inception trading at prices and now are trading at prices with junk bonds less than a year after issuance, there is a concern.

These events, combined with the weaknesses in the markets last week, have brought many new issues to light and raised significant concerns about some of the systemic risks facing our securities markets. And I would hope, Mr. Chairman, that you would address these potential risks as you present your testimony this morning and the questions.

Finally, let me comment about last week's SEC proceedings, two distinct proposals regarding proxy access to shareholders. I'm concerned about both the process associated with approving these proposals as well as the proposals themselves.

For starters, the issuance of two diametrically opposed proposals is unprecedented by the SEC. As Commissioner Nazareth pointed out, by issuing contradictory proposals, the SEC has opened the door to the possibility of cherry picking provisions from each of the proposals that may result in the worst of all worlds.

Additionally, while one of the proposals put out for comment would, in theory, allow shareholders access to proxies, I have serious concerns that the 5 percent threshold included in that proposal would make any subsequent rule meaningless in its application. This threshold would limit the ability of even large, long-term institutional investors, such as CalPERS, from having access to many shareholder proxies.

I hope that the chairman will elaborate for us on the derivation of the 5 percent threshold and direct us to data the SEC used in setting this threshold at that level.

Clearly, there are many issues that we must address this morning. I appreciate your presence here, Mr. Chairman, and your leadership and your thoughts on this and all of these issues.

Thank you.

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